Abstract：Bitcoin needs to settle trades with 'finality' in order to present a working monetary system without a central mediator. There is no way to go back in time or rerun transactions.
How do bitcoin miners confirm transactions？
What does “Proof of Work” mean？
Is it possible for everyone to be a Bitcoin miner？
Bitcoin Mining Pools: An Overview
Bitcoin needs to settle trades with 'finality' in order to present a working monetary system without a central mediator. There is no way to go back in time or rerun transactions.
Full Nodes, just as discussed in the last article in this part, ensure that transactions are valid by presenting the necessary digital signatures depicting that the unspent money (UTXO) linked with an address can be spent.
However, those transactions must be confirmed in the blockchain, making sure that no double spends have occurred, which is where Miners come in.
They are compensated for this service, which includes the role of issuing fresh bitcoin.
Transaction confirmation and miners
Because the Bitcoin network has a fixed block size of 1MB, it can only handle seven transactions per second on average, so unconfirmed transactions are stored in a Mempool until Miners take over.
The function of miners is to watch the Mempool for unconfirmed transactions and package them into a candidate block; every ten minutes, one of the candidate blocks is selected to be added to the existing blockchain, confirming (settling) all of the transactions contained within it.
Miners are compensated for this service by receiving fresh bitcoin for each confirmed block. The first block, known as the Genesis block, was mined in January of this year.
3rd 2009, with a 50BTC prize.
Since then, a new block has been introduced to the network every 10 minutes or so, and reward miners have received halves every 210,000 blocks. This corresponds to a four-year halving cycle, implying that the supply maximum of 21 million bitcoins will be reached around the year 2140.
The reward rate of 6.25BTC equates to nearly $420k paid per block, every ten minutes, at Bitcoin's ATH price of $64,805 in 2021.
The BTC given to the miner who confirms each new block is referred to as the “coinbase reward” — a phrase later adopted by the same-named cryptocurrency exchange.
Proof of Work & Miners
Because Bitcoin's value is based on its digital scarcity and the way it prevents double spending, the mining process must be challenging and incentivize honest behavior. This is accomplished through a process known as Proof of Work (Pow).
By solving a mathematical challenge, Miners compete against each other to grasp the opportunity to broadcast their candidate block to the network.
Every 2,016 blocks, Full Nodes change the complexity of solving the puzzle, ensuring that the needed amount of computational power has been consumed to ensure a new block is formed every 10 minutes, regulating issuance in line with the maximum supply.
While the riddle is meaningless in and of itself, the effort needed to get there is not:
It assures that no single entity can discover all of the blocks, retaining all of the bitcoin rewards to themselves, or remove transactions, bringing the entire system to a halt.
PoW is thus critical to the process of sustaining digital scarcity and improving on the fiat system's current flaws of endless supply.
The Bitcoin mining conundrum
The computational conundrum takes the shape of the SHA256 hashing method. This isn't unique to Bitcoin; it's a cryptographic standard produced by the National Security Agency.
A hash is a one-way identifier that presents privacy and security for a digital record. Consider it a randomizing engine.
You give the algorithm any input, such as a password, and it generates a random string of text and numbers (the hash) of uniform length. You can't go backwards from the hash to discover the password if you change one letter of the input, but a unique input will always generate the same hash value.
SHA256, which is used in Bitcoin mining, generates a 64-character hash irrespective of the size of the input; each character represents four bytes of data 64*4=256.
Because the job that Miners complete to illustrate Proof of Work is arbitrary, Bitcoin mining is mostly referred to as a lottery. It is just a clever way of regulating new block production and bitcoin issuance.
The aim of the game is to hash certain features from the new and prior blocks to get a different numeric hash value that is less than or equal to the Target, which is the winning number in our Lottery analogy.
The hashed block contains the following information: a version number, a timestamp, the prior block's hash, the Merkle Root's hash, a random number called a nonce, and a target hash.
Given the wide number range that a 256 bit algorithm can output, finding the Target will need a lot of guesses, so Miners just execute the algorithm as many as possible.
Bitcoin may be mined using the GPU (Graphical Processing Unit) in the early days - in an ordinary computer used at home, originally developed to improve graphics rendering, particularly in PC gaming.
Miners nowadays employ specialized gear called as mining rigs, which use ASICs (application-specific integrated circuits). These are computer processors that have been specifically designed to address the arithmetic issue at the heart of bitcoin mining. Bitmain's Antman S19j Pro Miner 100 TH/s is one of the most popular.
Mining operations will operate as many rigs as they can afford in order to solve the riddle before another Miner from another part of the planet does.
The block - and its transactions - are then added to the blockchain, which is synced with all Full Nodes and Miners, and the process continues.
