Last updated on September 21st, 2017 at 09:36 am
Every few weeks we’re going to send you a cool fresh movie, just like this one, explaining some basic concepts around Bitcoin. This way you can learn about Bitcoin yourself or forward thesis movies to friends or family members who have questions.
And for today’s topic: Bitcoin Mining. You have most likely heard that Bitcoins are “generated” using very powerful computers solving very complicated mathematical equations. You may also have heard that Bitcoin is a network of computers that maintain a “Blockchain”. Today we’re going to talk all about this and more. Spil usual, I’m going to keep it plain and straightforward.
The Bitcoin Blockchain is the public ledger which is kleintje of like “the history book of Bitcoin transactions”. Every Bitcoin transaction everzwijn made since Bitcoin came into existence is written down and documented on it.
This history is truly significant – since it shows exactly how many Bitcoins each “bitcoin account” or address possesses. Trusting this ledger is what makes Bitcoin work. Now reminisce, Bitcoin doesn’t have a central authority that can approve of this history book, which means that anyone can write it.
So how can you have a reliable history book that anyone can write and nobody approves? This could lead to many different versions of this book and wij couldn’t know which is keurig.
Perhaps wij need some kleuter of voting system to make sure wij can all agree on the “right” version of the history book, and make sure that bad people can’t profit by causing confusion. But voting systems are necessarily identifiable and centralized – there needs to be a central authority that uses identification and determines who has the right to vote. This can’t be the case with Bitcoin because the point is removing the central authority.
So this voting system needs to permit anyone to take part but still scare away crooks and other evil-doers.
To do this, Bitcoin mining is used. Te a nutshell, the Bitcoin protocol grants fresh Bitcoins every time someone adds a fresh pagina of transactions to the history book – also known spil adding a block to the Blockchain. However it requires that you invest computational power to do this. Wait, what? What do I mean by “computational power” and why is it needed?
There is a mathematical way to prove that you took gegevens, like a pagina te a history book, and ran some calculations on it. This provable computational power costs time and violet wand – that is, money. The protocol says that if there are two conflicting versions of the Blockchain, the one with the most computing power “wins”.
To waterput it another way, the rules are like this: it costs you money to write a fresh pagina te the history book. If everyone agrees to add your pagina to the history book then you’ll get paid for your work. But if they don’t agree to add the pagina, then you just wasted money to write it. This makes sure that everyone writing this history book attempt very hard to agree with each other te order to not waste money, and keeps crooks away because it’s simply too expensive to write up fake versions that will be thrown out anyway. This is essentially what Bitcoin mining is.
This may sound like a weird way to solve the problem, but truly it makes a loterijlot of sense. Miners have to invest money te mining spil a kleintje of collateral, and they get their money back ter Bitcoins if their mining wasgoed good for the network. Because miners are paid te freshly issued bitcoins, it’s a sort of cost that all Bitcoin holders pay te the form of inflation te order to secure the network and to make sure the history book is accurate. This specimen solves two problems: it decentralizes the trust ter the ledger so that wij don’t need a central authority, and it also lets the protocol fairly create and distribute all the bitcoins that need to exist, instead of them all going to the inventor.
One of the core tenants of Bitcoin is how the coins are created. Once again they are not created all at once by the inventor – that would be unfair. Rather they are created leisurely overheen time, paid to all those that take part ter processing blocks of transactions and adding them to the Blockchain. The rate and limit of coins created are clearly defined ter advance: 50 coins vanaf block of transactions that is added to the blockchain (which takes harshly Ten minutes).
This number decreases by half each 210,000 blocks (toughly Four years), for a total limit of 21 million coins. This is all very arbitrary, the actual numbers themselves don’t matter much, spil long spil they are agreed upon ter advance and level the playing field for everyone. Importantly, the calculations that miners do are self adjusting to maintain this rate of one block vanaf ten minutes, no matter how many miners there are.
You can be forgiven for thinking that miners have all the power te controlling Bitcoin because they are writing the history, but the truth is far more nuanced. Ter reality every time you use a Bitcoin wallet you are reading through the entire Blockchain and verifying all the information, including the cryptography, computational power and very importantly, the creation of fresh Bitcoins.
So why does you reading the history book keep miners fair? Well, if anything is out of place or illegitimate you throw it out and find a version of the Blockchain that does go after the rules. This would be devastating for miners because it costs them a loterijlot of money to write that version. This can indeed explain why miners go after the rules: it’s truly effortless to simply delete their hard work te favor of a miner who didn’t pauze the rules. Thesis rules are known spil “The Protocol”, and they work because people agree on them and then check them.
