One of the most misunderstood aspects of crypto is the process of mining bitcoin. Like many other terms in the crypto space, the word “mining” tends to create a false image of what is occurring with this vital aspect of the Bitcoin network. Most people think of gold miners when they first hear about bitcoin mining. However, it is better to think of it as a game or lottery. One where those who are willing to expend the largest amount of resources are most likely to win.
Early Bitcoin users were able to mine large numbers of coins on their laptop computers. However, Bitcoin mining has evolved into a massive industry. One where it’s becoming increasingly difficult for the little guy to compete. Indeed, the Bitcoin miners of today are using specialized hardware. They also try to protect their own trade secrets when it comes to finding new Bitcoin at the lowest possible cost.
Before understanding the role of crypto/Bitcoin miners, it’s important to understand how the mining process works in the first place. In short, the miners are effectively the accountants of the Bitcoin network. Although Bitcoin is a decentralized financial system, there still needs to be a centralized source of truth when it comes to the order of transactions. If this source of truth did not exist, then it would be difficult to trust the reliability of transactions on the network, as users would be able to trivially spend the same coins twice. The miners are the ones who have the simple job of ordering valid transactions on the Bitcoin network. Contrary to popular belief, they do not have control over the rules of the network.
Roughly every ten minutes, a new block of transactions is mine on the Bitcoin network. The block of transactions is find by doing a large amount of computation in order to find a particular solution to a cryptographic puzzle of sorts. Those who have more computing power are able to make more guesses with those resources, so they have a higher probability of finding the block. Making guesses at the mathematical solution associated with a particular block can be expensive, especially these days. For this reason, miners are get a reward for their efforts with the block reward.
Today, the block reward is made up of both newly-create bitcoin and transaction fees. Eventually, this block reward will be made up of only transaction fees as Bitcoin’s issuance rate continues to decline over time. This is a gross oversimplification of the mining process, but it’s useful to provide a newcomer with a basic understanding of how it works.
When the Bitcoin network was initially made in January of 2009, there was effectively no value assigned by the market to bitcoin. Therefore, there wasn’t much of a reason for anyone to point their computer hardware at the mining process. The earliest miners were mostly just crypto enthusiasts and Bitcoin creator Satoshi Nakamoto. However, things became much more interesting when bitcoin’s zero to one moment occurred and the crypto asset gained an exchange rate. At this point, it made sense for more people to participate in the mining process. It was not just volunteers who wanted to play around with new software that would be mining.
Those who have an interest in earning a profit would now also want to learn more about bitcoin mining. This profit motive brought a large amount of new innovation to the bitcoin mining space. At first, mining was only possible with a computer’s CPU. However, innovators quickly wrote software to unleash the power of their GPUs on the Bitcoin network. Eventually, the most savvy of early Bitcoin miners began developing special hardware, known as ASICs, they were specifically build to only run code to mine bitcoin. Over time, this specialized hardware has become much more powerful and efficient, which means those who are not using the ASICs basically have no chance of mining blocks on the Bitcoin network. There is some debate over whether or not this higher degree of specialization now required for bitcoin mining is a positive or negative development.
Today’s Crypto Mining Industry
Hobbyists were originally able to mine 50 bitcoin every ten minutes in the early days of the Bitcoin network. However, this aspect of crypto has now become an extremely specialized industry. Companies doing a lot of the mining today are publicly-trade companies. Ones that are in the United States. They even had discussions with the likes of Tesla CEO Elon Musk. This is in terms of the potential negative impact of Bitcoin mining in the fight against climate change.
On top of the costs of developing specialized hardware, these companies now also search the globe for the cheapest sources of energy in order to lower their costs and increase profits. That said, the little guy can still involve in the mining process. This is through hosted mining solutions. They are effectively able to buy a share of the mining equipment running in a datacenter. Further down the road, there is hope that cryptographic tools can develop. Develop to prevent the datacenter from potentially tampering with their customers’ mining equipment.
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