The process of how a bitcoin comes to be is an interesting one. Unlike traditional monetary systems, where governments decide when and how to mint, print and distribute money, bitcoins enter circulation though a creation process called mining.
While the name may conjure up images of booted, dirty men armed with torched hard hats and wielding pick axes, bitcoin mining is something quite different. Let's examine the process.
Bitcoin mining is the process by which transactions are verified and added to the public ledger, called the blockchain, and also the means through which new bitcoin are released into circulation. Anyone can become a bitcoin miner, provided they have access to the Internet and the required hardware and software to participate.
Bitcoin miners use specially-designed software to solve intricate mathematical algorithms (not possible for humans) and are issued a certain number of bitcoins in exchange. This serves as incentive for miners to join the network, and a secure, controlled manner in which to introduce new bitcoins into circulation.
All transactions made during a certain period, typically every 10 minutes, are added to a list called a block. It’s the miners’ job to confirm those transactions and write them into a public ledger. The public ledger is an extensive list of blocks, known as the 'blockchain'.
The blockchain has to be a trusted source, and all of its records must be held digitally. How can we be sure that the blockchain stays intact and isn't tampered with? This is where the miners come in.
When a block of transactions is created, miners put it through a computational process. They take the information in the block and apply a mathematical formula to it, transforming it into what is called a hash. A hash is a short, seemingly random sequence of letters and numbers. This hash is stored along with the block, at the end of the blockchain at that specific point in time.
Because each block’s hash is produced using the hash of the block before it, it becomes a digital version of a wax seal. It confirms that this block – and every block after it – is legitimate, because if an individual meddled with it, everyone would know.
Miners compete with one another to complete these blocks. They are incentivised with a 25 bitcoin reward and the transaction fees for processing, once a hash is successfully created. Once this occurs, the blockchain is updated and everyone on the network is informed. This process is what keeps the network working.
It's not intended for miners to interfere with the transaction data in a block, but they must change the data they’re using to create a unique hash. They do so using another, random piece of data called a ‘nonce’. This is used with the transaction data to create a hash. If the hash doesn’t fit the required format, the nonce is changed, and the entire string is hashed again. It can take many attempts to find a nonce that works, and all the miners in the network are competing to do so simultaneously in order to earn their bitcoin incentive.
The Bitcoin protocol automatically adjusts the difficulty of these algorithms, according to the speed of which these problems are being solved by miners, as well as the number of miners joining the network. As the speed of block creation increases, or the population of miners increases, so too does the complexity of the algorithms.
Miners look to counter this ever-increasing complexity by investing in specialised computer hardware that comprises a chip known as an ASIC (application-specific integrated circuit). This chip allows the miner to hash data over 100 times faster than the standard CPU, whilst utilising less energy to do so. You also find mining pools being formed, where miners combine their resources to increase their collective hashing power, and then share the rewards in proportion to the resources supplied.
Unlike a traditional mine, where miners are subject to certain safety and security procedures, the Bitcoin miners in fact create and control the safety and security of the network themselves. By applying the hashing processes and computational confirmation of transactions, they ‘run’ the network and ensure that any and each transaction represents a genuine transfer of bitcoin between two parties.
Mining is a unique, integral aspect of the bitcoin network and will be necessary long after the last bitcoins enter circulation, in order to verify transactions. Whilst this represents a way to acquire bitcoins, few of us will have accessibility to the hardware and software required to do so. For us, a more viable option to secure bitcoins is to make use of a market advisory service or an execution platform, like Bitstocks' Gravity.