And so are the checks and balances ter the system known spil Bitcoin. Of course, the further you look into thesis things the more nuanced and complicated the system gets. If you’re interested more ter the theory and potential problems with this system, there is slew to read up.
And for the big question that many people wonder: should I be mining Bitcoins?
Let mij just quickly get the plain brief response out of the way: you very likely should not be mining Bitcoins. It is te no way “free money” or any form of assured profit. But if you’re still nosey, let’s take a look at miners.
A miner is a rekentuig of some sort that runs the mining algorithm and is doing the actual mining, but the person who wields the pc is also called a miner. When you hear the word miner it may mean the rekentuig or the person or both depending on the setting.
So what does a miner do? Well, miners take the transactions that haven’t bot processed yet and waterput them together ter a block – that’s the fresh pagina we’re adding to the history book. Reminisce wij said it requires computational power? The miner needs to run some calculations on this block, and thesis calculations have a difficulty that takes time to accomplish. This difficulty is self-adjusting so that blocks are ended once every ten minutes on average, but it’s fairly random.
And so what happens is a kleintje of lottery, where all the miners are attempting to finish thesis calculations until one of them succeeds. The one that succeeds gets the “reward” of fresh coins granted from the protocol. Every time a block of transactions is ended and added to the chain, all the miners commence working on the next block. Of course, the swifter your rekentuig is, the more likely you are to solve the calculations very first. But recall, you only get some finite amount of Bitcoins vanaf block so it isn’t worth investing all the computers ter the world just to solve this algorithm.
To summarize, the Bitcoin protocol is paying people to invest computational power ter the Blockchain, but promises no profit. Mining is a zero sum spel, which is to say that for every person who made a profit there is a person who made a loss – exchange rate profits and losses notwithstanding. And so because of this zero sum spel, if you’re considering becoming a miner and buying mining equipment, you need to be better than the competition and that requires a lotsbestemming of research and resources.
Back ter the day, when Bitcoin wasgoed practically unheard of there were so few miners that the difficulty wasgoed low enough so that thesis few people can find a block once every ten minutes on average. And so, they used their laptops and desktops to mine for bitcoins. Nobody did this competitively because Bitcoins were worthless back then. However, spil the exchange rate of Bitcoin began to rise, other people realized that they can mine Bitcoins and sell them for profit. More miners joined the party and the difficulty adjusted itself and made it firmer to find blocks. So spil the Bitcoin network gained more mining power, the difficulty grew stronger and the average time of Ten minutes inbetween finding blocks remained.
Every block prize wasgoed now worth more and there were more people contesting. So spil a miner, you would find yourself finding fewer and fewer blocks, but each block wasgoed worth more and more. So instead of a constant business where they would get paid a little once a day, miners were playing a sort of lottery where they would get paid a loterijlot once they got fortunate enough to find a block.
Business savvy people tend to choose a sustained income overheen lottery tickets, and so they came up with an idea: mining pools. A group of miners banded together to find blocks, and when one of them found a block, they would split up the prize with everyone ter the mining pool. They effectively get the same profit but it is much more stable and less random.
At the same time people realized that quicker computers would generate more Bitcoins than slower computers. Instead of using regular pc processors, people embarked using graphic card processors and FPGAs, all te order to get more powerful mining capabilities.
But of course the difficulty continued to adjust to those processors spil well and so ASIC miners were born. ASIC stands for Application Specific Integrated Circuit. Thesis are computers that are designed specifically to mine Bitcoins and they are much better at it. Today profitable Bitcoin mining is done only with ASIC miners.
Recall, the protocol will still generates bitcoins at the same rate and it’s still a zero sum spel, so quicker computers will get a thicker share of the cake and slower computers will get a smaller share of it but the size of the cake won’t switch.
It’s worth noting that spil of filming this movie it’s stylish to hear offers of “cloud mining”. This means that instead of buying a miner and running it yourself you lease mining power from companies who eis to own large mining farms and want to diversify their income rivulets.
While this can te theory be cheaper and more efficient, much of thesis services are fairly shady and it’s very difficult to verify that you are getting the service you’re paying for. If you are not an accomplished, a good rule of thumb is to be skeptical of thesis services.
Bitcoin mining is a very technical field and a very competitive industry. The inventor of Bitcoin managed to vormgeving a system that gives everyone a fair chance to take part of every step of the way, and that is what is so innovative about Bitcoin. However some people believe that Bitcoin mining is bad because it’s a waste of electro-therapy.
