What Is Bitcoin Mining: Part 2
Tags: Fintech, Blockchain, Cryptocurrency, Bitcoin Mining, Bitcoin

What Is Bitcoin Mining: Part 2

Crypto mining is intensive and pricey, and you receive rewards only from time to time. However, this process is attractive to lots of investors who are concerned about crypto. The reason is simple: they are rewarded with crypto tokens for their hard work. Do you remember the Monuments Men? That’s how people see mining, especially those who know how the technology works. DeBay Follow Mar 25, 2020 · 6 min read

Mining Equipment

While earlier miners could use their regular PCs when competing for blocks, that isn’t possible anymore. Bitcoin mining has become much more difficult than before.

One of the main targets of the Bitcoin network is to generate one block every 10 minutes to provide continuous processes and operations and validate transactions. But when one hundred mining rigs are working on a hash issue, they will solve it quicker than five rigs that are trying to solve the same issue. That’s why the difficulty of the computational problem is updated every 2,016 blocks to control the rate at which blocks are generated.

When a large number of computers are working on Bitcoin mining at the same time, the difficulty level rises to keep block production at a stable rate. The opposite is also true — if fewer computers are working on mining problems, the difficulty level declines.

To understand how this situation has changed with time, we will show you the numbers. In 2009, the year of Bitcoin’s launch, the primary difficulty level was one. Now it is higher than thirteen trillion.

That is why miners started using much powerful hardware, such as application-specific integrated circuits (ASICs). The price of an ASIC can run as high as $10,000. A graphics processing unit (GPU) is much cheaper, which is why some prefer to buy those.

Bitcoin Mining

It’s not easy to figure out all the details of Bitcoin mining. This example explains the hash problem in an easy way: I think of a number between one to 50 and tell my colleagues about it. However, instead of telling them to guess the right number, I tell them to name a number that is equal to or less than the number I’m thinking of. One important detail: there are no limitations on the number of guesses.

Let’s say I choose number 25. Colleague A chooses number 31, so he loses because 31 is greater than 25. Colleague B chooses 21, and Colleague C chooses 18. Therefore, they both came to acceptable answers because 21 and 18 are both less than 25. Even though Colleague B is the closest to the right number, he doesn’t receive any benefit. The winner would be whoever chose first.

But what if I pick a 64-digit hexadecimal number and ask billions of people to guess? In such a case, there is little chance that one of them will pick an acceptable number. Also, in cases when both people answer at exactly the same time, this “Explain It Like I’m Five” analogy doesn’t work.

When we are talking about Bitcoin, such situations happen very often, but there can be only one winner. In such cases, the miner who has validated the most transactions will be rewarded by a simple majority, which is 51%. Other miners who solved the problem as well but validated fewer transactions will receive nothing.

Now, let’s talk about 64-digit hexadecimal numbers. Let’s look at an example:

0397601803C22E220509810703BDE2300460EA80322F000CF50ABD0226F27009

It consists of 64 digits, both numbers and letters. You may ask why. Let’s figure out it together by analyzing the word “hexadecimal.”

The first part of the word, “hex,” comes from Greek and means “six.” The second part of the word, “decimal,” is the standard system for denoting integer and non-integer numbers from 0 to 9 and means base 10. This word comes from the Greek word “deca,” which means 10.

If we combine these two words, we get the word “hexadecimal,” which means base 16. However, because our numerical system consists only of 10 numbers (0–9), six letters need to be added (a, b, c, d, e, f) to total 16.

Remember that in Bitcoin mining, there is no need to compute the total value of that 64-digit number or the hash.

Why We Need 64-Digit Hexadecimal Numbers for Bitcoin Mining

Let’s go back to my earlier example of my colleagues trying to guess the number I was thinking of. In the Bitcoin mining world, there is a special term for such a number: a target hash. Using their massive equipment, miners try to guess at the target hash. They generate a lot of “nonces” as quickly as possible.

What is “nonce”? The word itself stands for “number only used once.” It’s a 32-bit number that is much smaller than the hash. The person who generates a hash first (using the nonce) that is equivalent to or less than the target hash will receive an award for completing that block, as well as 12.5 BTC.

How to Guess the Target Hash

The target hash always starts with a minimum of eight zeros. This number may reach up to 63 zeros. What is more, the minimum target doesn’t exist, but we know the maximum one, which was established by the Bitcoin Protocol and can’t be bigger than this number:

00000000bbbb0000000000000000000000000000000000000000000000000000

How to Increase Your Chances to Be the First?

To make everything possible, the miner needs to get a fast-mining rig. The other and more realistic option is to join a mining pool, which is a dedicated server that is used to distribute tasks for Bitcoin mining. Each participant receives a “share” when the group comes up with the proof of work to show that they have successfully solved a problem.

Joining a mining pool is one of the best options because it’s very hard to work on your own; the difficulty level of the recent blocks is more than thirteen trillion right now. The chances of guessing and coming to a correct solution are extremely small.

Huge and pricey equipment does not mean everything in terms of solving a hash problem. Electrical power mining rigs play a huge role, as well.

Summarizing all we said above, individual mining is quite unfavorable in today’s conditions.

What Are Coin Mining Pools?

Miners receive tokens when they solve a problem first. The possibility that a person will do that is proportional to the network’s mining power. Those who don’t have powerful computers have a little chance of finding the next block.

One mining card that would deliver less than 0.001% of the mining power on the network can cost thousands. Not every miner can afford such purchases. That’s why it takes a lot of time to find the next block.

How can this problem be solved? The answer is mining pools.

Mining pools have effective control over third-party hashes and guide miners. A mining pool’s payout scheme determines how the reward will be distributed among the pool’s contributors, so even from the very first day, miners can receive a constant flow of Bitcoin.

Other Ways to Profit from Cryptocurrencies

As we said at the beginning of the article, if you want to buy cryptocurrency, you can use exchanges. However, there is one other way: invest in the corporations that produce hardware for Bitcoin mining, such as those that make ASICs or GPUs. That’s how you can reduce the risks, but you need to have a lot of capital to make an investment.

Stay tuned to DeBay!