Chances are you’ve already heard the phrase “Bitcoin Mining,” and among the first things that you immediately thought of are stones, metals, pickaxes, and getting rich. Well, you’re not too far off.
Ever wondered where Bitcoins come from? With fiat currencies, it’s the government that decides when to print and distribute the money. Bitcoin, which has no central authority, is different. To mine Bitcoins, miners use specialized computers to solve complex math problems, and if they’re successful, new Bitcoin is produced. It’s like striking gold from the ground, but digitally.
Bitcoin mining, however, serves a vital purpose other than rewarding the miners for their hard work. The activity confirms the transactions that take place in the blockchain in a trustful manner. By verifying if the transactions are valid, Bitcoin miners make the network trustworthy and secure as well as help prevent double-spending, in which the Bitcoin is illicitly spent twice, from taking place.
How does Bitcoin Mining work?
The first step involves verifying the transaction information. Once verified, the Bitcoin miners bundle transactions in a block, then they insert the header of the most recent block into a new block as a hash. This is followed by solving the Proof-of-Work (PoW) problem. PoW is a method that ensures the new block was difficult—costly and time-consuming, in other words—to be made.
After the PoW problem is solved, the new block is added to the local blockchain and then propagated to the network.
Bitcoin, now reborn as Bitcoin SV (BSV), as well all current Bitcoin forks rely on the SHA-256 hashing algorithm for mining. This is the reason why having specialized equipment is important, as it demonstrates that thee miners are making serious skin-in-the-game investments to take part in securing the network. In comparison, CPU-focused algorithms, like Equihash, can pave the way for botnets and server farms to easily mine on the network, while having no incentive to continue mining if a more profitable use of CPU time presents itself.
Simply put, miners secure the Bitcoin network—and the more miners there are, the more secure the network becomes.
When a block is discovered and successfully verified, the miners automatically receive a reward for the solving the block. The block reward currently sits at 12.5 coins, but the value is halved every 210,000 blocks, or roughly 4 years.
In addition, miners also receive the fees users pay to send their transactions on the network. It’s also an incentive for a miner to include the transaction in their block, and will help sustain miner profitability when the block reward halve in 2020 and again several years later.
The Bitcoin network processes seven transactions per second, with transactions embedded in the blockchain every 10 minutes. That means miners were being rewarded every 10 minutes, although the waiting time for transactions to be confirmed is currently longer as the number of Bitcoin users continue to grow. Unlike Bitcoin Core, which remains stuck with its small 1MB blocks, BSV has pursued massive scaling and big blocks in preparation for Bitcoin’s mass adoption.
With bigger blocks, the Bitcoin network is capable of handling more transactions and data. Miners also get more fees, the users get faster transactions, and everyone is incentivized to create something better. That’s the economic model of massive on-chain scaling—as Satoshi Nakamoto intended.