In the traditional economic system, states and governments can print money as they please. This does not happen in Bitcoin due to 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 a process called halving.
Until the moment 21 million bitcoins are fully issued (something that will happen around the year 2140) new coins are put into circulation every 10 minutes. These 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 accounting book that is the Bitcoin blockchain network.
Gold mining consists of removing large portions of land with heavy machines to obtain the precious metal in sufficient quantities to pay the exploitation costs and obtain a profit. The same is true of Bitcoin mining, with the exception that complex computer equipment is used that perform computational calculations and as compensation they get two incentives:
- New Bitcoin put into circulation
- Transaction fees
“The network timestamps transactions as they are hashed (does a cryptographic transformation) within a continuous chain of hash-based proof-of-work. A record is built up that cannot be changed without redoing the proof of work. The longest chain not only serves as proof of the sequence of events that occurred, but also 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 outrun the attackers."
Satoshi Nakamoto in the Bitcoin Whitepaper
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How to be a bitcoin miner
El bitcoin mining process It's always the same: miners receive a new math problem every ten minutes and the fastest to solve it wins the new coins that are put into circulation.
This mathematical problem is based on random calculations that aim to find the solution and thus obtain block validation. Whoever cracks this gets the reward, as long as the rest of the network members confirm that the answer is correct.
Before continuing, we recommend that you review what a mining rig to continue understanding how to proceed to mine Bitcoin and obtain a good performance.
Role of mining
Because cryptocurrencies are a decentralized system, we need a formula that allows us to check all the operations carried out. The mining mission is vital to prevent someone from using the same amount of Bitcoin more than once or being able to introduce fake coins to the market.
Thus, the miners review the transactions and gather the last ones that have been generated in a group called block. The set of blocks could be compared to the set of pages of a ledger (ledger) or ledger, which certifies all the movements and the balance of the users.
Cooperative of mining or pool
The more computing power you have, the easier it is to solve a block and therefore get a reward. For this reason they created the mining pools, to carry out joint work and obtain a fair reward among all members for the work done.
Joining a pool guarantees us more chances to solve a block and get the reward. If we did it individually, we might never get a reward, either by sheer chance or because we had less computing power than the competition.
So partnering with other users who contribute mining machines ensures that we are more likely to get a reward.
The reward for the miner
First of all, we have to take into account that each 210.000 blocks, the amount of Bitcoin offered as a reward is halved, something known as halving. This implies that the value of each Bitcoin has to increase for mining to continue to be profitable.
Within the Bitcoin code it is established that when a block is validated, a certain amount of coins is obtained. Currently, 6,25 BTC is obtained for each new block validated, this is due to the third bitcoin halving that took place on May 11, 2020. We must bear in mind that the commissions for each of the transactions are added to this fixed amount of Bitcoin.
In addition, it is important to take into account that, depending on the dynamic difficulty of the blockchain, the mining of each block happens approximately every ten minutes, but the reward has not always been the same, but has been progressively reduced as the number of blocks has passed. different Bitcoin halvings, which take place every four years or so.
By convention, the first transaction in the block is a special transaction that generates a new coin owned by the block creator. This adds an incentive for nodes to support the network, provides an initial way to distribute and circulate the coins since there is no authority to create them. This steady addition of a constant amount of new coins is analogous to gold miners spending resources to get gold into circulation. In our case, the resources are the CPU time and electricity that are spent."
Satoshi Nakamoto in 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. In fact, initially only Satoshi Nakamoto mined on the Bitcoin network and other miners gradually joined the process. But as people joined mining, the difficulty increased due to the increase in computing power of the network, a situation that made it very difficult to obtain a reward. This is how the jump to graphics cards occurred because the GPU (graphics processor) have more computing power than the processor.
On December 16, 2009, version 0.2 of the Bitcoin software was released, which incorporated an interesting novelty, which is that it allowed the use of several processors in the same system.
What Bitcoin's v0.2 enabled was the development of specialized machines for computing: the ASICs. Basically, an ASIC is a specialized computer that has many processors. The computing power of each of these systems is much higher and it made mining using graphics cards completely obsolete. Although an ASIC cannot serve us like a normal PC, it can perfectly execute the necessary instructions to carry out mining, extremely efficiently.
Difficulty and hash rate
We must understand that the more computer equipment is added to the network, the more its computing capacity increases. And at the same time, more competition is concentrated to obtain a reward.
La difficulty it is the necessary calculation to guarantee 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 reset itself to increase the complexity of the problem. The opposite would happen if the average in those 2.016 blocks exceeded 10 minutes.
Thehash rate on the other hand, it 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 power of the ASIC we have and the pool we are in, we will have more or less possibilities of obtaining Bitcoin. Profitability depends on the value of Bitcoin, the difficulty of the network and the determining factor: the cost of electricity.
The price of electricity will be the one that really determines if it is viable or not to mine Bitcoin, that is, if we will obtain compensation for the work done. Large mining farms are usually installed in countries or areas where there is access to cheap electricity, especially based on renewable energy, mainly hydraulic. Unfortunately in Spain, the high cost of electricity makes it practically unfeasible to mine Bitcoin.
How much does a bitcoin miner earn?
We must not only take into account the direct electricity necessary to power the miner's equipment. We also need to cool all the heat they generate, so the electrical cost goes up significantly.
We must take into account the cost of acquiring the equipment and the competition. What is the same: the number of machines that are operating in the network and that tends to increase over time. This can cause our mining operation together with the electrical cost to be profitable or not.
Finally, the development of new specialized systems must be taken into account. Bitcoin mining systems are still under development and this may mean that our ASIC is obsolete at any time or, in other words, profitability is reduced.
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