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How Does Bitcoin Mining Work?
Crypto mining is the process by which new units of digital currency are created. Unlike a centralized physical bank, Bitcoin acts as a decentralized banking ledger, a transaction record kept in multiple locations at once and updated by contributors to the network. That record is called the blockchain. The blockchain is updated by adding new blocks of data to that chain, which contains information regarding Bitcoin transactions. To add a block of new transactions to the chain, miners must compute the correct random numbers that solve a complex equation the blockchain system has generated. Once they do, a set of rules written into Bitcoin’s code awards the miner a certain amount of Bitcoin. This, in a nutshell, is the process of mining, but it gets more complicated than that. Miners use expensive and complex mining rigs to make these computations, and the more computing power you have, the easier it is to mine Bitcoin. Fast processing means more guesses at the correct solution to the blockchain’s equation, and the better chance to find the correct answer. The catch is, miners have to be the first to arrive at the answer or they don’t get the reward, though they still lend their computing power to the network. Once a miner finds that answer, a group of transactions (or block) gets added to the ledger. The miner who solved the equation is rewarded with Bitcoin and any fees for the transactions that are added to the blockchain ledger. Then the entire process starts again until someone finds the solution to the next equation so the next block can be added.
What Is a Mining Rig?
A typical rig will include all the components of a PC—motherboard, CPU, GPU, RAM, storage, and power supply. Since it can take a long time to mine even a single unit of Bitcoin, miners have needed to upgrade over the years. That means multiple high-end graphics cards, pooled together, in order to process more equations at once. In turn, this requires more power, better cooling, and a way to vent all that heat, which often increases the price of mining. Another option that has become popular is to invest in preconfigured mining hardware, such as an Application-Specific Integrated Circuit (ASIC) miner. These are essentially banks of microprocessors with a cooling system. People also join up to form mining pools that combine their processing power, then split the rewards for whatever blocks they mine.
What Is a Hash Rate?
System that Bitcoin miners answer are called “proof of work” equations. Miners have to produce the correct 64-digit hexadecimal number to solve it. The first miner to correctly guess a number, or hash, at or below the value of the target gets the reward for that block. Of course, if a miner wants to make money, they need to have a rig capable of calculating the hash before anyone else. This is where hash rate comes in. The difficulty of solving each new proof of work problem isn’t from the equation itself, but how many possible answers a machine has to grind through to guess the correct hash. That constant calculation requires immense amounts of energy and power, especially in the case of mining farms that use banks of mining rigs running around the clock to mine new Bitcoin. Essentially, a hash rate is how many guesses per second your rig can manage. Depending on how much processing power someone’s mining equipment has, they’re able to compute answers at a certain hash rate, which can be anything from megahashes per second (MH/s), to gigahashes per second (GH/s), all the way up through terahashes per second (TH/s).
Why Is Mining Necessary?
Since Bitcoin is still a form of currency, you need to exchange labor for payment. Bitcoin mining serves this purpose, but it also helps mitigate certain issues that are unique to digital currency. Bitcoin mining doesn’t just add new currency into the pool, it also verifies transactions that have already taken place using the decentralized LEDGER of the blockchain. If there was no ledger for cryptocurrency, people could illicitly spend the same amount multiple times—known as double-spending—with no way to know whether they actually had the currency to back up their transactions. Bitcoin uses the blockchain instead of a conventional bank, there needs to be a way to keep track of transactions without allowing any one person to fake or hide them. That’s why having multiple simultaneous copies of the ledger is so important. Solving proof-of-work equations helps verify transactions on the blockchain by adding them to the record. Every time the blockchain gets updated, the entire ledger is updated for everyone on the network, so all miners will always have the most current version of the ledger. This helps maintain the integrity of the ledger and weed out discrepancies.
Crypto mining certainly has its issues, but it also has a purpose. It creates new units of currency and maintains the integrity of the blockchain ledger, which helps to prevent illicit transactions. Whether that purpose justifies the environmental cost is up for debate. While efforts are being made to make mining more environmentally friendly, other digital currencies, such as Ethereum, are planning to phase out the mining process entirely.
