If you have come this far into researching about Bitcoin, you probably know the basics of what it is all about. Bitcoin lives and breathes on the internet, and is the first real working example of an internet-native currency that has actually proved successful in the sense of worldwide use without failure. You may know that there are only 21 million Bitcoin, and that the network is structured in such a way that every participant has to follow a rigid set of rules to be able to use it. Bitcoin is also the first man-made decentralized currency, meaning that it functions and grows purely through network participants and without control from a single group of people.
The most similar physical object to Bitcoin is gold, in the sense that it derives value through having the necessary properties to be a good money. These include divisibility, durability, scarcity, and fungibility (can be divided into equal smaller amounts). One prominent feature also shared between the two is that they both require effort to be produced. For both Bitcoin and Gold, someone has to do work to be able to create them. Bitcoiners have since adopted the phrase “proof of work” to describe this phenomena, which forms the basis of the mechanism which gives Bitcoin a bridge between the physical and digital world. This bridge is known as mining.
Mining is arguably one of the most fascinating aspects of Bitcoin, and is an ingenious solution to multiple problems when designing Bitcoin-
- How to issue or “mint” new Bitcoin
- How to secure the network
- How to incentivise participants to secure the network
- How to process transactions
- How to create a decentralized consensus
In this article we will cover how mining provides a solution to these, as well as some other common questions regarding the future of mining and its profitability.
Mining: The Fundamentals
Bitcoin operates in such a way that every 10 minutes or so there is a “block” of transactions added to an immutable “blockchain”, which has been growing steadily since 2009 and is up to around 610,000 blocks at the time of writing. Miners compete in a race against each other to guess the matching set of numbers and letters, known as a “hash”, as per the current “candidate block”.
The “winning” miner is rewarded two things: a predetermined number of Bitcoin to be given to the miner, and the transaction fees of all the transactions included in the respective block. The predetermined number of Bitcoin given to the miner is known as the “block subsidy” and acts as the issuance of newly minted Bitcoin. This issuance is scheduled to be reduced by 50% every 4 years, and began with 50 Bitcoin in 2009, and was then halved in 2012 to 25, and then to 12.5 where it is today. The chart below illustrates this-
Chart showing inflation over time. Link
As seen in the chart, this “halving” of Bitcoin produced every 4 years helps Bitcoin to reach its hard cap of 21 million. Not only does this form the basis of Bitcoin’s monetary supply schedule, but it also acts as the incentive mechanism for people to help secure the network. Over time as more miners join to compete for the Bitcoin reward, the amount of “work” required for a dishonest miner to game the system also increases. If you want to read more about a miner-based attack, a good article is Can Bitcoin be Hacked as it is out of the scope of this article. By design, this increasing number of miners and mining power helps the network become more resilient to attack due to a larger enforcement of its consensus rules. The chart below outline this increasing growth-
The rule of thumb is the higher the hashrate is, the healthier and more secure the network is due to a decreased risk of a single entity gaining control. This increasing security adds to another one of Bitcoin’s “positive feedback cycles”: as more people become confident in Bitcoin’s security the price is driven up, leading to more mining, leading to more security and so on.
One of the amazing things about Bitcoin mining is that it will always stay profitable, not necessarily for everyone, but just enough so that the best and most efficient miners will continue their operations. This all comes down to what is known as the “difficulty adjustment”, which happens every two weeks. Difficulty is the self correcting mechanism which maintains the margins of efficient miners, and is achieved by an algorithm which uses the average current hash rate and the target block time of 10 minutes to make sure it is never too hard or too easy for the miners. In the grand scheme of things, this means that if the Bitcoin price drops, the efficient miners will still be able to profit.
How feasible is Mining?
The mining process is quite simple, but has become largely industrialised. Mining started off as a process that could be run on any ordinary computer or graphics card, since there was not much competition and the hash rate was very low. As the years went on, people started to realise the value and the profit they could gain from Bitcoin mining, so large operations began to emerge. At the same time, hardware specifically designed for Bitcoin known as ASIC miners (application specific integrated circuits) became available which outperformed regular computers. Nowadays Bitcoin mining is a multi billion dollar industry which is increasing rapidly, with huge mining “farms” being developed in areas with cheap electricity or prospects of long lasting renewable energy.
So the technical answer is yes, you can still mine. However because large operations have a massive advantage and the initial setup cost is quite large, it is now a very lucrative business. If you are interested just for the sake of learning, there are still ways you can do it at home such as using an old graphics card or even cloud mining.
Cloud mining is where you can take advantage of remote mining operations from your home computer, however this is quite dangerous since there is no way to ensure that the mining work you have done will actually be rewarded as you are trusting a third party. A common phrase in the Bitcoin world is “Don’t trust, verify”, and it’s roots are grounded in the premise of a “full node”, which is a computer that stores and runs its own copy of the Bitcoin blockchain. This allows a greater level of security and decentralization all of the nodes together form a network that verify and check one another to make sure everyone is playing by the rules. True Bitcoin mining functions the same way, and proper miners are often referred to as “mining nodes”.
Another interesting feature of mining is the ability to form a “mining pool”. This is where a network of miners join forces to collaborate their mining efforts in order to create a greater chance of winning the block and thus the Bitcoin reward. Mining pools distribute the rewards evenly amongst all participants, while also creating a greater chance of winning the block due to the increased effort. The chart below outlines the current composition of all mining pools and their relative size-
A common misconception about mining and mining pools is that if they get too large then they can be coerced by Governments or go rogue and attack Bitcoin. There are two errors with this, the first being that although these “pools” operate in a group they are actually composed of thousands of operations in completely different parts of the world. This means that if any government or bad actor seeks to use the pool to attack Bitcoin, the miners can peacefully opt out. The second and most important argument is this: there is simply no economic incentive. Miners spend billions of dollars building their infrastructure to be able to make a living from mining Bitcoin, and carrying out an attack would render everything worthless.
Mining: The Bigger Picture
Mining has several functions within the network, so a fitting common analogy is that it serves as the “backbone” of the entire operation. On the surface level, mining may seem to just exist for the purpose of creating new Bitcoins, however the purpose goes much deeper than that. A great summary of mining is one by Andreas Antonopoulos in his book “Mastering Bitcoin”, where he states:
“Mining secures the bitcoin system and enables the emergence of network-wide consensus without a central authority. The reward of newly minted coins and transaction fees is an incentive scheme that aligns the actions of miners with the security of the network, while simultaneously implementing the monetary supply.”
The future of Bitcoin mining is also very bright, as it incentivises the use of renewable energy as well as making excess energy profitable. A study by CoinShares in 2019 determined that 74% of mining operations are already grounded in renewable energy, and that figure is likely to increase as more large scale mining operations seek to find the most efficient ways to power their miners. Another movement is using excess energy produced in wind, coal, etc to power mining rigs.
If you would like to read further interesting topics related to mining, here are a few good picks-
- Proof of Work is Efficient
- Bitcoin Mining Competitive Economics 101 — The Oversimplified Version
- Proof-of-Work, The Fundamental Laws of Physics And Nature
Overall, mining is one of the many new beautiful advancements and industries that Bitcoin has brought to us.