What Is Bitcoin Mining?
Bitcoin mining is the process of using specialized computers called bitcoin miners to systematically guess a number that completes a math equation. Whoever finds the number (known as a nonceWhat Is A Nonce? A nonce, short for "number used once", is a pseudo-random number used by miners to iterate the output of their block hash. Miners use a trial-and-error...) wins the privilege of adding a block of transactions to the blockchainWhat Is The Blockchain? The blockchain is the public record of bitcoin transactions, which are organized into blocks that are all chronologically linked to one another. Because every block is... and receives a reward of newly generated bitcoin as well as the transaction fees for all of the transactions in the block.
When a miner finds a winning nonce (which is short for number once), they win brand new bitcoin (the block subsidyWhat Is The Block Subsidy? The Block Subsidy is the amount of new bitcoin that is created in each block and awarded to the miner that finds the block. The...) and all of the fees for transactions that they include in the block and add to the blockchain. Finding the winning nonce is proof that a large amount of work has been done to find it. This process is called proof of workWhat Is Proof Of Work? Proof Of Work, often abbreviated as PoW, is both the method for achieving consensus across the entire Bitcoin network as well as a piece of... since it requires large amounts of work (in form of electrical energy) to find the winning nonce.
The process of completing the math equation, showing proof of work to the rest of the network, and adding a new block of transactions to the blockchain is commonly called “finding a block” or “mining a block”.
Proof Of Work
Once a miner or mining poolUnderstanding Bitcoin Mining Pools Bitcoin mining is one of the fastest growing industries in the Bitcoin space right now. As more people wake up to Bitcoin, more people want to... has found a nonce that solves the equation, the miner shows proof of their work by publishing the solution so that the rest of the network can verify it.
Part of what makes proof of work so secure is the difference between how difficult it is to do the work and how easy it is to verify that the work has been solved correctly. Proof of work problems are difficult to solve but easy to verify that they have been solved correctly.
The Block Reward
The Block RewardWhat Is The Block Reward? The block reward is how Bitcoin miners are compensated for mining and adding blocks of transactions to the blockchain. The block reward is made up... is how miners are compensated for expending energy to do the work that’s required to find the winning nonce. The Block reward is made up of two main components; the block subsidy and the miner fees.
The block reward is an important part of how bitcoin works because it is how miners are compensated for expending energy and contributing their proof of work.
The block reward is always paid out in the first transaction in every block called the coinbase transaction.
Candidate Block
As a bitcoin miner, building a candidate block is an essential step in the process of adding transactions to the blockchain. Selecting transactions with the highest fee rateWhat Is The Fee Rate? The fee rate for a Bitcoin transaction is the number of sats a sender is willing to pay for each byte of on-chain transaction data.... is key to maximizing profits and ensuring the block is added to the chain. This involves selecting transactions that are currently waiting in the mempoolWhat Is The MemPool? The MemPool, short for memory pool, is a short-term database of unconfirmed transactions that is kept by each node. Although the term "MemPool" is frequently used,... and assembling them into a block.
Once a miner has created a candidate block, they need to provide proof of work by adding the block header from the previous block and hashWhat Is A Hash? A hash, or cryptographic hash, is a mathematical function that takes digital data of any size as an input and produces a digital output of a... it to see if it meets the current difficulty requirements set by the nodes. Simply selecting transactions at random won’t suffice. To maximize mining revenues, it’s important to prioritize those transactions that pay the highest fee rate. Doing so maximizes the miner’s profits while also ensuring that the network runs smoothly.
Mining Pools
In order to increase the likelihood of finding the next block and receiving the block reward, bitcoin miners band together in groups called mining pools to “pool” their computational power. When the mining pool finds a block, each user receives bitcoin proportional to the amount of hash power that they contribute to the pool. The operator of the mining pool also receives a small portion of the block reward to cover the costs of running the mining pool.
For example. if a miner contributes 10% of the mining power to a mining pool and that mining pool receives 12.5 bitcoins for finding a block, then the miner would receive 1.25 bitcoins for being part of the mining pool. (12.5 bitcoins x .10 = 1.25 bitcoins).
Bitcoin Mining Difficulty
Bitcoin mining difficultyWhat Is Mining Difficulty? Bitcoin mining difficulty is how much computational power is required for bitcoin miners to mine the next block. As more miners join the network, the difficulty... is how difficult it is to mine the next block. The greater the difficulty, the less bitcoin miners receive per hash of computational power that they contribute. If the difficulty of mining bitcoin never increases, the amount of time between each block will get shorter and shorter as more and more miners begin mining in an attempt to get bitcoins.
To compensate for an increase in computational power when new bitcoin miners begin to mine and bring new hashpower online, the difficulty of mining bitcoin has to increase otherwise the supply of new bitcoin will increase too quickly. To better understand how this works, you might enjoy bitcoin mining explained with Rubik’s cubes.
Bitcoin Mining Hardware
Mining can be done with three different types of hardware: CPUs, GPUs, and ASICs. CPUs, or central processing units, are the brains of a computer. They can be used for bitcoin mining, but are not very efficient at it. GPUs, or graphics processing units, are designed for rendering graphics but can also be used for bitcoin mining. They are more efficient than CPUs but still not as efficient as ASICs. ASICs, or application specific integrated circuits, are specialized chips that are specifically designed for bitcoin mining and nothing else. They are the most efficient type of bitcoin mining hardware but are also the most expensive.