What is cryptocurrency mining?
What Is Bitcoin Mining?
Bitcoin mining is a critical component for the security of the Bitcoin network, as well as being the sole mechanism for the issuance of new coins. Those involved in this operation, known as miners, mobilize powerful computing equipment to compete to become successful validators of new blocks on the Bitcoin blockchain – and thereby to pocket both network transaction fees and newly minted coins.
While this brief explanation summarizes the overall role and nature of Bitcoin mining, it does not clarify its technical aspects. The following will provide a more in-depth guide to the operations of Bitcoin miners.
How Does Bitcoin Mining Work?
Miners function as auditors of the Bitcoin network as their role is to verify the validity of new transactions and, once verified, to add them to the blockchain.
Importantly, this task helps eliminate the possibility of what is known as double spending. Unlike the fiat currency system, the decentralized structure of cryptocurrency networks exposes them to this unique type of problem. For the network to be viable, it must be possible to verify that participants are not trying to outsmart the system by spending the same coin twice — and this must be done without the intervention of banks or any other intermediary.
Recall that in the case of fiat currencies, a person either spends a physical bill or coin – and therefore no longer has it in their possession – or else a bank audits their transactions and continually updates the balance on their accounts.
To prevent the possibility of double spending, miners are tasked with verifying transactions. At each instance, miners confirm the validity of 1 MB worth of new Bitcoin transactions, which are then added to the Bitcoin blockchain so long as they successfully fulfill other requirements imposed by the network’s consensus mechanism. You may be wondering: why are they restricted to 1 MB of transactions? Well, the answer lies in the infrastructural design of the Bitcoin protocol.
Note that Bitcoin’s underlying technology is blockchain, which, as its name implies, involves a sequential chain of blocks containing records of past transactions. Bitcoin’s creator designed each block to have a fixed 1 MB size. It is therefore impossible to load transaction data that exceeds this limit.
After verifying 1 MB worth of transactions, the miner becomes eligible to mine new coins. That said, this does not mean that the miner will automatically be awarded Bitcoins as a reward for verifying these transactions. Instead, the miner must compete with other miners to become the first on the network to successfully verify and therefore underwrite the next new block of transactions on the Bitcoin blockchain. This is where all the fun begins.