TOPSHOT – Mining rigs (L) of a supercomputer and air filters (R) are depicted in the bitcoin … [+]
AFP via Getty Images
While new dollars are printed under the control of the US federal government, bitcoin is produced through “mining” that is not under the control of any government or corporation. How is that possible? Let’s break down what that means.
Bitcoins are sent in transactions from one person to another. People run specialized computers called miners that examine bitcoin transactions and create new blocks of transactions to add to the older blocks stored by each miner. Each miner validates each new proposed transaction. Once there are enough transactions to fill a block, all miners work on the new block to ensure it and all of its transactions are valid. Once they agree that a new block is good, it is added to the older ones on what is known as the BitcoinBTC blockchain. This process is called “mining” Bitcoin. A transaction is not complete and confirmed until a majority of Bitcoin mining machines around the world have verified it.
In the case of Bitcoin, this mining process is referred to as “proof of work,” which refers to the large number of guesses that must be made to find a “hash code” that meets Bitcoin’s demanding criteria. This requires a lot of power and special hardware.
Bitcoin mining is a decentralized ecosystem
There are hundreds of crypto mining companies around the world running these verification machines. There is no central authority approving bitcoin miners or their operators.
Miners are volunteers. Nobody chooses them – they just jump in, assemble their hardware and software, and start mining. All alone – without permission and even without an invitation! They do this because mining bitcoin brings in money in the form of newly issued bitcoins. The formula and rules are built into the Bitcoin Core open-source software that everyone uses. The more you mine, the more you can earn.
As a miner, if you are ever tempted to think of playing around with the software, cheating and just taking a bunch of money (Bitcoin), immediately think of the huge investment you have already made in mining equipment. Not good for much besides mining. Attempting to thwart the integrity of the bitcoin mining system would hamper your future earning potential and devalue all those devices.
If people started thinking that miners were corruptocrats trading in themselves, the value of Bitcoin would immediately plummet. Then the miner’s investment would be worthless, both the machines and the accumulated digital assets. So, as a miner, you are still a trusted transaction verifier – and by the way, keep a close eye on the other miners to make sure none of THEM are cheating. If the other miners cheated on them, it would hurt you too. Bad. In this way, the incentives in the bitcoin mining ecosystem make transparency and integrity mutually beneficial.
Open source funds are only as valuable as users’ trust in network participants. In short, while there are trade associations and groups for professional crypto mining operations, miners are independent groups that spend their own money and time making bitcoin.
proof of work
What the miners actually do is solve computationally intensive problems – all with standard software on beefed up hardware – with two important functions:
- First, computing ensures that every new transaction someone tries to enter into the ledger follows the rules. Simple rules that are essential for virtual currencies to work. Things like you can only spend money you have. You can only spend it once. Things like that, things you don’t even think about when your money is physical and sitting in a wallet – but when it’s digital it has to be enforced with software.
- Second, the computing places a lock on the new transaction, a special failed lock associated with all previous locks from all previous transactions. To simplify the calculation, the transactions are grouped into blocks, and in fact it is the blocks that are tightly locked and chained together with hard-to-break software locks. Hence the name “blockchain”.
The rules built into the Bitcoin Core software used by all miners are key to everything. Since all miners use the same software, they all follow the same rules. These rules enforce the fact that there is a known Bitcoin supply at any point in time, with the ledger keeping track of who owns how much. The number of Bitcoins is fixed – until a miner earns something through the mining work. In this case, a brand new bitcoin is created – according to a set scheme – and deposited in the miner’s own account in the ledger.
After all, the Bitcoin miners see every single transaction. Every transaction is checked to ensure that the rules are followed. The owner is only identified by a VERY long string of letters, a public key. This is the capstone of the bitcoin network’s solution to the problem of government-issued currency. No sniffing!
Bitcoin’s supply cap
There is a publicly known amount of Bitcoin in the world that is slowly growing as it is created to pay the miners they earn from operating the system. The bitcoin protocol states that there will never be more than 21 million bitcoins. Once miners produce that many, no more can be created unless there is a consensus change to the Bitcoin Core software. The limit will not be reached for about a century.
As supply increases, bitcoin miners find it more difficult to earn bitcoin rewards. This is called difficulty adjustment, meaning that the more Bitcoin there is in the world, the harder it is for miners to earn Bitcoin rewards. This makes the mining industry more competitive as the value of Bitcoin increases.
Despite the expensive hardware, many volunteer miners keep transactions flowing, safe and secure without the network depending on any of them as a single point of failure. Competition keeps bitcoin mining diversified. Bitcoin miners generally create a new block of Bitcoin every ten minutes. With thousands of volunteer miners working around the world, there is no single authority responsible for verifying Bitcoin transactions. Nobody is responsible. Just a variety of different miners all having an incentive to be honest. No governments, no bureaucracies, no politics, nobody to spy on you. Problem solved!
Because of this, the Bitcoin blockchain is innovative and deserves the attention and recognition it is getting.
Learn Crypto Trading, Yield Farms, Income strategies and more at CrytoAnswers
https://nov.link/cryptoanswers
Comments are closed.