A Brief Explanation of Bitcoin Mining

written by Geo Coelho

A Brief Explanation of Bitcoin Mining

The incentivized workhorses of the decentralized network

How to mine for bitcoins

Bitcoin Mining is an essential cog in the Bitcoin ecosystem. Miners play two critical roles: They mint new Bitcoin, of which there’s a finite supply of 21M, and they validate transactions submitted to the Bitcoin network.

For a transaction to be considered complete and valid it must be recorded in the Bitcoin blockchain. Before this can be done, miners must work through a hashing puzzle. The first miner to complete this complex computational problem wins the Bitcoin (BTC) block reward and new bitcoins are minted while the block of verified transactions is added to the overall chain of data.

Currently the block reward is 6.25 BTC, the equivalent of approximately USD$290,305.62 as of early 2021. Bitcoin mining has been, and remains, a lucrative business and with it comes fierce competition.

The chance or probability that a particular miner discovers the solution is directly associated with their proportion of total mining power on the network. This of course drives upward pressure to increase hashing rates in order to compete for block rewards.

Consequently, mining farms have been established around the world. Mining farms are locations where several computers dedicated to mining (one or more cryptocurrencies) are housed. They require a lot of space and power.

Application-specific integrated circuits or ASICs are the chips designed specifically for mining Bitcoin. Because ASICs are built to do the specific task of mining, they can mine bitcoins at a higher speed. This speed, which is a measurement of the entire network’s processing power per second, is called the hash rate.

Mining, power consumption and network congestion

When mining for bitcoins, according to Balance.com, a financial education website, miners have claimed to use only one watt of power for every gigahash per second of computing performed.

In 2020, an estimated 120 gigawatts (GW) per second was consumed in the pursuit of mining bitcoin. Balance.com converted this figure to 63-terawatt hours (TWh) per year, an astonishing amount of power.

In 2019, the average annual electricity consumption for a U.S. residential utility customer was 10,649 kilowatt hours (kWh). One terawatt equals 1 trillion kilowatts. That means mining for bitcoin in a single year was the equivalent to the power consumption of nearly 6 million U.S. families.

The overall cost would need to be calculated based on the electricity cost for the area.

Transaction fees and network congestion are two other common topics that have historically surrounded Bitcoin mining.

Since a block of transactions entered into the Bitcoin network cannot exceed 1MB in size, with increased activity comes congestion and a backlog. This issue raises what pundits term the Bitcoin Scalability Problem.

The issue was so serious that on Aug. 1, 2017 Bitcoin’s blockchain hard forked, meaning a separate faction split from the core Bitcoin blockchain. This faction was called Bitcoin Cash (BCH). 

Bitcoin Cash split because it viewed an increase (8MB) to the transaction block size as imminently needed. They eventually quadrupled that number to 32MB in May 2018, which was the basis of another split founded on paving the way for future adoption. 

Bitcoin Cash has historically been a top 10 cryptocurrency by market capitalization at approximately US$8.8 billion.

Halving and how Bitcoin mining works

The total amount of bitcoins in circulation right now is about 18.6 million. There is currently a finite supply set at 21 million, which means nearly 90% of the bitcoin that can currently be minted have been.

As mentioned, the current block reward is 6.25 BTC. When Bitcoin first launched, the block reward was 50 BTC. Bitcoin halving events have occurred three times since 2009. 

The most recent halving happened on May 11, 2020, which saw the reward move from 12.5 BTC (set in 2016), to the current 6.25.

With consumption and activity the way they currently are, it appears all bitcoins will be circulating within the next two to four years. However the algorithm is actually set up so that the final minted bitcoin will be released no earlier than 2140.

Nevertheless, the scarcity play has been a primary driving force behind 2020’s surge in Bitcoin’s price. After all, the majority of bitcoins are now circulating globally.

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