Financial Background: Mining Bitcoins

Bitcoin’s supply and circulation depends on a process called “mining.” Mining Bitcoin is just like mining gold but uses computers instead. It is the process of verifying Bitcoin transactions and adding them to the Blockchain ledger. Mining Bitcoins is done on a computer and relies extensively on hash functions. Every time a Bitcoin transaction is executed, miners must validate the transaction by solving a complex mathematical problem. The solution is then shared with all the other miners, who can quickly verify that the solution is correct. Once verified, the transaction or “block” is added to the blockchain. The first miner to solve the equation is rewarded in Bitcoins. A miner is rewarded each time a block is produced, which is roughly around every ten minutes. This reward incentivizes miners to be the winner. Every crypto miner must be a member of a crypto mining pool. Mining pools are beneficial because computational resources can be shared within the pool. If the pool is the first to successfully solve the mathematical equation, the reward is distributed to the members in the pool in proportion to each miner’s resource contribution.

Miners rely on “proof-of-work” consensus protocol, which requires sophisticated computer software and constant internet connection. In the past, an individual could simply rely on their computer’s central processing unit (CPU). But long gone are the days where individuals could mine Bitcoins on their CPU at home. CPUs consume too much energy. Miners now rely on graphics processing unit (GPUs), which are more powerful and effective than CPUs in performing mining operations. Alternatively, some miners also use an application-specific integrated circuit (ASIC), which is a chip that can be used specifically for mining. As more miners come into the picture and cryptocurrencies grow in popularity and acceptance, mining firms will increasingly rely on ASIC. As time goes on, less and less Bitcoin will be supplied, meaning that the mathematical equation will be more complex for miners to solve and consume much more amounts of energy.

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