It is the process of creating a new bitcoin by solving puzzles. It consists of computing systems equipped with specialized chips (mainly high-powered GPUs)competing to solve mathematical puzzles. The first bitcoin miner(as these systems are called) to solve the puzzle is rewarded with a bitcoin. The mining process also confirms transactions on the crypto currency's network and makes them trustworthy.
Just as gold is mined from the earth using large implements and machines, bitcoin mining also uses big systems connected to data centers. These systems solve mathematical puzzles generated by Bitcoin'salgorithm to produce new coins.
By solving computational math problems, bitcoin miners also make the cryptocurrency's network trustworthy by verifying its transaction information. They verify 1 megabyte (MB) worth of transactions—the size of a single block. These transactions can theoretically be as small as one transaction but are more often several thousand depending on how much data each transaction stores. The idea behind verifying Bitcoin transaction information is to prevent double-spending. With printed currencies, counterfeiting is always an issue. But generally, when you spend $20 at the store, that bill is in the clerk's hands. Digital currency, however, it's a different story.
Digital information can be reproduced relatively easily, so with Bitcoin and other digital currencies, there is a risk that spenders can make a copy of their bitcoin and send it to another party while still holding onto the original.
The miners in Bitcoin's network try to come up with an a64-digit hexadecimal number, called a hash, that is less than or equal to a target hash in SHA256, Bitcoin'sPoW algorithm. A miner's systems use considerable brute force in the form of multiple processing units stacked together and spit out hashes at different rates—mega hashes per second (MH/s), gigahashes per second (GH/s), orterahashes per second (TH/s)—depending on the unit, guessing all possible 64-digit combinations until they arrive at a solution. The systems that guess a number less than or equal to the hash are rewarded with bitcoin.
So to simplify this a bit here's an example to explain the process. Say you ask friends to guess a number between 1 and 100 that you have thought of and written down on a piece of paper. Your friends don’t have to guess the exact number; they just have to be the first person to guess a number less than or equal to your number.
If you are thinking of the number 19 and a friend comes up with 21, they lose because 21 is greater than 19. But if someone guesses 16 and another friend guesses 18, then the latter wins because 18 is closer to 19 than 16. In very simple terms, the bitcoin mining math puzzle is the same situation described above except with 64-digit hexadecimal numbers and thousands of computing systems.
Another incentive for bitcoin miners to participate in the process is transaction fees. In addition to rewards, miners also receive fees from any transactions contained in that block of transactions. As Bitcoin reaches its planned limit of 21 million (expected around 2140), miners will be rewarded with fees for processing transactions that network users will pay. These fees ensure that miners still have the incentive to mine and keep the network going. The idea is that competition for these fees will cause them to remain low after halving events are finished.
Bitcoin transactions are aggregated into blocks that are added to a database called a blockchain. Full nodes in Bitcoin's network maintain a record of the blockchain and verify transactions occurring on it. Bitcoin miners download the entire history of the blockchain and assemble valid transactions into a block. If the block of assembled transactions is accepted and verified by other miners, then the miner receives a block reward.
There are three main costs of bitcoin mining:
The total costs for these three inputs should be less than the output—in this case, the bitcoin price—for miners to generate profits from their venture. Considering the skyrocketing price of bitcoin, the idea of minting your own cryptocurrency might sound like an attractive proposition.
However, despite what Bitcoin proponents tell you, mining cryptocurrency is not a hobby of any sort. It is an expensive venture with a high probability of failure. As illustrated in the section on mining difficulty, there is no guarantee that you will earn bitcoin rewards even after spending considerable expenses and effort. Aggregating mining systems to run a small business that mines bitcoin might offer a way out. However, even such businesses are at the mercy of the cryptocurrency's volatile prices.
Bitcoin mining is an energy-intensive process with customized mining systems that compete to solve mathematical puzzles. The miner who solves the puzzle first is rewarded with a bitcoin. The bitcoin mining process also confirms transactions on the cryptocurrency network and makes them trustworthy.
Though individual miners using desktop systems played a role during the cryptocurrency's early days, the bitcoin mining ecosystem is dominated by large mining companies that run mining pools spread across many geographies. Bitcoin mining is also controversial because it uses astronomical amounts of energy. With increasing awareness of climate change, several miners have moved operations to regions that use renewable energy sources to produce electricity.
But new advancements such as Proof-of-stake (PoS) are now rapidly bringing changes to it.
Research by University College London has systematically assessed the energy consumption of leading proof-of-stake networks in contrast with Proof of Work(PoW).
Proof-of-stake has been heralded as the environmental savior of the crypto industry, emerging as the rousing response to widespread attempts at decrypting blockchain technology on the basis of its environmental impact.
PoE technology allows circumvention of the energy-intensive cryptographic problem-solving needed to mine cryptocurrencies in Proof of Work (PoW) systems. It allows owners to stake their tokens as collateral in order to validate transactions by consensus on the network in exchange for rewards, this often takes place in large public pools.
In effect, this means that PoSdoesn’t require extra energy to prove trustworthiness, reducing the overall energy consumption of the network substantially. That is why Ethereum is progressively developing its second-generation blockchain (PoS) and rapidly working on its advancements which will significantly decrease energy consumption all in all.