Blockchain and Mining Explained: How Mining Works and Transactions Processed

In this topic, we will use Bitcoin as an example to explain most of what you will learn about mining. The concept is the same everywhere. What do you think about when you hear someone say that they are ‘mining’?

Do you picture the Wild West, people panning in rivers, taking their pickaxes and looking for rich veins of gold?

Well, that imagery is not too far off from what you will have to do when you are mining cryptocurrency. The analogy is almost perfect because mining cryptocurrency is uncertain and difficult. It will take its toll before you can get returns.

We perform the exercise with the aid of super-powerful computers, which have to solve complex mathematical computations. The math problems are so hard, you cannot do them by hand. It explains why you need powerful computers.

At the time of writing this, the odds of a computer solving one of these math problems to get Bitcoin is 1 in 13 trillion. Don’t worry, we will get into that later on.

What Comes of Mining?

 When mining, the result is twofold:

1. When the computers solve the math problems in the Bitcoin network, the produce new bitcoin. It is the same thing as mining. You get gold from the ground.
2. By solving these problems, the miners make the Bitcoin payments secure and trustworthy by verifying transactions.

If you remember anything from the first lessons, verifying transactions on the blockchain requires that several computers be able to solve a math problem. To make this easier to understand, we will get into the basics of a cryptocurrency like Bitcoin.

The Basics: What Cryptocurrency Mining Means

When you buy or sell something using Bitcoin, we call that a transaction, just like with anything else. When you make a transaction in-store or online, banks do the documentation, point-of-sale systems record your transaction and you get paper receipts.

Mining bitcoin has the same effect but involving none of the financial institutions. As we said, all they put together the transaction date in blocks. They then add the blocks to the public record we call the blockchain.

The nodes (computers active in the network) maintain the records of the blocks for reference. Because they are immutable and unchangeable, no one can overcharge or double-charge you.

Bitcoin miners do more than just mine for bitcoin. They make sure that the transactions are accurate.

Miners and Verification

If you walk into a store and hand a $20 to the person in there, they have it and you do not have it. For data, it is easy to make a copy. Bitcoin is a digital currency and there is a risk that someone can make a copy. How do you stop that from happening?

If you duplicated your $20 bill, the only way for the storekeeper to know that it is a fake would be to look at the serial numbers, authenticity markers or just to feel the paper. Digital information is easy to duplicate and harder to detect.

Miners come into the picture to verify that someone is not sending a copy of a bitcoin to purchase something while keeping the original.

Miners Reward

No one will force you as a miner to do the job of verifying a transaction. Instead, incentives are what you get for this kind of work. In a single day, Bitcoin is used in as many as half a million transactions. Verifying each of these is a lot of work for miners.

As compensation for the work done, they award miners bitcoin whenever they add a new block of transactions to the blockchain. The amount of Bitcoin released when a block is added to the blockchain is called the ‘block reward.’

The blockchain halves the reward every 210,000 blocks (roughly every four years). Back in 2009, it was 50. In 2013, it was 25. In 2018; it was 12.5. Sometimes in 2020, it will be 6.25.

With the halving working at this rate, the number of bitcoin in circulation will approach the 21-million limit. This will make the currency scarcer and more valuable. It will become more costly for miners to produce.

How Does It Work? What’s the Catch?

As a miner, to earn bitcoin from verifying transactions, two things have to happen. You must first verify 1MB (megabyte) worth of transactions. The transactions to fill this can sometimes be as small as a single transaction or often several thousand of them, depending on how many data transactions rack up.

This is the easy part.

The hard part is that to add a block of transactions to the blockchain, miners need to solve complex math problems. This is what we call ‘proof of work.’ The problem involves coming up with a 64-digit hexadecimal number called the ‘hash’ that is less than or equal to the target hash.

A miner’s computer spits out hashes at a rate of megahashes per second (MH/s), gigahashes per second (GH/s) or terahashes per second (TH/s). It all depends on the unit. Guessing all the 64 numbers until you get the solution is a gamble, and that is the catch.

The difficulty level just gets worse as the years go by. With a 1 in 13 trillion chance, you are 44,500 times more to win the Powerball jackpot with a single lottery ticket than you are trying to pick the correct hash in a single try.

The good thing is that computer systems geared for just mining spit out many more hash possibilities than just one. To own one of those requires a lot of energy and money to get the sophisticated equipment.

The difficulty level changes about every two weeks (the equivalent of 2016 blocks). This is a method that keeps the rates of mining constant. The more the miners competing to get the answer, the difficult the math problem. If the computational power in the network goes down, the difficulty does the same too.

 One Last Explanation (Assuming You Were A Five-year-old)

Say we have Jon Snow and his three friends; Samwell, Ser Davos and Tyrion. Jon Snow tells them he is thinking of a number between 1 and 100. Let’s say the number is 27. The three friends do not have to guess the exact number. They just have to be the first person to guess any number that is less than or equal to 27.

There is no limit to how many guesses they get. However, one of them will get it first. Now, imagine that Jon Snow is asking a million friends for a number between 1 to 100 but it is a 64-digit hexadecimal number. That will be very hard.

So, that is all you need to know about mining for now. We will get into the details of things like mining pools later and see if the mining practices are sustainable.