Bitcoin was created as a decentralized alternative to the banking system.
This means that the system can operate, and transfer funds from one account to the other; without any central authority.
With a central authority, transferring money is easy. Just tell the bank you want to remove N3000 from your account, and add it to someone else account. In this case, the bank, has all the power – since the bank is the only one allowed to update the ledger that holds the balances of everyone in the system.
But how do you create a system that has a decentralized ledger?
How do you give someone the ability to update the ledger without giving them so much power that they’ll become corrupt, or negligent in their work?
The rules of the bitcoin system, known as the protocol, solves this in a very creative way I like to call, ‘Who wants to be a banker?’
In short,… Anyone who wants to participate in updating the ledger of bitcoin transactions; known as the Blockchain, can do so.
All you need to do, is guess a random number, that solves an equation generated by the system.
Sounds simple right?
Of course, this ‘guessing’ is all done by your computer (or mobile device).
The more power your computer, the more guesses it can make per second. Thus, increasing your chances of winning this ‘game’.
If you manage to guess right, you earn bitcoins, and get to write the next page of bitcoin transactions on the Blockchain.
Here’s a more detailed breakdown of the mining process;
Once your mining computer comes up with the right guess, your mining program determines which of the currently pending transactions will be grouped together into the next block of transactions.
Compiling this block, represents your moment of glory; as you have now become, a temporary banker of bitcoin, who gets to update the bitcoin transaction ledger – known as the Blockchain.
The block you’ve created, along with your solution, is sent to the whole network; so that other computers could validate it.
Each computer that validates your solution, updates its copy of the bitcoin transaction ledger with the transactions that you chose to include, in the next block.
As you can imagine,… Since mining is based on a form of guessing, for each block, a different miner will guess the number, and be granted the right to update the Blockchain.
Of course, the miners with more computing power, will succeed more often. But, due to the law of statistical probability, it is highly unlikely that the same miner will do so, every time.
After this stage is complete, the system generates a fixed amount of bitcoin, and rewards them to you – as a compensation for the time and energy you’ve spent in solving the math’s problem.
Additionally, you get paid any transaction fees that were attached to the transaction you inserted into this block.
So,… That’s bitcoin mining in a nutshell.
It’s called ‘mining’, because this process helps mine new bitcoin from the system.
But if you think about it, the ‘mining’ part, is just the by-product of the transaction verification process. So, the name is a bit misleading; since the main goal of mining, is to maintain the ledger, in a decentralized manner.
Well, now that you know what bitcoin mining is, you might be thinking, ‘Cool!… Free money,… So, where do I sign up?’
Well,… Not so fast!
Satoshi Nakamoto, who invented bitcoin, crafted the rules for mining, in a way that the more mining power the network has, the harder it is to guess the answer to the mining math problem.
So, the difficulty of the mining process, is actually self-adjusting to the accumulated mining power the network possesses.
If more miners join, it will get harder to solve the problem. If many of them drop of, it will get easier. And this is known as the ‘Mining difficulty’.
So, why on earth did Satoshi do this?
He wanted to create a steady flow of new bitcoins to the system.
In a sense,… This was done, to keep inflation in check.
The mining difficulty is set, so that on average, a new block will be added every 10 minutes.
When bitcoin first started out, there weren’t a lot of miners out there. In fact, Satoshi – the inventor of bitcoin, and his friend, were some of the very few people mining bitcoin back at the time; with their own personal computer.
Using your CPU (Central Processing Unit), or your ‘computer’s brain’, was enough for mining bitcoin back in 2009, since the mining difficulty was very low.
But, as bitcoin started to catch on, people looked for more powerful mining solutions.
And gradually,… People moved to GPU-mining.
A GPU, or Graphics Processing Unit, is a special component added to computers; to carry out more complex calculations.
GPUs, were originally intended to allow gamers to run computer games, with intense graphics requirements.
Because of their architecture,… They became popular in the field of cryptography. And around 2011, people also started using them to mine bitcoins.
For reference,… The mining power of one GPU, equals that of over 30 CPUs!