Introduction to Bitcoin mining
How to Mine Bitcoin
Bitcoin, a buzzword ballooning in popularity since its release as open-source software in 2009, is a cryptocurrency – a digital currency that lacks centralization and is therefore untethered to a single administrator or bank. This cryptocurrency can be transferred between users without the encumbrance of intermediaries, directly from peer-to-peer on the bitcoin network. Cryptocurrencies are digital assets of which 4,000 altcoins, or cryptocurrencies that are alternatives to bitcoin, have been created since 2009; however, bitcoin is considered to be the first. As a medium of exchange, bitcoin employs strong cryptography in order to secure transactions, manage the creation of units, and to verify transactions, all without requiring traditional central banking systems. The public financial transaction database of bitcoin is a distributed ledger technology known as a blockchain.
Mining is a reward process that creates bitcoins, which can then be used as currency for goods, services, and arbitrage. Though volatile, bitcoin mining has grown in popularity as an investment. Predictably, cryptocurrency exchange requires a method of storage, for which cryptocurrency wallets are used to contain the public and private “keys” or “addresses” for receiving and spending. Private keys then note transactions in the public ledger, at which point the currency is exchanged and spent, whereas public keys are used to send currency to a specific wallet. The bitcoin network does not recognize proofs of ownership outside of private keys, so if a private key is lost, the bitcoins are unusable. This creates an enormous susceptibility to data breaches, and nearly 20% of all bitcoins created are believed to be lost.
Introduction to Mining
Entire bitcoin mining companies have enormous facilities simply to manage the infrastructure necessary for housing and operating the high-performance hardware that mining requires. Mining cryptocurrency is simply a method of record keeping that employs computer-processing power. As previously noted, the distribution ledger is referred to as a blockchain, and the actions of miners are what maintains the consistency, completeness, and inalterability of the blockchain by organizing new transactions into a block, to be broadcast to the network. Recipient nodes verify this information. In telecommunications, a node is either a point of redistribution or a communication endpoint. For the purpose of organization, each block is linked to the previous block by the SHA-256 cryptographic hash of the prior block, which then also serves as the name of the blockchain. A cryptographic hash, a basic tool of modern cryptology, is a mathematic algorithm for mapping data to a bit string, and its security lies in that it is a one-way function and therefore nearly unfeasible to invert. This technology is invaluable to information security.
Each new block must contain a PoW, or proof-of-work, which necessitates that miners find a nonce, which is an arbitrary number to be used only once within cryptographic communication. As an authentication protocol, the nonce is a random or semi-random number to be sure that old communications are not reused, and a nonce often features a timestamp. Through the use nonce of numbers, the hashing algorithm can be made more or less difficult, resulting in a non-linear variety in bitcoin awards, in that bitcoin miners add nonce values to what is already being hashed in order to alter the algorithm. This results in a sort of lottery possibility of being awarded bitcoins, because the first miner to discover a nonce is the one to receive the reward.
The finding of a nonce number is a requirement of the PoW, so that when the block content is hashed with this nonce, the result is smaller than the overall network’s difficulty target. This may be easy to verify but is time-consuming to generate, due to the requirement of trying as many different nonce value as necessary before reaching the difficulty target. The network is reevaluated with the aim to maintain the average time between new blocks at ten minutes. The PoW system may be onerous, but along with the chaining of blocks, it makes alterations in the blockchain unlikely since an attacker would have to also modify any subsequent blocks as well. Since the process is constant with new blocks appearing constantly, security is maintained.
Once a miner finds a new block, they are rewarded with newly created bitcoins and transaction fees. The claiming of a reward requires a transaction called a coinbase, through which all currently existing bitcoins have been created. Through the bitcoin protocol, the reward for adding a block will be halved within approximately each four years, eventually ending at zero, when the limit of 21 million bitcoins will be reached. In effect, this is a means of artificial scarcity for the purpose of monetary policy.
To reduce variance in miner income and tame the activity’s volatility, bundled computer power is pooled and all participants are paid when a participating server discovers a block. The payout is regulated by the amount of work of the individual miner, but the quantity of time required to confirm a block and receive payment is increased.
How to Mine Bitcoin
Those wishing to mine bitcoin can either use their own hardware or go through a company. At the first introduction of bitcoin, little more than a home PC was required for mining; however, the barrier to entry has evolved much higher. It is necessary to note that as a form of investment, bitcoin mining is the most volatile means of engaging with cryptocurrency, for reasons such as hardware price fluctuations, the aforementioned arbitrary variations in Bitcoin-mining difficulty, and the lag and lack of guarantee of payout.
Through cloud mining, one can rent a portion of a company’s hardware, or hashing power, and effectively pay another to do the mining. Upon choosing a company, one must then sign on to a package. The following step is choosing a mining pool, or team to join. After this, bitcoin will gradually flow into one’s cryptocurrency wallet, and it can then be used or reinvested.
For personally mining bitcoin, a great deal of electricity and computing power is required, and due to the high cost of this, the rewards may not be lucrative. In effect, the mining software opens the padlock that is the blockchain, which then verifies all of the transactions in the chain and gains the reward of bitcoin.
The software required for mining is a bitcoin wallet and the mining software itself, which is free and open-source. The software runs on its own, so greater success is the result of speed and computing power. An ASIC is an application-specific integrated circuit, a program designed for the express purpose of mining. Such technology for discovering new bitcoins at a faster rate is not in the ballpark of $12,000, which is why joining a mining pool spreads the cost and is a more conservative, less volatile form of investment in mining bitcoin.