Bitcoin: Winners, losers and miners

For over 1,100 years, the Royal Mint has been manufacturing or ‘minting’ our British pennies and pounds under the direction of the government and its Treasury. Digital coins, be they Altcoins or Bitcoins, are different. They are created via a process known as ‘mining’.

So what exactly is Bitcoin mining and how does it work? How can non-techies understand it, or at least begin to understand it? Cryptocity finds out with help from the good folk of Reddit.

Coin Press
Coin Press for minting physical currency. Photo by techsavi, Flickr.

Dear Reddit, what exactly is Bitcoin mining?

In our quest to understand mining, we posed a killer question in the Bitcoin Beginners Reddit forum:

What’s the best analogy to use to explain the concept of Bitcoin mining to laymen?

1. Think about Bitcoin in the right way

Reddit user BobAlison started off the debate by pointing out that miners provide a service to the Bitcoin network, and it’s imperative that we understand that service otherwise an explanation of mining will seem pointless.

As a good recap, he included a handy link to an excellent article which tells us how we should think about the Bitcoin network, and in particular, Bitcoin transactions. We would recommend consuming this from start to finish if you are a Bitcoin newbie.

A transaction is a secure message that reassigns ownership of a coin. For the moment, think of a transaction as a specially-formatted digital document in which a payer transfers coin ownership. Transactions are secured through a system called public key cryptography. – BobAlison

2. Understanding the ledger

Bitcoin works by keeping track of a world wide ledger. – Anon515

Anon515 explains that transactions made over a set period must be stored in a list, called a ‘block’. Instead of a bank for example, it’s the miners who confirm these transactions, adding them into a public ledger known as the ‘blockchain’.

Miners…are exclusively responsible for including a transaction in the blockchain. The only way to write to the blockchain is by expending a lot of computing resources. – 2xE4bRr

3. But how? The mining process

Bitcoin mining is a process of solving difficult math problems which costs expensive hardware (and luck) to generate the currency that goes into circulation. It’s ultra competitive, and only makes sense for people who have nearly free electricity. – Anon515

A user called Jackelfrink offered a useful comparator. He says Bitcoin mining is like Folding@Home, a project linked to Stanford University whereby volunteers donate their unused computer power to solve computation problems as part of research into diseases. You basically just download software onto your computer and let it run (even overnight while you sleep). It will crunch numbers automatically, working on a tiny piece of a huge problem, and sending the results back to Stanford.

Bitcoin, Jackelfrink says, works in a similar way although instead of being volunteers donating their resources, Bitcoin miners are rewarded in Bitcoin:

People donate their computing time to solving complex math problems. The problem in this case is verification and conformation of global financial transaction data. But unlike other distributed computing projects, for bitcoin if you find a solution/verification you get more than a heartfelt thank you. You actually get rewarded in cold hard cash. – Jackelfrink

This has led to a deluge of Bitcoin mining companies:

Naturaly (sic) this has lead to the situation where businesses have sprung up that fill entire warehouses with thousands upon thousands of “home” computers donating computing time to the project. For all practical purposes this has driven the actual home user out of competition. – Jackelfrink

Folding@Home screenshot
Folding@Home screenshot by DoctorButtsMD, Flickr

 4. Hashing: Here’s where it gets more complicated

Miners apply a mathematical algorithm to the information in a block of transactions and use new data in an attempt to create what is called a hash, a random sequence of letters and numbers.

Miners compete with each other constantly to essentially brute force guess the right hash that the Bitcoin protocol will accept. If they successfully create a hash, they get around 25 Bitcoin, with each block’s hash being a pointer to the next block in the blockchain and so on. This is the way miners secure the transactions which make up a block into the blockchain forever.

5. It’s a lottery say “Bitcoin mining is a lot like a giant lottery where you compete with your mining hardware with everyone on the network to earn bitcoins.” Reddit user btcee99 agrees:

That analogy is pretty accurate from an economic point of view – the miner is quite literally ‘buying’ or searching for winning tickets – the hashing rate is the rate at which he is obtaining tickets, and the ‘network difficulty’ is related to the chance that each ticket wins a reward. – btcee99

Bitcoin mining lottery ticket
Bitcoin Mining – it’s a lottery! Photo by Sean MacEntee, Flickr

6. You could do it differently if you wanted…

There are set attributes to the mining process that can be changed, but if those changes are unpopular they won’t be adopted by the mining community – who are free to use any version of the Bitcoin protocol that they wish. Anon515 explains:

The Bitcoin protocol is implemented in software by a handful of people, but only by popular consensus of people downloading and using the software by their own free will does it achieve widespread adoption. If the developers make unpopular decisions, people will naturally choose to use something else (an older version, a fork, a different cryptocurrency, etc). Competition makes regulation unnecessary. – Anon515

Leave a Reply

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s