Mining is the process that Bitcoin and some other cryptocurrencies use to create new coins and verify new transactions. It involves vast, decentralized networks of computers around the world that verify and protect blockchains, the virtual registries that document cryptocurrency transactions. In exchange for their processing power, computers on the network are rewarded with new coins. Later, you can even exchange these coins for currency or play in an online casino. It’s a virtuous circle: miners maintain and protect the blockchain, the blockchain awards coins, the coins incentivize miners to maintain the blockchain.
How does mining work?
There are three main ways to get bitcoins and other cryptocurrencies. You can buy them on an exchange like Coinbase, get them as payment for goods or services, or virtually “mine” them. This is the third category we explain here, using bitcoin as our example.
You may have thought about trying to mine bitcoins yourself. Ten years ago, anyone with a decent home computer could participate. But as the blockchain grew, the processing power needed to maintain it increased. ( Much : In October 2019, 12 trillion times more computing power was needed to mine a single bitcoin than when the first blocks were mined in January 2009.) As a result, amateur bitcoin mining is unlikely to be profitable for amateurs. these days. Virtually all mining nowadays is done by specialized companies or groups of people who pool their resources. Still, it is useful to know how it works.
- Specialized computers perform the calculations necessary to verify and record each new bitcoin transaction and ensure the security of the blockchain. Verifying the blockchain requires a huge amount of computing power, which miners voluntarily allocate.
- Bitcoin mining is very much like running a large data center. Companies buy mining equipment and pay for the electricity needed to run it (and cool it down). For it to be profitable, the value of the coins earned must be higher than the cost of mining those coins.
- What motivates miners? There is a lottery on the network. Every computer on the network aims to be the first to guess a 64-digit hexadecimal number, known as a “hash.” The faster a computer makes a guess, the more chances a miner has to get a reward.
- The winner updates the blockchain registry with all recently verified transactions, thereby adding the newly verified “block” containing all those transactions to the chain, and receives a predetermined number of newly minted bitcoins. (On average, this happens every ten minutes.) As of the end of 2020, the reward was 6.25 bitcoins, but it will be halved in 2024 and then every four years thereafter. In fact, as the difficulty of mining increases, the reward will decrease until there are no bitcoins left to mine.
- There will always be only 21 million bitcoins. The last block should theoretically be mined in 2140. From then on, miners will no longer rely on newly released bitcoin for rewards, but will instead rely on the fees they charge for transactions.
Why is mining important?
In addition to releasing new coins into circulation, mining plays a key role in the security of Bitcoin (and many other cryptocurrencies). It verifies and protects the blockchain, allowing cryptocurrencies to function as a peer-to-peer decentralized network without the need for third-party control. And it creates an incentive for miners to invest their computing power in the network.
