What is Bitcoin Mining and How Does it Work?

Posted on June 24, 2014.

Traditionally the government decides when to print and distribute money when they need to. But in the world of Bitcoin, the virtual currency isn’t printed at all and there is no central government. Bitcoin money is simply ‘discovered’.

Computers around the world ‘mine’ for coins by competing with one another. These computers are known in the Bitcoin community as ‘miners’ and each miner uses a special software to solve math problems in exchange for a selected amount of bitcoins.

Not only does Bitcoin mining provide an easy and efficient way to issue the currency, it creates a system to which more people can mine.

Bitcoin Miners Work to Keep the Bitcoin Network Secure

Bitcoin users are sending bitcoins to each other all the time. If no-one kept a record of these transactions, no-one would be able to see who has paid for what.

Bitcoin miners inevitably work to keep the Bitcoin network safe and secure. They do this by collecting all the transactions made during a set period of time into a list (known as a ‘block’). It is the miners’ job to confirm those transactions and write them into the ‘general ledger’.

It is important that Bitcoin has miners to ensure fairness over the community while keeping the Bitcoin network safe.

The Bitcoin Network Boasts a Tamper-Proof System

The general ledger consists of a long list of blocks (known as the block chain) which stores a continuously growing list of all the transactions that have ever taken place on the Bitcoin network. A constantly updated copy of the block chain is given to miners to ensure they know what is currently going on.

As the general ledger is held digitally, it is the miners’ job to make sure that the block chain cannot be tampered with. They do this by applying a mathematical formula to the information on each block.

The formula turns the information into something else and something far shorter. This is known as a ‘hash’ and ultimately looks like a random sequence of letters and numbers. The hash is stored along with the block at the end of the block chain.

Hacking Into Bitcoin Would Create a Domino Effect

If someone tried to add a fake transaction into the general ledger by altering a block that has already been added in the block chain, the hash on that block would change.

Once the hashing function was run on the block chain, the system would instantly recognise that the hash was different from the one previously stored. That block would be immediately deemed as a fake.

As each block’s hash is used to generate the hash of the next block in the chain, altering or tampering with one block would subsequently change the next block’s hash. Before allowing this to happen, the system will detect that there is a block with inadequate information and subsequently ignore that block. This means that the fake transaction will not be permitted.

Bitcoin Miners Compete for the Bitcoin Currency

Each miner uses a software specifically designed to mine blocks in order to ‘seal off’ a block successfully. Each time a hash has been created, a reward of 25 bitcoins is issued to that miner and the block chain gets updated. Sounds easy right? Wrong.

It is easy to produce a hash from a collective of data and computers are extremely good at doing this. Therefore the Bitcoin network has had to make this system more difficult otherwise every bitcoin user would be mining. This has been done with the introduction of ‘proof of work’.

The ‘proof of work’ protocol demands that a block’s hash has to look and work a certain way. There is no telling what a hash will look like before you produce it and with the addition of a new piece of data, that hash will look completely different.

If the hash generated doesn’t fit the required format, the whole process has to be done again. It can take several attempts to find a hash that works and competition can be tough.

And that users of Bitcoin, is how miners earn their bitcoins. For more information on Bitcoin or mining contact Sure Bitcoin today!