Bitcoin mining is the core concept at the heart of the Bitcoin blockchain network. You can think of this as the running engine of the system that is constantly providing the physical infrastructure needed to facilitate a functioning financial ecosystem. Miners get rewarded for the work they do and in tandem provide the network transactions with validity and security.
But much is said about the real-world impacts of this activity. Most notably its large amounts of energy consumption that has been likened to the energy consumption of the entire country of Argentina, and also the specialized hardware that it requires. But it is important to recognize that blockchain technology is at the very beginning of its history and the development of exciting new ways to maintain blockchain systems is well underway, sometimes even in practice.
This guide is going to tell you everything you need to know about Bitcoin, how it works, how the process of crypto mining is completely interconnected with the token, and also what new and competing blockchain consensus mechanisms are out there.
What Is Bitcoin
Bitcoin was created in 2009 shortly after the 2008 economic recession. The seismic events of 2008 had revealed a new concern for centralized financial systems and out of this grew the first truly decentralized peer-2-peer cash system: Bitcoin. This network was supposed to be able to simply send financial transactions and the value they hold to one another without the need for any centralized authority. The Bitcoin network would inherit its infrastructure from the community of miners that ran and verified its transaction, and get its security from cryptographic means.
It was this cryptography element that also interested some users to see Bitcoin as a store of value, as a comparable virtual gold (Bitcoin vs Gold). Today this is how we know Bitcoin; it now sets the bar and trends for the entire cryptocurrency market with a total market capitalization of over $777 trillion. Bitcoin also famously has no leader, instead, it is a mysterious figure known as Satoshi Nakomoto, a riddle yet to be solved by the community. You can find the Bitcoin white paper online written by Satoshi that sets out the core principle of how this technology works.
How Bitcoin Works
You can imagine the Bitcoin network as a big order book full of transactions, or a ledger. Users can send large amounts of Bitcoin to other users on this ledger by using a specific address, just like with a traditional bank transaction. But where a bank transaction is sent to the centralized network of that bank to be verified Bitcoin is sent to the decentralized Bitcoin ledger. This is how funds are sent to users.
Miners are the next crucial part of this puzzle as they provide the physical infrastructure for this platform to be run on. Once they have verified the transactions and sorted them into blocks users know that the funds they are sending and receiving are secure, and this is what creates a functioning financial network. It really is more simple than you may think, at least when we talk about its process in this simplified way. The technology behind this that makes this all possible is truly amazing and has use-cases that we may not have even thought of today, as is the nature of novel technology. But it's the mining and transaction confirmations that really make the Bitcoin network possible.
What Is Bitcoin Mining?
There are two core concepts to understand about the nature and functions of Bitcoin mining that both hold incredible value to the wider system.
These two facets are:
The process of new Bitcoin entering the overall supply via rewards for work
The process in which transactions become confirmed (blocks made)
Supply and Rewards
When users send transactions to one another they are entered into an unconfirmed transactions pool to be sorted and verified by the network’s miners. This verification process is called mining and essentially consists of computers solving complex mathematical equations. You need a lot of computer power to complete these problems so miners are required to have special hardware to do so. But it's the utility within this complex problem-solving process that holds the key to Bitcoin’s success.
Essentially, once a problem is solved it means a block has been created. A block represents a collection of verified and confirmed transactions that give the network security of trade. Miners all work on these problems to create verified blocks, and once connected to a chain they form the Bitcoin ledger and its blockchain network.
Once a miner successfully creates a block they are rewarded with Bitcoin and the overall market supply is slightly increased. These rewards are halved every four years as a deflationary measure to ensure the integrity and value of the Bitcoin supply. It is designed in this way to be a direct antagonist to the current financial system.
Bitcoin confirmations are one of the core pillars providing security to the financial ecosystem. When a user signifies that they want to make a payment in Bitcoin this is sent to an unconfirmed transaction pool and miners undergo the verification process. Once this verification process is complete the block is constructed - we can describe this as one confirmation. Once this group of transactions is confirmed and grouped into a block miners then begin working on the next block. Blocks are constructed, or chained, on top of one another so every time a new block is added to the chain it becomes harder to manipulate or change an old transaction. If a new block is built on top of an older block then the community can have faith that the transactions they are built on are valid and verified.
The degree of security you enjoy depends on how many Bitcoin confirmations there have been. Also, another influencing factor can be the value the transaction represents. Manipulating blocks requires an extreme amount of computing power, much more than just mining which is already energy-intensive, so it is unlikely to be undertaken for a small amount for example.
Different Types of Mining
The blockchain consensus mechanism for Bitcoin. Requires miners to solve complex mathematical problems with extensive levels of computing power.
Very energy consuming
Requires specialist hardware
Mining is ongoing and indefinite in order to solve problems and verify blocks
Proof-Of-Stake is supposedly the future of blockchain consensus mechanisms. The Ethereum network has been working on transitioning from PoW to PoS for some time now but is seemingly a stark challenge to actually implement. PoS does not require intensive energy consumption or computing power but instead a volume of the token native to the blockchain - for example on the Ethereum network this would be ETH.
In this system, there are no miners but validators. Validators are paid with all or part of the transaction fees that reside within the block they have validated. Validators are selected for the most part on how much ETH they hold. When they hold a certain amount they may apply to be a validator and begin to earn rewards for their services.
Requires 99.95% less energy than Proof-Of-Work
Validators are chosen based on their token holdings
No specialized hardware
Doesn’t require ongoing and indefinite work
Hybridized Consensus Mechanisms
Each decentralized network can function in its own unique way as developers play around with different decentralized consensus mechanisms.
One example of this is the Solana network which is currently one of the fastest and cheapest networks in the crypto space because of its Proof-Of-Stake and Proof-Of-History combination. PoH is a new technology that tries to incorporate time within its chain management. Adding in this variable can dramatically cut time and cost when having to do the labor of confirming blocks and organizing a chain.
There are also a host of other types of blockchain consensus mechanisms, some of the most significant are:
The Bitcoin decentralized network completely relies upon mining to keep its ecosystem running and verified. It is a complex and intricate way of removing any centralized authority from a financial system and works very well. Although it is often criticized for its taxes on physical resources like energy and specialized computing hardware.
There are now other consensus models being developed, like Ethereum’s Proof-Of-Stake model that would dramatically reduce resource consumption by 99.95%, but this is proving a stark challenge for the Ethereum team as spectators wait for the eventual release of a fully PoS Ethereum 2.0.
For now, PoW mining seems the most valid option when objectively assessing how to run a decentralized network. But equally, it seems that perhaps the PoW model’s days are numbered and that it is only a matter of time before a network solves the puzzle of a more efficient, secure, and less resource-intensive blockchain consensus mechanism.
Explore the difference between Proof of Work (PoW) and Proof of Stake (PoS) in blockchain and learn each of them individually.