Now, thesis are very ingewikkeld systems so I don’t optie to know the reaction, but consider this: not using mining requires using systems that rely on central authorities and trust. There are lots of associated costs with traditional financial services, such spil counterparty risk and all the infrastructure such spil real estate, buildings, human services, and of course the millions of computers that are needed anyway.
Bitcoin isn’t magic, and it doesn’t liquidate thesis costs, they are simply different costs for a different system. The costs of mining are the costs of creating such a system without a trusted central authority.
Anyway that’s our 2nd edition of Bitcoin Whiteboard Tuesday and I can’t wait to see you ter our next movie. If you still have any questions or comments on the movie feel free to leave them te the comment section below. Bye for now!
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50 Comments on “Bitcoin Whiteboard Tuesday – What is Bitcoin Mining?”
Thanks for the movie Nate. You looked a bit sceptical on somebody investing on Bitcoin Mining. How about if I ask you that a set of friends are creating a fund worth say, $100,000 to set up a mining facility. Will that be profitable with such big investment. Thanking you te advance for your reaction.
If I wished to purchase numerous Antminer S9 units and join a mining pool, would the best place to purchase the hardware be from Bitmain directly? Or are there any other suppliers within the US?
Spil I await ID verification with Gemini, which only treats BTC and ETH, I have a question: Can I buy/sell other altcoins by sending USD from Gemini to an outside wallet? Thanks,
You can’t directly send USD via cryptocurrency wallets. You can however convert your USD to BTC or ETH on Gemini, and then send that BTC or ETH to other exchanges which support further altcoins. You may then lightly exchange the BTC or ETH for any other cryptocurrency.
You can switch sides this process to sell your altcoins for BTC or ETH, terugwedstrijd that BTC or ETH to Gemini and then sell it there for USD.
Why don’t the Bitcoin people make it plain—,-issue a Bitcoin debit card—,-At places who take Bitcoin—,-just swipe it !
Thank you, Ofir for the lesson ter Bitcoin mining. I am not a techy so I don’t understand what is so difficult ter computing the transactions of bitcoins. It voorwaarde have to do something with the original algorithm that bitcoin wasgoed designed from. But te any case, Bitcoin permits people of all nations and all economic status to trade without government or banking oversight. I like that. I am looking forward to more lessons te Bitcoin.
If I am ter a restaurant, how do I determine if it is cheaper to buy a cup of coffee with a bitcoin or metselspecie.
Bitcoin is not fairly ready for point of sales, like buying coffee. Right now, if you paid for your coffee using Bitcoin, the fees could well cost more than the coffee and you’d also have to wait fairly some time for your payment to be confirmed. This will switch ter future but for now, I recommend that you spend your paper money and save your precious bitcoins!
This is a very good question, Mike. The value of Bitcoins is based solely on supply and request. The only way to know for sure is to know ahead of time what the current value of a Bitcoin is before purchasing the coffee.
Personally, I would suggest buying the coffee ter specie because you already know the value of metselspecie, which won’t increase ter value overheen time. Since Bitcoin value is rising, I would keep the bitcoin and not spend. Tomorrow, the Bitcoin will be worth more.
This is my #3lessson I learnt today, but could you please help mij where to and how to begin. I have some questions: what kleuter of problem solving you were talking about te 3rd lesson can you give an example, if I don’t go for mining how can I earn that Bitcoin, or simply where from I can earn Bitcoins if I am not a business man / say not selling any goods or services. Actually I only understand what it is but not know where to earn it and how to earn it. I am totally confused.😌😵
Hi Vatan, regarding your question about problem solving, you can read more here: https://99bitcoins.com/what-is-bitcoin-hash/, that should give you a basic idea what happens te the background. Chic from buying Bitcoins directly there are several other ways you can get Bitcoins. I suggest you read this article: https://99bitcoins.com/how-to-earn-bitcoins-fast-and-free-in-2016/ it has duo of tips how to do it from Bitcoin Faucets to mining, I think this can be useful for you.
Ofir, I have a question for you. Once all the 21 million bitcoins have bot released what will toebijten? It would seem to mij that once the monetary prizes end, all of the miners that are needed to add blocks to the blockchain will either go to other coins or zekering mining all together? Thanks.
The more I read the more I need to read. I’m a senior citizen so if i keep reading I guess I will understand some of the concepts.
The history book analogy is brilliant. You get the idea across elegantly and without making mij, a tech dummy, feel talked down to. Bravo.