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  • Writer's picturePatrick Aloisio

What is Bitcoin Mining?

Updated: Jun 14, 2022

Originally posted on Twitter, you can view the full thread on Twitter here

bitcoin mining
 

What is Bitcoin Mining?


Here is the easiest explanation you’ve ever heard! 👇


1/ First what do you think of when you hear the word mining?


Probably pick axes, hardhats, and people deep in the ground looking for gold or some other precious resource.


2/ While physical digging is definitely not the case for bitcoin, the term “mining” came from the last example I listed:


People looking around for a resource that hasn’t been unearthed yet (unmined bitcoin).


3/ So are there random bitcoin scattered across the web or digital landscape for people to just find like a scavenger hunt?

Although that would be awesome, unfortunately not the case...


4/ What happens with the bitcoin network is as people make transactions, each one gets added to the network’s public transaction list, or “ledger.”


There’s a certain amount of transactions that can be recorded in one group together, this is called a block.


5/ Once that block is complete, the system confirms with all of the other authentication points (nodes) that the transactions listed are all accurate, genuine, & non fraud.


If everything checks out, this block is now added to all the previous blocks of confirmed transactions.


6/ Since the confirmed blocks are listed chronologically, they form a chain of blocks...


Voila! That’s where the name blockchain comes from!


Blockchain is just a list of all of the previous confirmed blocks of transactions.

bitcoin mining

7/ So how do the blocks and pending transactions magically know what to do?


Here’s where miners come in!


Since Bitcoin is a decentralized network and not a company, the network needs volunteers to tell the blocks what to do.


8/ But why would people volunteer for this?


Well, the protocol rewards the volunteer with Bitcoin since the volunteer donated their own computer processing power to the network.


Great! Where do I get in line for the free bitcoin???


9/ Not so fast... The system basically holds a lottery for who gets to submit the next batch of pending transactions as a block.


I say lottery because the system uses an extremely tough math equation to decide who wins.

10/ So tough, that the computers aren’t actually trying to solve it, they are just entering as many guesses as possible per second to try to win the lottery.


This is a highly specialized process that wouldn’t be run on a normal computer, but instead by special-made mining rigs.


11/ The rigs are called ASICs, (Application-Specific Integrated Circuit).


Literally all they do is guess as many guesses as they can per second.


The higher the number of guesses, the higher the computing power, which means the higher your electricity bill will most likely be.

bitcoin mining

12/ This means the cost structure for mining is:


The fixed cost of the rig + the variable cost of the electricity used.


Mining profits are:


The fixed reward + the variable fee amount for each of the block’s pending transactions.


13/ Are the miners hand-reviewing each of the transactions line by line to make sure it’s correct?


Almost 100% of the time they are not, which takes us to the last piece of the puzzle:


Mining Pools.


14/ There are 1000s of miners out there and the number is increasing every day.


While it’s great if you win the block reward lottery and get to keep it all for yourself, who knows IF and WHEN that will actually happen...


15/ Mining Pools are groups of miners that have agreed to pool their mining efforts together so they can guarantee a more dependable and steady income flow.


Whatever % of mining power you make up for the pool, you would get that % of the rewards.


16/ The other nice thing about the pools is they will handle all of the transaction verification within the block.


So there’s no work needed to be done on the miner’s end. Really just a "set it and forget it" situation. Pools charge a fee around 1%-2%.


17/ The largest pool right now is Foundry USA. They account for about 19% of all mining power, and in the last month have mined 758 blocks. That's more than $190,000,000 with a $40k BTC price!


There’s a slight variation between pools with profit & governance structure.


18/ Now obviously there’s a lot more nuance & finer details involved with the mining process. But this thread should serve as a solid guide for how bitcoin mining works.


I’ve also done a basic intro to crypto thread which can be found here: https://twitter.com/Patrick_Aloisio/status/1443652423638212609

bitcoin mining

19/ If you are interested in more bitcoin & mining related info, here are some great follows:


@ajscalia

@btc_buddhist

@rocco_marchiori

@nic__carter (especially for mining energy usage info)

@adam3us

@ODELL

@TomerStrolight

@jimmysong

@danheld


Follow for more plain easy analysis.

bitcoin mining
 

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