If you've taken your first steps towards understanding Bitcoin, you've probably heard references to "mining" and "miners" thrown around quite a bit, and for a good reason. Miners and mining's role is key to the overall success and stability of Bitcoin as a whole.

Today, we are taking a closer look at what mining is, who is doing the mining, and why it is so vital to the world of cryptocurrencies.

Note: Bitcoin (capital B) refers to the network and bitcoin (lower case) refers to units of currency, according to bitcoin.org.

What is a Consensus Mechanism?

Cryptocurrencies are a decentralized alternative to the traditional banking system. These decentralized systems can operate and transfer funds from one account to another without a central authority like the bank. Typically, banks maintain a ledger of transactions that indicates who sent funds to whom. Without a central authority, a cryptocurrency's ledger of transactions (AKA blockchain) is maintained through consensus among participants. 

A consensus mechanism is any method used to achieve agreement, trust, and security across a decentralized computer network. Every node (computer) has the same copy of the blockchain data. Consensus allows all of the network nodes to follow the same rules to validate transactions and add new blocks to the chain, therefore making sure all nodes continue to have the same blockchain as it grows.

The most well-known consensus mechanism is proof-of-work, or PoW. In PoW, a type of node called a miner competes with other miners to solve complex mathematical puzzles using computational power. Bitcoin created the PoW consensus mechanism and continues to use it, as it has never gone down or been hacked since going online on January 3, 2009.

How Does Bitcoin Mining Work?

Adding new blocks to the Bitcoin blockchain is called mining because it is the way that new bitcoins are introduced into the ecosystem and requires a great deal of work - similar to how precious metals are mined, but all done from a computer.

Anyone can mine bitcoin; all you need to do is guess a random number called a nonce (number used once) that solves an equation generated by the system. As simple as that sounds, solving this equation takes quite a bit of computing power.

Here's a very simplified explanation: the miners receive all the data they need to create a new block on the blockchain every ten minutes or so - all except the nonce. The miner takes all the data for the new block and just guesses what the nonce is, and puts it all together to create a hash, then submits that to the Bitcoin protocol. If the miner is right they get to add the block and receive a reward in BTC, plus all the fees associated with the transactions on that block. If they're wrong they can guess again with a different nonce. The more powerful your computer, the more guesses you can make in one second, thus increasing your chance of solving the equation before another miner.

The block you've created, along with your solution, broadcasts to all of the computers on the Bitcoin network to be validated - meaning they check the math. Each validator on the network acts independently and does not trust any other computer's version until it has checked the math itself. As these computers validate the solution, they update their copies of the Bitcoin transaction ledger with the transactions in your block. 

How Much is the Mining Reward?

In 2009, when Bitcoin was first created, the reward for adding a new block to the chain was 50 BTC. In 2012 it went down to 25 BTC. In 2016 it went down to 12.5 BTC... and in 2140, when the last bitcoin is expected to be mined, the block reward will be something like 1.4551915228366852 × 10^-9 BTC, which is worth less than a penny in today's money. Why will the reward number decreased so much over the years? Because built into Bitcoin's design is a process known as Bitcoin halving. 

Bitcoin halving refers to the process where every 210,000 blocks, roughly every four years, the block reward given to miners cuts in half. This also halves the rate at which new bitcoins are introduced into circulation. Bitcoin halving helps make BTC more valuable over time as new coins increasingly become more scarce. 

The maximum supply of bitcoin to ever exist is 21 million. So, when Bitcoin reaches the supply cap around 2140, the miners will rely entirely on transaction fees to compensate their mining efforts.

Now That I Understand What Mining Is, Should I Become One? 

Possibly! Whether or not you could receive enough BTC from processing transactions as a miner to make it worth your time depends on what kind of hardware you have. Most miners use custom-built computers called ASICs (Application-Specific Integrated Circuits) that are designed for the sole purpose of efficiently and quickly solving for the nonce, which are bound together in water-cooled harnesses. In addition to hardware and location, you also have to consider electricity cost. Some current successful Bitcoin mining operations use as much power as a small city and are often connected to their own power source, like a hydroelectric plant, coal plant, or a wind farm.

If you don't have the budget for the most advanced mining technology, you could always join a mining pool. A mining pool is a collection of miners working together to increase their chances of finding a block at the group level. Through these pools, miners combine their computational resources to enhance their joint processing power and make more attempts at solving the blockchain's equation faster. If your mining collective is the first to solve the blockchain equation successfully, you will have to split your BTC reward with your team.

Do I Need to Mine BTC to Participate in the Digital Economy?

Thankfully, if you have no desire to become a miner, that is fine. You can always buy Bitcoin and invest in the blockchain via direct cash purchase to your digital wallet at a CoinFlip ATM, or buy in bulk with wire or ACH transfer and save through our over-the-counter service, CoinFlip Preferred. Need a wallet? We got you covered there too!