Bitcoin Mining: Digging for Digital Gold

If you have heard of bitcoin, then you probably also have heard of bitcoin mining. You might also have some idea that bitcoin mining is about producing new bitcoins, but let’s be real here, there is a lot more to it than that!

Have you ever been curious about how bitcoin mining really works or how bitcoin mining turned into this crazy technological powerhouse that consumes so much energy? Isn’t it fascinating how a concept that started as a few lines of code has transformed into a massive operation consuming terawatts of energy each year?  

Just like we need advanced machinery, electricity and skilled labor to mine gold, we also need specialized hardware and significant amounts of electricity to mine bitcoin -” earning it the nickname digital gold”. In this blog we will look into what bitcoin mining exactly is, why it consumes so much energy, how mining speed is regulated and why it is necessary to regulate mining speed.

Introduction to Bitcoin Mining

“Bitcoin mining is the process of solving complex mathematical puzzles by miners to produce bitcoins”. Yes, this is the way most media advertise about what bitcoin mining is. In simple terms this is true. But what does this actually mean? solving a complex puzzle? let’s get into what is really behind the idea of this complex puzzle. But before jumping into explaining how that happens, let me explain a few things so you won't get confused when you continue.

All the transactions that happen in the bitcoin network are recorded in a bundle or a collection of transactions, transactions are never recorded individually in the bitcoin network.  For example, you would use a document folder to store all the documents, right? You don't record individual documents everywhere, do you?

Likewise, all bitcoin transactions are bundled together or grouped together in a collection known as a “block”. These blocks have a specific size, in the case of bitcoin, it’s 1MB, this means when validated transactions occupy that 1MB space, another block is needed to record other transactions happening on the network. 

This suggests we need more blocks to record transactions, and the number of blocks can be unlimited as long as transactions are taking place on the network. Since many blocks are needed to record transactions, blocks are stacked in a ladder-like formation, where each new block is linked to the previous one in a sequence.

For example, Block 2 is linked to Block 1, and Block 3 is linked to Block 2 forming a very strong chain of trust. This chain of trust is built using cryptographic hashes. So, when a new block (e.g., Block 2) is created, it includes the hash of the previous block (Block 1) in its header. When block 3 is created it includes the hash of block 2.

This links all the blocks together, meaning if we try to change the data in Block 2, Block 2 hash will change, since Block 3 contains Block 2's original hash, the change in Block 2's hash will break the link between Block 2 and Block 3, and the network will quickly detect this tampering.

For your understanding, a cryptographic hash is a unique digital fingerprint of data. This fingerprint is a fixed size length string much like a hexadecimal number that uniquely represents a piece of data, where a slightest change could change the entire hash value.

So, the question is who creates these blocks? While people are responsible for making transactions (buying and selling Bitcoin), the actual creation of blocks is done by miners. Miners are individuals or companies who use specialized computer hardware (ASIC miners and FPGA miners) in the bitcoin network tasked with verifying and bundling transactions into blocks. Their main job is to include verified transactions into blocks and mine them and add to the blockchain. 

How Mining Works and Regulated?

To understand how Bitcoin mining works, we need to look at how the system regulates the creation of new blocks. In order to control the speed of block creation, Satoshi Nakamoto, the inventor of bitcoin, came up with a solution called Proof-of-Work. This is like a game which is designed to take, on average, about 10 minutes to play.

It ensures that all miners have an equal chance to create a block without any barriers to entry, thus preventing any central control. All the miners compete to mine a successful block, and the one who successfully mines a block will get the chance to add that block into the blockchain after getting the verification of other miners that the block was correctly mined according to the rules set by the bitcoin network.

The Bitcoin network is designed to create a new block approximately every 10 minutes. However, the speed at which miners mine a block can vary based on the total computational power, or hash rate, in the network.

If more miners are competing and adding computational power, blocks would naturally be mined faster. Conversely, if fewer miners are working, blocks would take longer to mine. To keep the block creation time consistent at 10 minutes, Bitcoin’s protocol automatically adjusts the target number every 2,016 blocks, which is roughly every two weeks. 

When miners mine blocks too quickly like below the average time of 10 minutes, bitcoin protocol sets a low target number to increase the mining difficulty, conversely, when miners take more time higher than the average time of 10 minutes, the target number is made bigger.

This is like rolling some dice, don't you think? think that you have to roll two dice and get a sum total below eight, that is pretty easy right? But what if you have to get a sum total below three? then that will take you more rolls. So, adjusting the target number adjusts the difficulty of mining. 

The Role of a Nonce Value and the Idea Behind Mining

When miners try to mine a block, they include various transactions and calculate a cryptographic hash from this data. The block is considered valid only if its hash is lower than a specified target number set by the bitcoin protocol.

If the hash is too high compared to the target number, the miner must alter the input data and try again. But instead of changing transactions, which can be complicated, miners use a special field in the block called the "nonce."

