Bitcoin and other cryptocurrencies use mining to generate new coins and verify transactions. A vast decentralised network of computers is involved in this process globally. Mining helps verify and secure blockchains – virtual ledgers that store crypto transactions. The computers involved in the process get rewarded with new coins for contributing their processing power. It is essentially a circle where the miners maintain and secure the blockchain. In turn, the blockchain awards the miners, and the coins provide an incentive for maintaining the blockchain.
Definition of mining
The process by which networks of specialized computers generate and release new Bitcoin is called mining. The step also includes verifying new transactions.
How does mining work?
There are three ways by which you can get Bitcoin and other cryptocurrencies. They can either be bought on an exchange, received as a payment for goods or services, or be “mined” virtually. Using Bitcoin as our example, let us try and understand the third category. A few years back, anyone owning a decent home computer could participate in the mining process. But now, the computational power required to maintain it has increased tremendously. (The computing power required to mine a bitcoin in October 2019 was 12 trillion times more than it was in January 2009 when the first block was mined). It is also why amateur bitcoin mining is no more a profitable hobby these days. Today specialised companies and groups of people pool the resources together for virtual mining operations. Even then, you should know how the process works.
Here’s how it goes -
What motivates miners?
The network holds a lottery. And each computer takes part in it to guess a 64 digit hexadecimal number. This hexadecimal number is also known as a hash. Ultimately, the faster a computer makes a guess, the more probable it becomes for a miner to earn a reward.
The winner updates the blockchain ledger to get a predetermined amount to freshly mined Bitcoin. The task includes adding a newly verified block containing all the transactions. (This roughly happens every ten minutes). Earlier, the reward was 6.25 Bitcoin (as of late 2020). But in 2024, this will reduce by half and similarly, every four years after that. Why will this happen? That is because, after the difficulty of mining will increase, the reward will consequently decrease. And this will continue until there are no Bitcoins available for mining.
Only 21 million Bitcoin will ever exist. Theoretically, the final block should get mined in 2140. And from then onwards, miners will no longer rely on newly issued Bitcoin as rewards. Instead, they will rely on fees charged for making transactions.
Why is mining important?
Mining is pivotal to Bitcoin security. So, beyond releasing new coins into circulation, mining plays a crucial role in the safety of Bitcoin and most other cryptocurrencies. It verifies and secures the Blockchain, allowing cryptocurrencies to function as a peer-to-peer decentralised network. And all this without any need for oversight from a third party. It also creates incentives for the miners who contribute their computing power to the network.