Bitcoin mining is the process by which new bitcoins are created, and it is also the process that secures and validates transactions on the Bitcoin network. It is an essential component of the decentralized nature of the Bitcoin protocol.
Here’s a step-by-step explanation of how Bitcoin mining works:
- Transaction Verification: When someone initiates a Bitcoin transaction, it is broadcast to the entire network. Miners collect these transactions into a pool called the “mempool.”
- Creating a Block: Miners compete to create a new block containing a collection of valid transactions from the mempool. This process involves solving a complex mathematical puzzle called the Proof-of-Work (PoW) algorithm.
- Proof-of-Work (PoW): The PoW algorithm requires miners to find a specific value called a “nonce” that, when combined with the data of the block and hashed, produces a hash that meets certain criteria. The hash must start with a certain number of leading zeros (difficulty level), which is a time-consuming and computationally intensive task.
- Competing for the Solution: Miners compete against each other to find the correct nonce, as the first one to find it gets to create the next block and is rewarded with newly minted bitcoins and transaction fees from the included transactions. This is also known as the “block reward.”
- Block Verification: Once a miner finds the correct nonce and creates a new block, they broadcast it to the network. Other nodes in the network verify the validity of the new block and its transactions. If it’s valid, the new block is added to the blockchain.
- Difficulty Adjustment: The Bitcoin network automatically adjusts the difficulty level of the PoW puzzle approximately every 2016 blocks (roughly every two weeks) to maintain an average block creation time of about 10 minutes. This adjustment ensures that the mining process remains secure and the rate of new bitcoins entering circulation remains relatively constant over time.
Bitcoin mining is resource-intensive and requires specialized hardware (ASICs - Application-Specific Integrated Circuits) to compete effectively in the mining process. As the network’s hashrate (total computing power) increases, the difficulty of the PoW puzzle increases, making it more challenging for individual miners to find the correct nonce and mine new blocks.
The block reward started at 50 bitcoins per block when Bitcoin was launched in 2009. It is halved approximately every four years through an event known as “halving.” As of my knowledge cutoff in September 2021, the block reward was 6.25 bitcoins per block after the third halving in May 2020. Halvings are programmed to continue until the total supply of bitcoins reaches 21 million, which is expected to happen around the year 2140.