We discussed how Full Nodes change to regulate block generation earlier, and how this accounts for any increase or reduction in the total Mining capacity. The value of the incentive for participating - the coinbase reward + fees - will logically vary in accordance to the price of bitcoin.
The viability of participation may be determined using the Bitcoin price, the known difficulty rate, the collective hashrate, and the cost of maintaining a mining operation (energy/cooling/overheads).
A bad actor would need to control 51 percent of the collective hash rate to be able to pick which transactions are included to future blocks and double spend coins, hence hash rate is a proxy for the strength of the Bitcoin network.
It should also be evident why Bitcoin mining consumes so much energy, taking into consideration that mining rigs are running 24 hours a day, 7 days a week to discover the Target, which becomes more difficult as the total hashing power increases. This creates a virtuous cycle with pricing, which tends to rise as hashrate rises, recruiting more Miners in the process.
Is it possible for everyone to be a Bitcoin miner？
If you've made it this far and are looking forward to operating a mining rig, it's time for a dose of cold reality. Bitcoin mining has evolved into a professional industry, with the majority of bitcoin mining facilities located near renewable energy sources in areas where electricity is cheap and plentiful.
Professional miners overclock their equipment to run them at speeds higher than the manufacturer's specifications.
This should only be tried by experienced miners, as care must be taken not to overheat the miners in the process, as correcting one problem can result in the need to cool your mining operation, which will utilize even more energy.
So, unless you have your own hydroelectric dam or a large bank of solar panels, you'll have a hard time mining bitcoin profitably using GPUs or ASICs as a hobby.
Even with numerous ASICs linked together, it's possible to work for weeks, months, or even years without finding a new block. In the meantime, due to the power requirements and the necessity to reduce the heat generated, you'll be racking up a hefty electric bill.
Bitcoiners have built Mining Pools to tackle this problem and make mining more accessible to as many people as possible. This involves a group of miners pooling their hashpower (combined computer processing power) to look for a new block.
If any miner in the pool completes this quest, the coinbase reward will be distributed evenly to each pool member's hashpower.
If you're serious about mining bitcoin, you'll need to choose the correct ASIC for your demands and budget, and also the right site to put up a rig (cold, well vented, and well insulated or separated to avoid noise complaints).
After you've completed that and received your mining equipment, it'll be time to decide which mining method to use.
For example, if you provide 5 percent of your hash power to the pool and the pool discovers a new block, you will receive 5 percent of the reward, which is 0.3125 BTC (minus pool fees).
It may seem to be simple money, but if it were, everyone would be doing it! The truth is that profiting from bitcoin mining is exceedingly difficult.
You might consider mining other cryptocurrencies with less competition, but the profit must be weighed against the risk.
Choosing a Bitcoin Mining Pool is a difficult task.
Choosing a mining pool boils down to a simple equation: the larger the pool's hashpower, the more often they'll find blocks. This will assure a steady flow of income.
However, because you will only contribute a modest amount of hashpower to the pool, your share of the coinbase payouts will be insignificant. You'll get a bigger percentage of the prizes if you join a smaller pool, but payouts will be less frequent because the pool will find fewer blocks.
There are a few more technical factors that will influence your decision. If you want to do it yourself, you'll need a fast internet connection with minimal latency for pinging the pool and sharing data.
Any time spent looking for a solution to the next block can be wasted if data is delayed. A ping of less than 200ms and as near to zero as possible is preferable.
Different pools charge different costs, so this must be considered as well. Check the payout frequency as well; some pools will only pay out on specific dates or after a certain quantity of BTC has been accumulated in your wallet.
Because you're relying on them not to get hacked or hold onto funds, pools that keep the miners' rewards until they're delivered are similarly at danger. It's possible that you'd like to join a pool that pays out directly to your bank account.
The opportunity cost of investing in a mining pool should be your final decision. Is it possible to receive a similar or better rate of return on your investment elsewhere, when risk is taken into account？
Using A Hosted Service
Using a provider that hosts a mining rig for you might be a better option. The machine and electricity are your responsibility, but everything else is taken care of. You may use a dashboard to track your ROI and even figure out when you'll break even. Here's an illustration from Compass Mining.
The method for using a Bitcoin Mining Hosting Service in a nutshell (referencing the tweet above).
Purchase a mining rig for $9,000 (notice that they are in low supply).
Choose where your Miner will be housed and pay for the electricity - in this case, $250 per month.
Connect to a Pool to track block reward and transaction fee money, and create a wallet to collect them.
Miners also receive fees from the sender of each transaction linked with the blocks they try to add to the blockchain, although they are insignificant in comparison to the block reward.
Consider a block to be a collection of transaction data; miners verify the accuracy of each transaction and are rewarded with coins for their efforts. As a result, miners perform both settlement and issuance functions.
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