When it comes to traditional currency, all of us are aware that the government exercises control over all printing and distribution related decisions. With bitcoin, there is no central authority calling the shots. So where does bitcoin come from and how is it created?


Let’s find out how bitcoin mining works


Every day people are sending and receiving bitcoins over the network. In order to ensure safe, secure and trusted transactions, each transaction is verified and updated in a public ledger called the blockchain. This process of verification and updating of the blockchain is called mining and the ones who facilitate the mining process are called miners.


What’s in it for the miners?


Miners are no philanthropist. They assist in facilitating the transactions by contributing processing power required for transactions to get rewarded in the form of bitcoins. Mining incentivizes the contribution of processing power for the miners thereby smartly decentralizing the creation of bitcoin.


Why is mining needed in the first place?


One of the biggest challenges for digital currencies is tackling the double spending problem. Double spending, as you can infer from the name, refers to the problem of illegitimately spending the same money twice. Fiat currency is difficult to replicate but digital transactions are relatively easier to reproduce. Mining is firstly needed to prevent people from making a copy of the digital token and sending it to someone while retaining the original.


Miners ensure that the sender has not by any means tried to trick the system and then the transaction details are broadcasted over the bitcoin network. Once it has been established that the transaction is a legitimate one, the next step is updating it on the blockchain ledger.


Since the ledger is entirely digital and is susceptible to tampering, it is imperative to add a layer of security to it. This layer of security is added by the miners using a technique called hashing. In mining terms, hashing is the process of taking all the information in a block, applying a mathematical formula to it and turning it into a random sequence of letters and numbers called a hash.


Hashing is chosen to secure the blockchain ledger because it has some very interesting properties. While it is easy to produce a hash from available data, it is impossible to work out the original data by just looking at the hash. Another favourable property of the hashing technique that every hash produced is unique and therefore hashing perfectly fits the bill for building a secure network.


Why do miners compete with each other?


Now since there are many miners vouching to make a hash of the transaction blocks and earn rewards, they have to compete with each order in order to mine the block. The rule is that the one who succeeds at making the hash first wins. But the game isn’t that simple. Since computers are really good at producing hashes, the bitcoin network demands a certain complexity level of hash required to mine a block. The network demands that the hash should look a certain way, have some zeroes in the beginning to name a few requirements. With more and more people getting into mining, the difficulty of the network is increased regularly. This protocol, wherein miners are rewarded for verifying and updating the transactions is called ‘The proof of work’.
Now that you know how bitcoin mining works and are interested in setting up your own mining rig, check out How to set up a mining rig .
Example HTML page

Leave a comment