What is Bitcoin mining?
Firstly let's hang this on something that most people can imagine. Mining for gold takes energy, power and skill. The gold supply increases by roughly 2% a year. Gold is considered one of the 'hardest' forms of money and stores of value to have ever existed. We do not know how much gold remains to be mined. Consider the people and energy resources needed to solve the problems faced when mining for gold. The challenges in gold mining can be a helpful comparison to Bitcoin mining (solving the mathematical equations).
How does Bitcoin mining work?
In the last edition of the newsletter, we looked at nodes. Every node on the BTC network shares information about new transactions and stores these transactions in its memory pool (a node's temporary storage area for transaction data). Each node can try and "mine" the transactions in its memory pool into a file. This file is a ledger of every bitcoin transaction, and it's called the blockchain. You could think of the memory pool as "floating" transactions and the blockchain as "archived" transactions.
However, to add transactions from the memory pool to the blockchain, a node has to use a lot of computer processing power. This processing power is forced through the existence of a problem/equation in the memory pool. Like gold miners digging to find the gold mine, whoever solves the mathematical problem first will get a certain amount of Bitcoin reward. The reward incentivises people to mine, maintain the secure system, and generate new coins. Bitcoin's inbuilt incentivisation means that a 51% attack on Bitcoin is not worth it. Miners are incentivised to protect the network, not to destroy it. After each block is locked, it gets placed in a chain of pre-existing blocks, which is why this system is called "blockchain". As the blockchain grows, the mathematical equations get more challenging, and the coin rewards get smaller.
It used to be possible to mine for BTC on a home computer. Still, now the mathematical problems are so complex there are specifically made, extremely powerful computers solely for Bitcoin mining. Image 1 shows a large bitcoin mining facility using multiple machines. Image 2 shows a Bitcoin mining machine. It is no longer profitable to mine bitcoin at home because of the cost of electricity.
Additionally, if you think of mining like a game, all the miners are competing to mine the remaining bitcoin; therefore, a single machine will not compete against a Goliath of a bitcoin mining facility (David doesn't win this one against Goliath). 'David' joins what is known as a Bitcoin pool, whereby people combine their computational resources. The mined Bitcoin is shared across the pool.
Summary
In summary, the bitcoin mining process involves verifying new transactions against the Bitcoin network, which results in the production of new bitcoins.
Bitcoin mining is the process by which Bitcoin transactions are validated digitally on the Bitcoin network and added to the blockchain ledger.
It is done by solving complex cryptographic hash puzzles to verify blocks of transactions that are updated on the decentralised blockchain ledger.
Solving these puzzles requires powerful computing power and sophisticated equipment. In return, miners are rewarded with Bitcoin, which is then released into circulation hence the name Bitcoin mining.