Bitcoin Mining Simplified

What is Bitcoing Mining?

How Bitcoins are actually mined and for that matter other Cryptocurrencies like Ethereum are mined/curated/created in a Blockchain and appear in real world?

Let's think of a scenario where every 10 minute a train is arriving at trainyard so that a new bogey/block can be added to it.There are 100 people who are waiting for it to add a block/bogey to it, however only one person will be able to add that block in that 10 minute window.

The one who adds it gets rewarded with some coin that has store of value which means owning/storing that coin has a value in market. In other words people in that market/community firmly belive that value of the coin will keep increasing over the period of time so there is a value to store/own it.

With above scenario in mind, there is one obvious question that comes to our mind.

How it is decided that which person out of 100 people will get the chance to add block/bogey to the train?

Answer is Lottey :-) :-).Yes Lottery but with some work and he/she has to show that "Proof of Work".

They will be asked to do some work which is to generate random numbers in that 10 minute window and whosoever generates a number that is closest to the number generated by Trainyard system will win the bid to add a block/bogey to the train and earn a reward (Coin with store of value).

100 people will keep generating random numbers till they get a match or closest match and moment one gets it, other 99 will look at it, verify and with consensus they approve that yes he/she gets to add the block and win the coin.

Train keeps coming every 10 minute and people keep adding block/bogey and keep earning the coins.

Difficult level of the number generated by Trainyard systems keeps changing based on the number of people who are bidding. If number goes up, they increase the difficulty level of their number and if number decreases, they make it bit simple so that average time to add block remains 10 minutes.

With that being said, this is excatly how Bitcoins are mined by Bitcoin Miners and I have tried to put an analogy of some Blockchain terms with above example.

In above example:

Trainyard is "Blockchain Network".

Train is the "Blockchain".

100 people are "Bitcoin miners".

Bogey is the "Block" added to the Blockchain.

Coin reward is "Bitcoin" that has store of value in the market/community.

Number they generate in above example are nothing but "Hashes" and they have to sumbit a "Proof of work" once they win the bidding to add a block to the chain.

Miners on the Bitcoing Blockchain network use Application Specific Integrated Circuits (ASICs). We can visualize these as specialized computers designed to "Compute Hashes" as fast as possible. "Compute Hashes" means generating an output through a function once a random value is plugged into it.?

SHA256 hash function is used in Bitcoin network that yields a fixed-sized output, known as a hash. A single hash can be computed in less than a millisecond and contrary to the popular opinion it doesn't involve any complex math.

However as the numbr of miners increases, as explained in above example, difficultly level increases which means miners have to produce hashses much faster per second (Hashrate) to win the race, please note that generating Hash itself is not that much compute intensive but Hashrate is the key to win the race and hence more compute power, electricity etc. which are the negative points doing the round against Bitcoin. Ethereum solves it with a copncept of "Proof of Stake" rather than "Proof of work". I will cover that in my next article.

Higher hashrate or more hashes produced per second is equivalent to generation of random number in above example per second, and thus a greater probability of winning the bid.

Bitcoin Network generates a number automatically it coded in Bitcoing Blockchain software if the hash produced by a miner is lower than the one generated by Bitcoin Network, then the miner who proposed the block wins. If not, then the miner continues trying by computing more hashes.?

The successful miner’s block is then added to the blockchain, the miner is rewarded with newly issued bitcoin for their work, and the “next round” begins.

As explained above, average time is always kept at 10 minutes, hard coded in the system. There is no specific reason to it.

Miners can keep the bitcoins or sell in the market on Crypto exchanges, transfer to someone or do whatever they want to do with it.

There are two main purposes for mining:

1. Permanently add transactions in other words Immutable transactions to the blockchain without the permission of any entity and as explained above it is consensus driven. Everyone agrees yes this miner can add the block.

2. Distribute 21 million bitcoin by rewarding new coins to miners who spend electricity, computers etc.to secure the network.

There is a fixed supply of 21 million Bitcoin coded in the software and till now 89% have been issued. Since many people believe it has store of value and supply is fixed, it's value has increased manifold since it's inception. There are other cryptocurrencies like Ethereum which are "Deflationery" in nature. I will cover that in my next article.

I hope you liked it and got some understanding of Bitcoin Mining and how Bitcoins appear in the real world.