This nonce allows them to input an arbitrary number to modify the hash. By changing the nonce, miners can generate different hashes without disrupting the transactions included in the block​. 

So, to summarize this, miners change the nonce value until they end up with a hash which is less than the target number. This process is called mining. Mining is actually a very repetitive and tedious task, it is not solving a complex mathematical problem like it is advertised in the media, it is misrepresented like that to keep things very simple.

Mining is like scratching off a lottery ticket to find the winning number, so until a winning number is found, anyone can try many tickets! But in the case of bitcoin mining, changing the nonce value to get a hash below a target number is a very energy intensive task.  Refer to the below image to get a good idea about mining.

In the above image, a miner who mines a specific block was able to achieve a hash value less than the target number at nonce value 3. But in real life, it takes about 1 trillion of nonce values on average to find a valid hash less than the target number in bitcoin mining. So now you can understand why this is so repetitive and very energy intensive right?

Why Does Regulating Mining Speed Matter?

For bitcoin to gain value over time as a digital currency and also to become a secure and decentralized peer to peer payment system, the speed of block creation plays a very crucial role. Why? Because if blocks were created too quickly or too slowly, major issues could arise undermining the purpose of bitcoin. 

When Block Creation is Faster

Value Erosion: If blocks were created quickly this would mean that bitcoins will quickly release into the market the sudden flood of bitcoins into circulation would reduce their scarcity, leading to a drop in value.

This would mean bitcoin to have a very low value and will eventually fail as a peer-to-peer payment network. This is because the price of bitcoin is the only factor that incentivizes miners to include transactions in blocks.

If bitcoin prices fail to gain momentum due to higher supply, then many miners will leave the network making the network a total failure. Therefore, by keeping mining difficult and adjusting the speed, Bitcoin retains its scarcity, contributing to its status as "digital gold." 

Security Risks: If block creation was pretty easy and quick, then it would become easier for bad actors to potentially alter the blockchain and compromise its integrity. The slower, regulated pace of mining and its difficulty makes it exponentially harder for anyone to manipulate past blocks to their advantage.

Since Mining is very difficult, it is super difficult for hackers to hack into the system, why would they even try to do it?, that would mean they will have to use immense amounts of computer power which is obviously costly, so rather than trying to hack into the system, it is more profitable for them to take part in the mining processes and earn bitcoins! 

When Block Creation is Slower

Slower Transaction Settlement Time: When blocks are created too slowly, this means that transaction confirmations take more time. More transactions would be in a waiting list waiting to be added to a block by miners, since block creation is slow, transactions will eventually pile up, this means bitcoin as a peer-to-peer payment network could fail when settlement times get very slow leading to user frustration and loss of interest to use bitcoin.

Miners will lose interest: Slowly block time will lead to slower earnings by miners. Remember, miners only get bitcoins when they are successfully mine a block, and if the block creation is slow, their cash flow in bitcoins becomes slow as well This is not good specially when miners need to keep up with rising costs of mining bitcoin.

Potential for centralization: When reward in bitcoin is slower due to slower block mining, this can drive out smaller and weaker miners who cannot keep up with costs. As a result, only the toughest miners who have the financial capability to deal with slower returns or slow cash inflow will survive the game. This can lead to centralization of bitcoin mining undermining its purpose as a decentralized peer to peer payment network.

The concept of bitcoin as a peer-to-peer payment system excluding banks and regulating the difficulty in mining bitcoin per 10 minutes on average per block, no matter who comes into the game or who leaves the game, add value to bitcoin. Therefore, regulating the mining process not only preserves Bitcoin's scarcity and value but also protects the network's integrity from malicious activities. 

As of October 2024, about 19.7 million bitcoins have been mined, leaving 1.3 million left to mine. So, all the new bitcoins earned by miners are coming from the remaining 1.3 million. The total supply of bitcoin is 21 million, and this amount is final, meaning the total supply of bitcoins cannot be changed by any single entity as bitcoin operates on a decentralized network. 

Final Thoughts

The creator of bitcoin Satoshi Nakamoto is a mastermind, even though his identity has not been revealed yet and no one exactly knows whether the name represents an individual or a group of people, the concept of bitcoin and logics behind bitcoin mining to make bitcoin a scarce digital currency is mind blowing. 

The bitcoin protocol is beautifully self-balanced, adjusting the difficulty level when needed. It is astonishing to think how a simple piece of code can result in the consumption of over 100 terawatt-hours (TWh) of electricity annually. 

Many say bitcoin is backed by nothing, but I argue that bitcoin is backed by energy. Each Bitcoin carries energy tied into its creation, even if we can’t precisely calculate how much. So, if you have Bitcoin, it means you've got energy in your hands! 

Disclaimer: The contents of this article are for informational purposes only and are not financial advice. The views here are just the author’s opinions. The crypto market is volatile, so be sure to do your own research before investing.