What is Bitcoin Mining?
Cryptocurrency: mining is painstaking, costly and only sporadically rewarding. Nonetheless, mining has a magnetic appeal for many investors interested in cryptocurrency because of the fact that miners are rewarded for their work with crypto tokens. This may be because entrepreneurial types see mining as pennies from heaven, like California gold prospectors in 1849. And if you are technologically inclined, why not do it?
However, before you invest the time and equipment, read this explainer to see whether mining is really for you. We will focus primarily on Bitcoin (throughout, we'll use "Bitcoin" when referring to the network or the cryptocurrency as a concept, and "bitcoin" when we're referring to a quantity of individual tokens).The primary draw for many Bitcoin miners is the prospect of being rewarded with valuable bitcoin tokens. That said, you certainly don't have to be a miner to own cryptocurrency tokens. You can also buy cryptocurrencies using fiat currency; you can trade it on an exchange like Bitstamp using another crypto (as an example, using Ethereum or NEO to buy bitcoin); you even can earn it by playing video games or by publishing blog posts on platforms that pay users in cryptocurrency. An example of the latter is Steemit, which is kind of like Medium except that users can reward bloggers by paying them in a proprietary cryptocurrency called STEEM. STEEM can then be traded elsewhere for bitcoin.
The bitcoin reward that miners receive is an incentive which motivates people to assist in the primary purpose of mining: to support, legitimize and monitor the Bitcoin network and its blockchain. Because these responsibilities are spread among many users all over the world, bitcoin is said to be a "decentralized" cryptocurrency, or one that does not rely on a central bank or government to oversee its regulation.
KEY TAKE A WAY
By mining, you can earn cryptocurrency without having to put down money for it.Bitcoin miners receive bitcoin as a reward for completing "blocks" of verified transactions which are added to the blockchain.
Mining rewards are paid to the miner who discovers a solution to a complex hashing puzzle first, and the probability that a participant will be the one to discover the solution is related to the portion of the total mining power on the network.
Double spending is a phenomenon in which a bitcoin user illicitly spends the same tokens twice.
You need either a GPU (graphics processing unit) or an application-specific integrated circuit (ASIC) in order to set up a mining rig.
What Coin Miners Actually Do
Miners are getting paid for their work as auditors. They are doing the work of verifying previous bitcoin transactions. This convention is meant to keep Bitcoin users honest and was conceived by bitcoin's founder, Satoshi Nakamoto. By verifying transactions, miners are helping to prevent the "double-spending problem."
Double spending is a scenario in which a bitcoin owner illicitly spends the same bitcoin twice. With physical currency, this isn't an issue: once you hand someone a $20 bill to buy a bottle of vodka, you no longer have it, so there's no danger you could use that same $20 bill to buy lotto tickets next door. With digital currency, however, as the Investopedia dictionary explains, "there is a risk that the holder could make a copy of the digital token and send it to a merchant or another party while retaining the original."
Let's say you had one legitimate $20 bill and one counterfeit of that same $20. If you were to try to spend both the real bill and the fake one, someone that took the trouble of looking at both of the bills' serial numbers would see that they were the same number, and thus one of them had to be false. What a bitcoin miner does is analogous to that—they check transactions to make sure that users have not illegitimately tried to spend the same bitcoin twice. This isn't a perfect analogy—we'll explain in more detail below.
Once a miner has verified 1 MB (megabyte) worth of bitcoin transactions, known as a "block," that miner is eligible to be rewarded with a quantity of bitcoin (more about the bitcoin reward below as well). The 1 MB limit was set by Satoshi Nakamoto, and is a matter of controversy, as some miners believe the block size should be increased to accommodate more data, which would effectively mean that the bitcoin network could process and verify transactions more quickly.
Note that verifying 1 MB worth of transactions makes a coin miner eligible to earn bitcoin—not everyone who verifies transactions will get paid out.
1MB of transactions can theoretically be as small as one transaction (though this is not at all common) or several thousand. It depends on how much data the transactions take up.
"So after all that work of verifying transactions, I might still not get any bitcoin for it?"
That is correct.
To earn bitcoins, you need to meet two conditions. One is a matter of effort; one is a matter of luck.
1) You have to verify ~1MB worth of transactions. This is the easy part.
2) You have to be the first miner to arrive at the right answer to a numeric problem. This process is also known as proof of work.
Let's say you had one legitimate $20 bill and one counterfeit of that same $20. If you were to try to spend both the real bill and the fake one, someone that took the trouble of looking at both of the bills' serial numbers would see that they were the same number, and thus one of them had to be false. What a bitcoin miner does is analogous to that—they check transactions to make sure that users have not illegitimately tried to spend the same bitcoin twice. This isn't a perfect analogy—we'll explain in more detail below.
Once a miner has verified 1 MB (megabyte) worth of bitcoin transactions, known as a "block," that miner is eligible to be rewarded with a quantity of bitcoin (more about the bitcoin reward below as well). The 1 MB limit was set by Satoshi Nakamoto, and is a matter of controversy, as some miners believe the block size should be increased to accommodate more data, which would effectively mean that the bitcoin network could process and verify transactions more quickly.
Note that verifying 1 MB worth of transactions makes a coin miner eligible to earn bitcoin—not everyone who verifies transactions will get paid out.
1MB of transactions can theoretically be as small as one transaction (though this is not at all common) or several thousand. It depends on how much data the transactions take up.
"So after all that work of verifying transactions, I might still not get any bitcoin for it?"
That is correct.
To earn bitcoins, you need to meet two conditions. One is a matter of effort; one is a matter of luck.
1) You have to verify ~1MB worth of transactions. This is the easy part.
2) You have to be the first miner to arrive at the right answer to a numeric problem. This process is also known as proof of work.
