Last updated: April 13, 2016
What is Bitcoin mining?
Mining in general, regardless of what is actually being mined, is the process of extracting something of value from some place where it is not readily available. The mining process usually requires time and expense in the form of equipment and labor. If the value of what is extracted from a mine exceeds the cost of acquiring it, then a mining operation is profitable.
Bitcoin “mining” is the process of solving complex math problems using specialized computer hardware and software, and a connection to the Internet, to “extract” Bitcoin. Those who engage in the effort of Bitcoin mining are called “miners”, which is analogous to gold miners, and miners are rewarded with new bitcoins commensurate with their mining effort.
Bitcoin mining is more than just a treasure hunt for new bitcoins. Mining serves to secure and synchronize the Bitcoin network by validating transactions, and the issuance of new bitcoins is a reward to miners for providing the service of playing a role in operating a secure payment network. The mining software connects to the peer-to-peer Bitcoin network, receives transactions that are broadcast, and performs tasks such as processing Bitcoin transactions, and confirming their authenticity. Miners engage in, and are incentivized by, this effort because, by doing so, they can earn a share of both transaction fees paid by Bitcoin users for faster transaction processing, as well as a share of newly created bitcoins. Plus they play an integral role in maintaining a digital payment and currency system that is completely independent of a central authority (such as a nation-state or central bank).
Bitcoin mining is an increasingly competitive effort because the greater the number of miners, the more difficult mining becomes (also see What is Bitcoin difficulty?). Bitcoin mining entails the process of running SHA-256 double round hash verification processes using the aforementioned specialized computer hardware and software. The speed at which mining hardware performs the verification process is measured in hashes per second — also referred to as the hash rate. The higher the hash rate, the greater the computational power of the mining hardware, and therefore greater the return of the Bitcoin reward. Miners purchase Bitcoin mining hardware based on the maximum possible hash rate the hardware can achieve.
As the computational power required to receive any reward from Bitcoin mining has increased, miners have organized into pools. At Bitcoin’s inception, individual miners were able to use the processing power of desktop computer CPU’s, and later, video graphic card GPU’s, to mine independently. As such, early adopters were able to amass a large number of Bitcoins due to a low Bitcoin network difficulty, and relatively high processing power. By 2013, application-specific integrated circuit, or ASIC, processors rendered CPU and GPU Bitcoin mining virtually obsolete through an exponential increase in the hash rate they brought. By joining a mining pool, miners combine their hash rates under a single effort to share the work, and then divide any reward among the members of the pool based on each miner’s contribution.
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