In the traditional economic system, states and governments can print banknotes at will. This does not happen in Bitcoin for two reasons:
- There is a limit of 21 million coins, and you cannot change that amount.
- The number of coins released as a reward for work done is limited in the software and halved every 210,000 blocks by splitting.
Until the 21 million bitcoins are entirely issued (approximately 2140), new coins are put into circulation every 10 minutes. These coins are obtained by the miners in compensation for the verification work carried out. The miners generate and validate the blocks that make up the great ledger of the Bitcoin blockchain network.
Gold mining consists of removing earth with heavy machines to obtain the precious metal in sufficient quantities to pay the operating costs and make a profit. The same happens in bitcoin mining, with the exception that the machinery is complex computer equipment that performs computational calculations, and as compensation, they obtain two incentives:
- New bitcoin that are put into circulation
- Transaction fees
The bitcoin mining process is always the same; miners receive a new mathematical problem every ten minutes, and the fastest to solve it takes the new coins put into circulation. This mathematical problem is based on random calculations that aim to find the solution and thus validate the block. Whoever deciphers this will get the reward, as long as the rest of the network members confirm that the answer is correct.
“The network times the transactions as they are hashed (do a cryptographic transformation) within a continuous chain of proof-of-work based on hashes. A record is being formed that cannot be modified without redoing the proof of work. The longest chain serves not only as proof of the sequence of events that occurred, but as proof that it came from the largest set of CPU power. As long as the highest CPU power is controlled by nodes that are not cooperating to attack the network, they will generate the longest chain and outcompete the attackers. “
Satoshi Nakamoto on the – Bitcoin Whitepaper
Role of mining
Because cryptocurrencies are decentralized, we need a formula that allows us to check all the operations carried out. It is important to prevent someone from using the same amount of bitcoin more than once or from being able to introduce counterfeit coins to the market. The mining mission is basically to certify that no one uses the coins twice and that no one can bring fake bitcoins onto the market.
Thus, the miners review the transactions and put together the latest transactions created in a group called a block. You could compare the set of blocks to the set of pages of a general ledger (ledger) or ledger, which certifies all movements and the balance of users.
Mining cooperative or pool
The more computing power you have, the easier it becomes to solve a block and therefore get a reward. For this reason, the mining pools were created to carry out joint work and thus obtain a fair reward among all the members for the work carried out.
Joining under a pool guarantees us more chances to solve a block and get the reward. If we did it individually per user, we might never get a reward either because of sheer probability or because we have less computing power than the competition.
So partnering with other users who contribute mining machines ensures that we have a better chance of getting a reward.
The reward for the miner
Within the Bitcoin code, it is established that when a block is validated, a certain amount of coins is obtained. Currently, 6.25 BTC are obtained for each new validated block due to the third bitcoin halving on May 11, 2020. We must bear in mind that the commissions for each one are added to this fixed amount of bitcoin of transactions.
Every 210,000 blocks, bitcoin offered as a reward is cut in half, something known as halving. This implies that the value of each bitcoin has to increase for mining to continue to be profitable.
“By convention, the first transaction in the block is a special transaction that generates a new currency owned by the creator of the block. This adds an incentive for the nodes to support the network, provides an initial way to distribute and circulates the coins since there is no authority to create them. This stable addition of a constant amount of new coins is analogous to gold miners who spend resources to put it into circulation. In our case, the resources are the CPU time and the electricity that are used. “
Satoshi Nakamoto on the Bitcoin Whitepaper
What do I need to mine bitcoin?
The first bitcoins were mined using the processors or CPUs of computer equipment because very few people were mining. Initially, only Satoshi Nakamoto was the one who mined on the Bitcoin network, and it is believed that other miners joined the process shortly after. But as it incorporates more people into mining, the difficulty increased due to the increase in the network’s computing power. This situation made it very difficult to obtain a reward. The jump to graphics cards occurred because GPUs (graphics processors) have more computing power than the processor.
On December 16, 2009, version 0.2 of the Bitcoin software was released, which included an exciting novelty, which is that it allowed the use of several processors in the same system. That day marked a before and after.
What allowed Bitcoin v0.2 was the development of specialized machines for computing: ASICs. An ASIC is a technical computer that has many processors. The computing power of each of these systems is much more significant and made mining using graphics cards completely obsolete. Although an ASIC cannot serve us as a normal PC, these can perfectly execute the necessary instructions to carry out the mining efficiently.
The difficulty and the hash rate
We must understand that the more computer equipment added to the network, the more its computing capacity increases. And at the same time, more competition is concentrated to obtain a reward.
The difficulty is the calculation necessary to ensure that the blocks are obtained every ten minutes. If new blocks were suddenly generated in less than 10 minutes on average over 2,016 blocks, Bitcoin would automatically readjust to increase the complexity of the problem. The opposite would occur if the average in those 2,016 blocks exceeded 10 minutes.
On the other hand, the hash rate is the processing capacity of the Bitcoin network for each of the computers that are added to it. The sum of the power of all the computers in the network gives us the total hash rate in the network.
Bitcoin mining profitability
Depending on the ASIC’s power and the pool in which we are, we will have more or less possibilities of obtaining bitcoin. The profitability depends on the value of the Bitcoin, the difficulty of the network, and the determining factor: the electricity cost.
The price of electricity will be the one that determines whether or not it is viable to mine Bitcoin if we obtain compensation for the work done. Large mining farms are usually installed in countries or areas with access to cheap electricity, mainly based on renewable energy, mainly hydroelectric. Unfortunately, in Spain, the high cost of electricity makes it practically unviable to mine Bitcoin.
We must not only take into account the direct electricity needed to power the miner’s equipment. We also need to cool all the heat they generate, so the electrical cost increases significantly.
We must take into account the cost of acquiring the equipment and the competition. What is the same: the number of machines operating on the network, and that usually increases. This will make our mining operation, together with the electrical cost, may or may not be profitable.
Finally, you must take the development of new specialized systems into account. Systems for mining Bitcoin are still under development, and that can mean that at any moment, our ASIC becomes obsolete or, in other words, profitability is reduced.