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What is bitcoin mining and how does it work?

  • 27. December 2020 at 11:58

Although the Bitcoin price explosion has once again focused media attention on the digital currency, the way mining works is still a closed book for many.

This guide will help you keep track of it all.

The article is taken from the Academy of BTC-ECHO. There you will find exciting background information as well as interesting introductory courses on Bitcoin, Blockchain and Co.

Bitcoin mining is a process in which computing power is made available for transaction processing, securing and synchronizing all users in the network. Mining is a kind of decentralized Bitcoin Bank data center with miners all over the world. This process is called mining in analogy to gold mining. Unlike gold mining, there is a reward for useful services in Bitcoin mining. The payout of the respective Bitcoin shares is based on the computing capacity provided.

In traditional fiat currency systems, governments or central banks print more money when there is a need. With Bitcoin, on the other hand, no money is printed. Rather, Bitcoin is mined itself or in the cloud (cloud mining). Around the globe, computers mine (calculate) Bitcoins, competing with each other.

How does Bitcoin mining work?

Around the clock, people transfer Bitcoins through the Bitcoin network. The Bitcoin network handles these transactions by collecting all the transactions in a given time period and putting them together in a list – called a block. It is the miner’s or prospector’s job to confirm these transactions and enter them into an account book. He is paid for this in bitcoin (the bitcoin transaction fee).

Generating a Hash

The account book is a long list of all the blocks. It is appropriately called the blockchain. The blockchain is used in Bitcoin mining to keep track of all transactions at all times. Whenever a new block is created, it is added to the blockchain. This results in a seemingly endless list of all transactions ever made. The blockchain can be viewed by anyone. Accordingly, every user can see which transaction is being carried out. What is not visible, however, is who is carrying out this transaction. Thus, Bitcoin is transparent and pseudo-anonymous at the same time.

How can it be ensured that the blockchain remains intact and is never manipulated?

This is where the miners come into play. Once a block of transactions has been generated, miners run that block through a process. They take the information and apply a mathematical formula that converts the transaction into something much shorter, really just a string of letters and numbers. This is also called a hash. This hash is kept in the block at the end of the blockchain.

Hashes have some interesting properties. It is quite easy to create a hash from the information in the Bitcoin block, but nearly impossible to see what the hash was before. Furthermore, it should be noted that each hash is unique: if even one character in the block is changed, the entire hash changes.

To create a hash, miners use not only the transaction data in the block, but also other additional data. Part of this data is the hash in the last block of the blockchain.

Since each hash of a block uses the hash of the previous block, it creates a kind of wax seal. It confirms that the current block and the one before it are valid. If someone tried to tamper with a transaction by changing the block that is already in the blockchain, they would have to change the hash as well. If someone checked the authenticity of the block using the hashing function, they would immediately notice that the hash did not match the one in the blockchain. The block would immediately be exposed as a fake.

The competition for bitcoins

Miners compete with each other to find new blocks. Each time someone successfully generates a hash, they currently receive 6.25 Bitcoins. The blockchain gets an update from the hash and everyone finds out about it. This incentive system rewards the mining that keeps the transaction processing going.

The problem is that it is very easy to generate a hash from a collection of data. So the Bitcoin network has to make it harder, because otherwise everyone would be hashing hundreds of blocks a second and all the Bitcoins would be mined in a few hours. Accordingly, the Bitcoin protocol intentionally makes it harder for miners by introducing a so-called proof of work – the mining difficulty increases over time.