Crypto Research

Bitcoin mining simply explained (Part 1/4)

You've probably heard the term "bitcoin mining" before, right? But what that is exactly is not entirely clear to you. Or maybe you know something about it but don't understand how it works, where its value comes from and how it is currently evolving.

What is mining?

The basic task of mining is to validate transactions and summarize them in a next block, which is then attached to the blockchain. Mining provides the computing power to create the blockchain and, so to speak, to continue writing this ledger, i.e. the entire transaction history of the Bitcoin. Of course, the miners are also paid for this task in two different ways:

  • The first way is the so-called Block Reward. Total bitcoins are capped at 21 million, but not all bitcoins have been mined yet. The new bitcoins are created with each new block mined. The miner who mined the block gets new bitcoins. This reward is halved approximately every four years.
  • The second way are the so-called transaction fees. Anyone who wants to make a bitcoin transaction must also add a small fee to that transaction, which the miner receives.

In summary, the miner is responsible for continuing to write the blockchain. The miner does this with the help of a so-called proof-of-work, i.e. has to solve a complicated puzzle. If the miner has solved the puzzle and cracked the next block, he gets a so-called block reward and also some mining fees.

How does bitcoin mining work?

Mining is an activity performed by network participants that involves proof-of-work. PoW requires a significant amount of calculations to be performed by a computer to solve cryptographic hash puzzles. Bitcoin's PoW is based on extremely complicated puzzles. These puzzles are programmed into the source code. About every ten minutes a new puzzle is published and computer computers around the world try to solve it. With Bitcoin's value increasing so much in recent years, this activity has become increasingly popular. It can be incredibly lucrative.

If bitcoin miners solve the puzzle first, their reward of 6.25 BTC of freshly mined bitcoin is released, and then the whole process begins again. The more computers and more computing power actually mine Bitcoin, the more secure the network is from cyber attacks or attempted theft.