How Does Bitcoin Mining Work and Why is it Done?

• Toshendra Kumar Sharma
• February 05, 2018

The Bitcoin protocol is a very sophisticated mechanism for processing transactions in a decentralized fashion. Eliminating the middlemen in a transaction helps in giving more control to the individuals regarding how they want to manage their wealth. Mining is a central part of the Bitcoin ecosystem which could also seem somewhat complicated at first. Here we take a broad look at how the mining works and why it helps secure the network.

The Decentralized Paradigm

Bitcoin’s biggest strength is that it’s decentralized – which means that there is no central figure verifying or creating transactions. But then, in such a scenario how do we make sure that transactions are legitimate? The answer is mining. Bitcoin network is secure with the help of mining process, and there is no unauthorized transfer of funds, sometimes called the “Double Spending Problem”.

How Does Mining Work?

To understand how Bitcoin mining works, we need to take a deeper look at how transactions are processed in Bitcoin first. While creating a Bitcoin transaction, it includes a digital signature from the sender to the receiver along with the amount of Bitcoin to send. An average 1 MB block can hold about 2000 transaction currently, so once 2000 transactions are picked up from the Bitcoin memory pool by miners, they can be sent to be processed. This is the part where miners have to compute complex mathematical functions, called Hashes, to solve the block. The process involves randomly guessing a “nonce,” which when added to block and passed through the hash function, results in a hash digest which satisfies the current network requirements. The first miner to solve a block in this manner receives the block reward. The solved block is then added to the Blockchain after it is approved by a majority of the nodes. The current Bitcoin block reward is 12.5 Bitcoins per block right now with an average block time of about 10 minutes.

How Does Mining Ensure Security?

The model of mining Bitcoin ensures that miners have an incentive to run nodes to keep Bitcoin decentralized. The process of validating blocks ensures that miners have to spend a lot of computational power to add a block to the Blockchain and get the reward. Bitcoin’s current hash rate is about 19.3 ExaHash per second which is more than 13000 times more than the world’s top 500 supercomputers combined. This means that for an adversary to perform a double spend attack on Bitcoin, they would have to spend an exorbitant amount of money to acquire the computers that could make the attack. At current price levels and network hash rate, such an attack is simply impossible.

Environmental Concerns

According to a new article about Bitcoin’s energy consumption by ARS Technica, Bitcoin uses electricity at an annual rate of 32 TWh, which is about as much as Denmark! By some simple calculations, we can then see that an average Bitcoin transaction uses about 250 kWh. That means every Bitcoin uses enough electricity to power an average home for about ten days. Most people in the cryptocurrency space agree that this electricity is a net waste since most of it is spent in trying to outcompete other miners. However, Bitcoin needed its mining mechanism in its early days to prevent the network for bad actors. But now since there are more efficient and sophisticated techniques to ensure consensus, it may be time to move to a more environmentally friendly solution.

Future of Mining and Proof of Stake

Growing electricity usage by the Bitcoin network has caused a lot of people to get concerned about its sustainability. In this regard, there are a lot of new and innovative consensus mechanisms that are being worked on. The most promising consensus mechanism that is in the works right now is Ethereum’s Proof of Stake, called Casper. Ethereum, which currently relies on Proof of Work to process a transaction, is in the process of transitioning to Proof of Stake. Proof of Stake requires only a small fraction of the current electricity consumption because of its unique architecture. Proof of Stake is achieved by using the validators own Ethereum funds as collateral rather than large amounts of computational power.