What is Bitcoin Mining?
Simply put, Bitcoin mining is a process of using computational power to verify the bitcoin transactions in the network. The process is referred to as “mining” to allude to gold-mining, because new bitcoins are also issued into existence – bitcoins are the reward that miners get for verifying transactions.
Every transaction made through bitcoin goes through a rigorous verification process. And there are numerous transactions happening all the time, and the “miners” across the world run software on their advanced hardware to verify the transactions and keep the system secure and synchronized.
How does bitcoin mining work?
All the transactions occurring in a set period are collected (to be verified) together and called a block. Several such blocks, arranged in chronological order, build the blockchain. Every new block is added to the blockchain, thereby increasing its length.
A miner puts a block through a process which modifies its information. The miner applies a mathematical formula/logic to the information and converts it into a random sequence of letters and numbers called a hash. The hash is stored along with the block. Each block’s hash is used to produce the hash of the next block and the process continues down the chain. Hence, all the blocks are stored in a perfect order and sealed together by their individual hash.
All the miners across the globe compete with each other to do this, thus making mining a very competitive business. But the competitiveness brings along with it a rich reward; every time a new hash is created, the miner is rewarded with 25 bitcoins as an incentive to keep the transactions working. The entire network is updated simultaneously.
Now considering that only a fixed number of bitcoins will ever be mined, the mining complexity is increased from time to time to limit the number of transaction blocks hashed and consequently, limit the number of bitcoins mined in a set period. The difficulty is automatically increased by the network to ensure that the average time to hash a block remains 10 minutes.
All the miners in the bitcoin network work to verify the transactions quickly and hence are paid a transaction fee by the client, apart from the usual 25-bitcoin reward. With new people joining the mining business, the competition has increased along with the network’s difficulty level, but that has only brought out the best cost-effective mining methods using the most specialized hardware.
The future of mining?
A few years ago anyone could mine on their laptop computer, but now you need serious hardware and graphics cards to compete and it has pushed the “home”/casual miner out of the game.
Mining is still possible for profit to the amateur, but now, gaining in popularity is “cloud mining”, which simply put, is other mining operations allowing you to rent their mining “hashing power” and paying you the bitcoins mined – essentially it is virtual mining, taken up through monthly, yearly, or even longer mining contracts.