Who are Miners? How Does Bitcoin Mining Work?

1. Who Are Miners? What is Bitcoin Mining?

"Miner" refers to individuals participating in the process of Bitcoin mining. Bitcoin mining describes the process of verifying information within a blockchain block by solving a cryptographic puzzle that meets specific criteria.

Once a correct solution is found, the miner who completes the task first receives a reward in the form of Bitcoin along with transaction fees.

2. How Bitcoin Mining Works

In the Bitcoin network, several key elements contribute to the unique operation of the mining process:

2.1. Hash Function

A hash function is a 64-character hexadecimal number representing the output generated by sending information through a hashing algorithm.

*A hash is a 64-digit hexadecimal number.*

Bitcoin mining involves creating a hash for each block. The more hashing power within the network, the greater its security and resistance to third-party attacks.

During Bitcoin mining, the hash is used to generate a block hash that becomes part of the header for the next block, linking each block to its predecessor, thus forming the blockchain.

2.2. Target Hash The target hash is a number miners aim for when mining a cryptocurrency like Bitcoin. It is a hash converted from hexadecimal to decimal form.

The target hash helps determine the mining difficulty by measuring how challenging and time-consuming it is to find a matching hash for each block.

For instance, the hash for block 786,729 is:

00000000000000000005a849c28eb24b8a5e04fcecc1ccb3eb2998e4730a456e

And the target hash may look like this:

0x1705c739

Miners aim to produce a hash that is less than or equal to the target hash.

2.3. Nonce

"Nonce," short for “number only used once,” is a random number miners search for when mining Bitcoin. The nonce is crucial for Bitcoin’s blockchain to function smoothly, and it’s a key component in the Proof-of-Work (PoW) algorithm and consensus mechanism. Most mining operations start with a nonce of 0 and incrementally increase it.

*Nonce is a compound word for “number used only once”*

During mining, a program generates a random nonce and pairs it with a hash. The nonce is adjusted with each attempt until the generated hash and nonce are less than or equal to the target hash set by the network.

The first miner to achieve this receives a reward along with transaction fees, and a new block is added. Miners have multiple opportunities to find the “golden nonce” and receive block rewards in proportion to their computational power.

2.4. Proof of Work

Proof of Work (PoW) is a blockchain consensus mechanism that incentivizes miners for contributing computational power to the network by rewarding them. To achieve a hash lower than or equal to the target hash, miners must invest considerable effort.

2.5. Confirmation Level

Even a small change to a block will alter its hash value, making it harder to update information in a block before verification. After a block is completed and the reward is received, it remains unconfirmed until five subsequent blocks are successfully validated.

Although it's technically possible to alter a block's information before it’s confirmed (i.e., before the five validations), it’s extremely difficult due to:

Computational Power: Changing a block’s data not only affects its hash but also requires altering the hashes of subsequent blocks. This is practically unachievable given computational limitations.
Network Control: An attacker would need control over the entire network to modify a block's information, which is highly improbable.
Hash Collisions: Although extremely rare, hash collisions could theoretically occur due to cryptographic limitations. However, the probability of this is so low that changing a block’s information before confirmation is nearly impossible.

2.6. Rewards

The Bitcoin mining fee, or block reward, is the cryptocurrency amount paid to miners for validating transactions. In addition to the block reward, miners also receive transaction fees for any transactions included in that block.

These fees incentivize miners to continue mining and help maintain the network’s functionality. Bitcoin rewards decrease over time, with this reward process continuing until 21 million Bitcoins are in circulation. As of November 2023, Bitcoin trades around $36,400, yielding 6.25 Bitcoin, valued at about $227,500.

Once the 21 million cap is reached, Bitcoin rewards are expected to end, and miners will be compensated solely through transaction fees.

2.7. Mining Difficulty

Bitcoin mining difficulty measures how challenging it is to find a hash below a specific target. This difficulty adjusts approximately every two weeks based on miners’ performance and the network’s hash rate.

*Bitcoin mining difficulty is a measure of how difficult it is to find a hash*

The difficulty level is set to maintain an average block time of 10 minutes, increasing if the time is below 10 minutes and decreasing if it’s above. As of October 2023, the difficulty level is 57.3 trillion, meaning the chance of successfully generating a valid hash is 1 in 57.3 trillion.

