Bitcoin Mining is the process of using a computer or server to help secure Bitcoin transactions against reversal and the introduction of new bitcoins to the network. Mining adds transaction records to Bitcoin’s public ledger of past transactions. This ledger of past transactions is called the block chain because it is a chain of blocks of data. The block chain is used to confirm transactions to the rest of the bitcoin network. Bitcoin miners use the block chain to distinguish legitimate Bitcoin transactions from attempts to re-spend coins that have already been spent elsewhere. Mining is intentionally designed to be resource-intensive and difficult so that the number of blocks found each day by miners remains slow and steady. Individual blocks must contain a proof of work to be considered valid. This proof of work is verified by other Bitcoin miners each time they receive a block. In technical terms, mining is the calculation of a hash (algorithm that turns an arbitrarily large amount of data into a fixed length hash) of the block header which includes a reference to the previous block, a hash of the set of transactions and a nonce (32-bit field). During the mining process, if the hash value is less than the current target then a new block is formed and the miner gets the newly generated bitcoins. If the hash is not less than the current target, another nonce is tried and a new hash is calculated. This ongoing process is done millions of times per second by each miner (computer) in the bitcoin network. In general terms, mining is the process of trying to find a number or nonce. As Bitcoins become more popular and the price of each bitcoin increases, bitcoin mining becomes more profitable and popular but at the same time it becomes more competitive. As more miners (computers or servers) attach to the the bitcoin mining network the harder it is to solve the hash.
The steps to run the network and generate or “mine” bitcoins are:
- New transactions are broadcast to all nodes.
- Each node collects new transactions into a block.
- Each node works on finding a difficult proof-of-work for its block.
- When a node finds a proof-of-work, it broadcasts the block to all nodes.
- Bitcoins are successfully collected or “mined” by the receiving node which found the proof-of-work.
- Nodes accept the block only if all transactions in it are valid and not already spent.
- Nodes express their acceptance of the block by working on creating the next block in the chain, using the hash of the accepted block as the previous hash.
Bitcoin mining can be done with a basic computer or server and special mining software with some computing power. Originally most of the bitcoin mining was done via the computers CPU and it was relatively easy for each miner to find a block and be rewarded with bitcoins. As the popularity and difficulty rose, mining migrated over to GPU processing or high end Graphics processing. While the CPU is managing many other process’ inside the Computer the Graphics Processor can be used solely for mining providing much more processing power. At the same time, computers can be outfitted with multiple graphics cards to increase their processing power. Around the same time GPU processing came into play so did mining pools. Mining pools are a group of miners that combine their processing power into 1 big miner and share the bitcoin rewards.
Anyone with the desire can build a Bitcoin Miner, install the mining software, connect to the internet and start mining. The competition is heavy and new miners are joining the ranks on a daily basis so the amount of processing power is pertinent in order to achieve any real results. One of the biggest drawbacks to GPU bitcoin mining is the power consumption and the heat created by these GPUs. Miners are constantly coming up with new ways to keep their miners (computers) cool and their power cost (electricity bill) down.
The profit potential of mining has spurred new companies into designing and producing an ASIC (Application Specific Integrated Circuit) to use specifically for Bitcoin mining. An ASIC can produce much more hashing power than your typical 3 card GPU miner while at the same time using less electricity and generating less heat. As you can imagine the demand for such a device is great and to date only one company (Avalon) has actually shipped a limited number of ASICs to the mining community. A few other companies are currently trying to deliver their ASICs but none have done so as of Spring of 2013!