One of the greatest innovations provided by Bitcoin is its ability to coordinate trust. It facilitates the transfer of value without the need to depend on a centralized authority. Much of this is attributed to its proof of work mining.
Bitcoin Mining Explained
Bitcoin runs on Blockchain, which can be described as a ledger of past transactions. They’re named so because the ledger takes the form of blocks. The Blockchain works to confirm transactions to the rest of the network as they take place. Bitcoin Mining refers to the process of creating and securing “Bitcoins” and pumping them into the network.
The Bitcoin network is heavily reliant on the miners for support and is thus rewarded for their effort. These rewards are generally paid in small installments of Bitcoins in exchange for the time and exertion a “miner” has invested. There are many ways to mine Bitcoin, the majority of which involve desktop units like using a PC’s CPU or GPU as well as more advanced programs like Application-Specific Integrated Circuits or ASIC excavators.
The Process of Bitcoin Mining
The process of mining begins by searching for a block. Miners do this by a compiling list of recent transactions and collect information about where the next block will be. They combine this with a number called a “nonce”. Next, they calculate the “Blockheader”, which is produced by combining the nonce with their collected information. The mining process will have a difficulty level. Miners must calculate the hash of the blockheader and check whether it is small enough to succeed at the existing level.
A miner has to use brute force to create a valid block. The process involves a trial and error method where miners try each nonce and keep on repeating the process until they get lucky. When searching, they do not have the ability to predict whether the next nonce will produce a smaller hash than the last. Miners can increase their chances of succeeding by increasing their speed while checking the nonces. To do this, they should increase their processing power. Once generated, a valid block is broadcasted to the rest of the network. The other nodes in the network quickly verify the new block.
The Profitability of Bitcoin Mining
No one can quite define the profitability factor involved with Bitcoin mining because of the involvement of too many variables. For instance, the energy requirements and the expenditure related to the cost of hardware needed to properly mine varies wildly across the world. The miner’s compensation and profit also depend greatly on how they’re able to compete with an ever-growing number of miners in the world.
While it’s true that we can’t properly calculate the profits associated with Bitcoin mining, there are some things that history has borne witness to. It’s a fact that the mining was profitable in the earlier days of Bitcoin. However, since the process of mining has continued and miners haven’t stopped, it stands to reason that there are still some profits to be generated.
However, one thing is for certain that the gains associated with Bitcoin mining have gradually decreased over the years of the rise in network difficulty level, as well as a growing number of competing miners. The difficulty level has increased dramatically, especially since 2018.
Reasons Why People Still Mine Bitcoin
There are many reasons why people still mine Bitcoin, with the reward being a major one. Miners are rewarded two-fold. They receive a newly produced Bitcoin as well as the attached transaction fees. This is one of the ways one can acquire Bitcoin without spending money. The rewards are fixed and do not depend on the number of competing miners on the network.
Additionally, the new Bitcoin value one receives stays the same, no matter the effort and computation power behind it. The only variable is the odds of each miner succeeding and receiving the rewards. Miners know that the total number of Bitcoins to be produced is fixed at 21 million Bitcoins. This means that there aren’t many bitcoins left to be mined. However, since newer bitcoins are produced in gradually smaller volumes, experts predict that the last bitcoin will be mined around the year 2140.
What Comes After Bitcoin Mining?
The maintenance and existence of Bitcoin’s public ledger depend on the rewards miners will get. With time the new generation of Bitcoin has become slow. This means that the reward model will shift to miners receiving modest transaction fees. There’s no doubt that Bitcoin will continue to be produced way into the next century. However, rewards will be less influenced by the bitcoin itself and would rather place more importance on earning transaction fees.
However, many have expressed two major concerns. The first is that the decline in new Bitcoin being produced will attract fewer miners to maintain the system. This can result in there being not enough miners to keep Bitcoin. The other reason the current transaction fees offered should increase to ensure that miners are getting compensated enough for their mining effort.
Both the futures of Bitcoin and its mining are exciting as well as uncertain. The best chance of success that a miner has, is to increase the computing power. This becomes tougher as costs associated with the hardware and mining process increases. The competition for the limited supply of reward also increases.
So, ultimately miners have to rely significantly on a high degree of luck along with their own efforts to attain success.