3. What is Bitcoin Mining as a Profession?

Bitcoin mining as a profession is a business venture that requires substantial investment in three main areas: electricity, mining hardware, and network infrastructure. Electricity powers the mining systems 24/7, and cooling these setups can also be costly.

Mining systems can range from desktops and gaming consoles to more advanced and expensive ASIC miners, which operate faster.

Network infrastructure requires multiple internal connections to link each mining rig to the primary router or server with internet access.

For the venture to be profitable, the total cost of these inputs must be less than the Bitcoin output. Currently, the total production cost per Bitcoin is around $26,500, including CapEx, electricity, and other OpEx. However, mining costs could rise to as high as $40,000 per Bitcoin after the 2024 halving event.

4. The History of Bitcoin Mining

The development of Bitcoin mining has been marked by significant advancements in the technology used for mining. In Bitcoin's early days, standard desktop computers with CPUs were primarily used for mining.

However, as the difficulty level of Bitcoin's algorithms increased over time, computers took longer to verify transactions on the cryptocurrency network.

According to some estimates, a standard CPU would take several hundred thousand years on average to find a valid block at the difficulty level in early 2015. The period from 2009 to 2015 witnessed a series of innovations and crucial events shaping the future of Bitcoin mining.

One of the most important milestones in this period was the transition from CPU to GPU (graphics processing unit) mining.

The mining industry continued to evolve, with efforts to promote decentralization through new mining algorithms, the exploration of alternative consensus mechanisms, and initiatives to encourage broader participation in mining.

4.1. GPU Mining

Over time, miners realized that GPUs were more efficient and mined faster due to their ability to perform multiple calculations, which improved the output of cryptocurrency mining.

GPUs are designed to perform repetitive calculations quickly, especially when rendering video games, graphics, or 3D video, making them highly effective for mining operations.

4.2. ASIC Mining

Today, miners generally use specialized mining devices called application-specific integrated circuits (ASICs), which are equipped with dedicated chips designed to mine Bitcoin faster and more efficiently.

*ASICs are equipped with specialized chips to mine Bitcoin faster*

ASICs range in price from a few hundred to tens of thousands of dollars. With rising competition in Bitcoin mining, some miners can only operate profitably with the latest ASIC models.

5. Challenges in Bitcoin Mining

With odds of 1 in 57.6 trillion, expanding difficulty levels, and a vast network of users verifying transactions, a transaction block is verified approximately every 10 minutes. However, it’s essential to understand that 10 minutes is a target, not a rule. Here are some critical challenges miners face in Bitcoin mining:

Speed

The Bitcoin network can handle between three to six transactions per second, with transactions being recorded on the blockchain approximately every 10 minutes. In comparison, Visa can process around 65,000 transactions per second.

While solutions like second-layer upgrades and improvements to the Bitcoin blockchain are addressing speed issues, modern banking networks and other blockchains still process many more transactions than the Bitcoin network.

Scalability

Although Bitcoin miners agree that measures are needed to address scalability, there is still no consensus on how to achieve it. As a result, Bitcoin has been modified through upgrades and off-chain solutions, but significant scalability improvements remain elusive.

Energy Consumption

The Bitcoin network consumes substantial amounts of energy. It’s estimated that Bitcoin uses 127 terawatt-hours (TWh) of electricity annually, surpassing some countries' energy usage. Mining alone accounts for a significant portion of this consumption, with an estimated 1,449 kWh required for a single Bitcoin transaction.

The energy consumption issue arises from Bitcoin's unique proof-of-work (PoW) mining process, where miners need substantial electricity to solve complex calculations.

Renewable energy-powered Bitcoin mining has been proposed as a potential solution to reduce environmental impact, but the challenges of energy use and economic costs remain.

6. Conclusion

Bitcoin mining is a resource-intensive process involving specialized mining systems competing to verify transactions. Bitcoin mining not only validates transactions on the cryptocurrency network but also makes them trustworthy.

Additionally, miners are rewarded with Bitcoin as an incentive to participate in this process.

While individual miners initially used conventional computers in the early days of cryptocurrency, the Bitcoin mining ecosystem is now dominated by large mining companies running mining pools across various geographic regions.

The above is Bigcoin Vietnam's overview of the Bitcoin mining process. If you have any other questions, feel free to ask in the Bigcoin Vietnam group for assistance.

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