Understanding the Concept of Bitcoin Mining

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Understanding the Concept of Bitcoin Mining

In traditional fiat currency systems, when governments need more money, they simply decide to print it. The same cannot be said for Bitcoin, one of the most popular digital currencies of the world. This currency is ‘mined’ into existence. The purpose of Bitcoin mining is to release new Bitcoin and to add transactions to the block chain. Recent transactions are compiled into blocks and then people try to solve a computationally difficult puzzle. The next block on the chain is placed by whoever solves the puzzle and they claim the rewards. Mining is incentivized by the rewards, which include the newly released Bitcoin and also the transaction fee that is paid to the miner in terms of Bitcoin.

The process of Bitcoin mining is decentralized. You just need the proper hardware and internet connection to participate. As decisions in the Bitcoin network are based on consensus, the security of this network is dependent on this decentralization. A majority consensus decides whether a block should be included in the block chain or not, if there is disagreement over it.

Block Reward

The block reward refers to the amount of new bitcoin released with every mined block. Every four years or every 210,000 blocks, the reward is halved. In 2009, the reward began with 50 Bitcoin and reached 25 in 2014. This diminishing block reward will lead to a total release of Bitcoin of about 21 million. This is the cap as no more Bitcoin will be mined after it reaches this limit. They are the greatest incentive for miners.

Transaction Fees

As mentioned above, the block reward will continue to diminish and will eventually reach zero. Therefore, the miners will not have the incentive to mine, which could lead to major security issues. Therefore, the incentive provided by the block reward maybe replaced with transaction fees. These are basically some amount of Bitcoin, which are included in a transaction as a reward for the miner who is mining the block. These fees are voluntary on the part of the individual sending the transaction and the inclusion of the transaction in the block is also voluntary.

Mining Difficulty

The difficulty of mining Bitcoin depends on how much effort is being put into it across the network. The difficulty of the mining is adjusted automatically by the Bitcoin network after every 2016 blocks or two weeks. The purpose is to keep the block discovery rate constant. Thus, if more computational power is used for mining purposes, the difficulty level will rise and mining will become more difficult. This will make mining less profitable.

Mining Hardware

You just need an internet connection and proper hardware to start Bitcoin mining. In the early days of the cryptocurrency, mining was done from normal computers with CPUs. These days, GPU mining has become more popular, i.e. graphic processing units mining as it is more effective. See what is being said about it by experts. Eventually, specific hardware called ASIC or Application-Specific Integrated Circuit was introduced for especially mining Bitcoin. As mining is highly competitive these days due to high demand of Bitcoin, it is best to use the right hardware.

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Hassan is a Blogger, Author, Entrepreneur and the Administrator of OnzineArticles.com. He heads Burgeoning Technologies, a Web and IT Company and manages several other blogs and websites. He can be followed on , Twitter and Facebook.

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