Bitcoin and other cryptocurrencies were created with the ambitious goal of solving the problems inherent in the traditional banking system. By decentralizing finance, Bitcoin empowers a financial system in which more people have access, inefficiencies are decreased, and a greater level of transparency is established.

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However, by doing away with a centralized authority that keeps an authorized ledger of transactions, decentralized finance (DeFi) requires a new system for ensuring that digital currencies like Bitcoin are not abused through fraudulent transactions. Bitcoin mining is that system.

Bitcoin mining creates new blocks on the blockchain

Bitcoin (BITCOMP) is built on technology known as blockchain. When a Bitcoin transaction takes place, which includes the initial creation of a coin, a block is created as a record of the transaction. These blocks are chained together to create a decentralized, immutable, and publicly-accessible ledger. “Mining” is the term used to describe the process by which new blocks are created.

The mining process is designed to frustrate efforts to create duplicate coins or to conduct multiple transactions with the same coin. In essence, those who mine Bitcoin are serving as auditors for Bitcoin. Their goal is keeping bad actors from corrupting the Bitcoin system through introducing counterfeit coins or conducting fraudulent transactions. They do this by completing a complicated, costly, and time-intensive task.

Bitcoin mining involves Proof of Work

When a Bitcoin transaction is initiated, the details of the transaction — such as the amount, the person giving it, and the person receiving it — are introduced to the Bitcoin network. Before the transaction can be completed, it must be verified, added to a new block, and connected to the blockchain. That is where mining comes into the picture.

The process for verifying Bitcoin transactions is known as “Proof of Work” because it involves the working out of a complex mathematical puzzle. In essence, all of the details of the transaction are summarized and put through a process known as the “hash process” that converts the information to a 64-digit hexadecimal number. That number is known as a “hash.”

This mining process demands a significant amount of work because the hash cannot be just any number; a target number for each new hash is set by the Bitcoin network. For the hash generated by miners to be accepted, it must be less than or equal to the target number. Once a transaction is initiated, miners begin a race to be the first to find an acceptable hash.

While the process of mining involves solving a numerical problem, it is not exactly a mathematical problem. The hash is not found through working a mathematical formula. Rather, it is racing through a series of guesses to be the first to arrive at an acceptable number.

If the initial hash process fails to return a hash with an acceptable value, it is rerun after making a random adjustment to an item known as the nonce. If the process fails again, the nonce is adjusted again. When you consider that there are trillions of possible guesses for each hash, you can understand the work that must go into finding an acceptable value.

Once an acceptable hash is found, the new block is created and sent to the Bitcoin network to be verified through the hash process and added to the distributed ledger. At that point, the proposed transaction is completed.

Bitcoin mining requires powerful hardware

The intense computational work involved in mining requires sophisticated computer hardware. While CPUs such as those found in standard personal computers were initially capable of providing the power necessary for mining, that is no longer the case. The Bitcoin system was designed to regulate the speed at which new coins are mined by increasing the difficulty of mining as more miners get involved. As a result, miners who wish to be successful in today’s Bitcoin ecosystem require a much higher level of computational power.

Application specific integrated circuits, commonly known as ASICs, are the standard processors used by today’s Bitcoin miners. The high costs involved with setting up mining rigs and running them has led to the creation of mining pools, in which miners combine their resources and share the rewards.

When Bitcoin was launched in 2009, miners were paid 50 Bitcoin for each block produced. Approximately every four years, the reward is reduced by half. In 2020, miners are rewarded with 6.25 Bitcoin for each block. As of May 19, 2022, that equals approximately $185,000 per block.