Where do Bitcoins come from? With fiat money, the central bank regulates the issuing and distribution of cash. The Bitcoin network is decentralized and instead of the government, it has the miners who provide their computing powers to issue new Bitcoins and secure the network.
How mining works, how big are the rewards, and how hard is it to set up your own mining farm? Read this article to find out.
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What is the point of mining?
Creation of new Bitcoins
Miners use special hardware to solve math problems embedded in the Bitcoin network. In return, the network rewards the miners with the new Bitcoins every 10 minutes. Why exactly 10?
Because the Bitcoin network automatically changes the difficulty of the math problems depending on how fast they are being solved. Bitcoin code is programmed that way to ensure the fairness of the system and to avoid cheating and creation of Bitcoins out of nowhere.
This provides a wise way to issue the currency and motivates more people to mine. But why does the network need the miners?
Confirming the transactions
Miners record the transactions made on the Bitcoin network in their blocks.
Block: Similar to a record book, a block registers the most recent Bitcoin network transactions.
Bitcoin network only documents those transactions which were verified in a block. Why? Because only then it is formally recorded in the blockchain.
Larger payments need more confirmations. For example, if your transaction is less than $1000 one confirmation will be enough. It may require up to six confirmations if you send hundreds of thousands of dollars worth of Bitcoin.
Securing the network
The network also needs miners for another reason – they secure the blockchain. The more miners are there the more decentralized the network. This makes the blockchain less vulnerable to different types of attacks.
The biggest disruption of the network may happen because of a so-called 51% attack. It can be done by a group of miners who control the majority of the network’s mining hash rate.
Hash rate: measuring unit that indicates the computational power of the mining hardware.
If the miner is in control of over 50% of the Bitcoin network hash rate he can cut off the recording of new blocks by limiting other miners from participating. This may result in double-spending, as now the same single digital token can be spent more than once.
The evolution of mining hardware
At first, the miners were using the processors to mine bitcoins. Those were pretty effective for the network at that time as the math problems were simpler.
As the industry developed, the miners figured out that the gaming graphics cards (GPUs) are much more effective for Bitcoin farming.
Then the commercial Bitcoin mining products entered the market – they included the same processor chips that were reprogrammed for the purpose of mining Bitcoin. These chips were faster than the graphics cards, but still very power-hungry.
The Bitcoin industry then developed enough that it required more efficient hardware – the ASICs. Those are the processors that are designed specifically for mining. ASICs are faster than the first commercial mining chips, but their main advantage is less energy consumption.
Can you start mining with home desktop
If you want to start mining your own Bitcoin you should never use your home PC— you will earn pennies. You will also most likely damage your hardware if you run it at maximum power all the time.
For the same reason, you should also never install the mining software on your smartphone – an average Android device will earn you less than a cent per year. At this stage of the Bitcoin mining industry development, it only makes sense to use the ASICs hardware.
But is there even a point to individually farm Bitcoins?
How big are the rewards
As the popularity of Bitcoin increases, more miners join the network. This makes the blockchain more decentralized and therefore secure, but also makes it more difficult for individuals to solve math problems. To overcome this problem miners have developed a way to work together in pools.
Pooled Mining: combining the efforts of multiple miners to work on the same goal. Such teams find solutions faster than individual miners, and each member of the pool is paid proportionally to the accomplished work.
The rewards for mining are directly linked with the Bitcoin supply. The rewards decrease with years because of halving.
Halving: A process that occurs every 210,000 blocks (about 4 years) when the mining rewards per block reduce by half until the last Bitcoin will be mined in approximately 2140.
Right now miners receive 6.5 Bitcoins per block mined, while before May 2020 halving the reward was 12.5 BTC.
Even though 85% of Bitcoin supply is already mined, it will take approximately 120 more years to mine the last bitcoin. Will the miners stop farming Bitcoin when the supply cap is reached?
No, because the dividends will shift from the block rewards to transaction fees. Those fees will become payments for the miners to keep the decentralized farmed going and keep the entire Bitcoin system a float.
When we speak about big mining companies, the key features that they are looking for are cheap electricity and cold location. The colder the climate the more it can dissipate the heat generated by the process.
The most popular countries for mining include China, Iceland, Canada, Switzerland, and Russia. China stands out among them as this country is responsible for over 65% of overall mining.
The location is also important because just as Bitcoin itself, mining the coin is also illegal or highly taxed in some countries. It does not usually affect smaller miners as it is almost impossible to detect them.
Larger mining farms, even those with big names in the industry, sometimes hide their location due to regulatory reasons.