The bitcoin network is a peer-to-peer payment network that operates on a cryptographic protocol. Users send and receive bitcoins, the units of currency, by broadcasting digitally signed messages to the network using bitcoin cryptocurrency wallet software.
Transactions are recorded into a distributed, replicated public database known as blockchain with consensus achieved by a proof of work system called mining.
The protocol was designed in 2008 and released in 2009 as open source software by Satoshi Nakamoto.
Where do bitcoins come from? With paper money, a government decides when to print and distribute money. Bitcoin doesn’t have a central government.
With Bitcoin, miners use special software to solve math problems and are issued a certain number of bitcoins in exchange. This provides a smart way to issue the currency and also creates an incentive for more people to mine.
Bitcoin mining is the process by which transactions are verified and added to the public ledger, known as the blockchain, and also the means through which new bitcoin are released. Anyone with access to the internet and suitable hardware can participate in mining. The mining process involves compiling recent transactions into blocks and trying to solve a computationally difficult puzzle.
The participant who first solves the puzzle gets to place the next block on the block chain and claim the rewards. The rewards, which incentivize mining, are both the transaction fees associated with the transactions compiled in the block as well as newly released bitcoin. Bitcoin mining is a lot like a giant lottery where you compete with your mining hardware with everyone on the network to earn bitcoins. Faster Bitcoin mining hardware is able to attempt more tries per second to win this lottery while the Bitcoin network itself adjusts roughly every two weeks to keep the rate of finding a winning block hash to every ten minutes.
In the big picture, Bitcoin mining secures transactions that are recorded in Bitcoin public ledger, the blockchain.
By conducting a random lottery where electricity and specialized equipment are the price of admission, the cost to disrupt the Bitcoin network scales with the amount of hashing power that is being spent by all mining participants.
Miners are getting paid for their work as auditors.
They are doing the work of verifying previous Bitcoin transactions. This convention is meant to keep Bitcoin users honest, and was conceived by Bitcoin’s founder, By verifying transactions, miners are helping to prevent double spending problem. Double spending means, as the name suggests, that a Bitcoin user is illicitly spending the same money twice.
With physical currency, this isn’t an issue: Once you hand someone a greenback $20 bill to buy a bottle of vodka, you no longer have it, so there’s no danger you could use that same $20 to buy lotto tickets next door. With digital currency, however, as the Investopedia dictionary explains, “there is a risk that the holder could make a copy of the digital token and send it to a merchant or another party while retaining the original.”
Bitcoin mining is the process by which transactions are verified and added to the public ledger, known as the blockchain, and also the means through which new bitcoin are released. Anyone with access to the internet and suitable hardware can participate in mining. The mining process involves compiling recent transactions into blocks and trying to solve a computationally difficult puzzle. The participant who first solves the puzzle gets to place the next block on the block chain and claim the rewards. The rewards, which incentivize mining, are both the transaction fees associated with the transactions compiled in the block as well as newly released bitcoin.
Should I get into the mining business?
That’s a big, open-ended question, and the answer depends on many factors. I’m not going to try and cover every aspect (because Google is your friend), but let’s quickly go over the basics of what you would need to get started, and I’ll include some rough estimates of how much money you might make when all is said and done.
The core of mining is the idea of block rewards. For most coins, these are given to the person/group that finds a valid solution to the cryptographic hashing algorithm. This solution is a mathematical calculation that uses the results of previous block solutions, so there’s no way to pre-calculate answers for a future block without knowing the solution to the previous block. This history of block solutions and transactions constitutes the blockchain, a sort of public ledger.
What is a block, though? A single block contains cryptographic signatures for the block and the transactions within the block. The transactions are collected from the network, typically with a small fee attached, which also becomes part of the block reward. There’s a difficulty value attached to the solution for a block as well, which can scale up/down over time, the goal being to keep the rate of generation of new blocks relatively constant.
Bitcoin mining is the process of authenticating and legitimizing bitcoin transactions sort of like being a bitcoin bank teller. Every time a new transaction comes along, it needs to be added to the final bitcoin ledger or blockchain, which records every bitcoin exchange. Transactions are added up until they reach “block” status, and the block is sent to miners. The miners use their specialized hardware and data keys called “nonces” to encrypt the block of transaction data into a “hash,” or an identification sequence that also includes all the block data (the hash has many useful properties, but this is its basic function).
This hash is then added to the block, authenticating it, and the block is officially added to the blockchain. Miners are typically paid when they complete a block, but the rate of work can fluctuate based on how many people around the world are making bitcoin transactions. At the time of this writing, the rate of pay is about 12.5 bitcoins for every hash that’s successfully implemented.
you will also need a wallet to help manage your bitcoin transactions. There are an assortment of bitcoin wallets, both online and software-based. They come with different features, including amount limits and payment frequencies, all of which you should consider when choosing a wallet.
We’re opening a can of worms at this point, but it’s probably in your best interest to find a mining pool. Mining pools are communities of bitcoin miners who work together and share the reward. At least, that’s how they’re supposed to work. Even official bitcoin organizations usually refrain from recommending any specific mining pool, because they might be scams or at least cheat you out of some money. It’s hard to know which pools do it until it’s too late.