Assets, Bitcoin

What Is Mining of Bitcoin?

Mining is how new Bitcoin is brought into circulation. Miners are rewarded with Bitcoin for verifying and committing transactions to the blockchain.

Mining is also the mechanism used to introduce Bitcoins into the system: Miners are paid any transaction fees as well as a “subsidy” of newly created coins. This both serves the purpose of disseminating new coins in a decentralized manner as well as motivating people to provide security for the system.

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 Bitcon’s public ledger, the block chain. 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.

Individual blocks must contain a proof of work to be considered valid. This proof of work is verified by other Bitcoin nodes each time they receive a block.

Bitcoin uses the hashcash proof-of-work function.

The primary purpose of mining is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus. Mining is also the mechanism used to introduce bitcoins into the system.

NOTE: WARNING: Mining of Bitcoin is a highly specialized activity that requires significant computing resources and technical knowledge. It can be difficult to understand, and carries an inherent risk of financial loss due to mismanagement or potential security flaws in the software used for the mining process. Before engaging in this activity, make sure you understand the risks associated with it and have the necessary expertise to carry out the process safely.

Miners are paid transaction fees as well as a subsidy of newly created coins, called block rewards. This both serves the purpose of disseminating new coins in a decentralized manner as well as motivating people to provide security for the system through mining.

Bitcoin mining is intentionally designed to be resource-intensive and difficult so that the number of blocks found each day by miners remains steady. Individual blocks must contain a proof-of-work to be considered valid.

This proof-of-work (PoW) is verified by other Bitcoin nodes each time they receive a block. Bitcoin uses a PoW function called Hashcash.

When a block is discovered, the discoverer may award themselves a certain number of bitcoins, which is agreed-upon by everyone in the network. Currently this bounty is 25 bitcoins; this value will halve every 210,000 blocks (approximately every four years). Additionally, miners get to keep any transaction fees that were included in the blocks they mined.

The incentive can therefore be twofold: firstly, miners are rewarded for their work with newly minted Bitcoins; secondly, they earn transaction fees paid by users for faster confirmation of their transactions.

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