What Is Bitcoin Mining?

Understanding the Role of Mining

By Alexander Lawn / March 15th, 2015

Bitcoin mining is how the cryptographic information distributed within the Bitcoin network is secured, authorized and approved. It is in essence a colloquial term to describe the processing of payments that have taken place once they occur.

What makes this different from traditional electronic payment processing is that there is no need for an issuing bank, an acquiring bank, merchant accounts or mandatory centralized clearing houses, such as Visa and MasterCard, holding on to funds until they process transactions at the end of each day.

Bitcoin mining is in fact reliant on individuals sharing computer hardware in a collective effort to decentralize and streamline this process. Each piece of Bitcoin mining hardware is a supercomputer that maintains a ledger of every transaction that has ever taken place. As a consequence there is no need for many layers of intermediaries, delayed payment confirmations, and a syndicate of corporations dictating associated transaction fees. With so many people dictating a percentage of the fees incurred, and an archaic system too bloated to refine without rebuilding itself from scratch, the resulting cost to the consumer is vastly greater than an instantaneous payment secured, authorized, and approved by Bitcoin mining.

“Bitcoin mining is in fact reliant on individuals sharing computer hardware in a collective effort to decentralize and streamline this process.”

In fact the customer can currently choose to not pay any fee, or voluntarily pay an amount to facilitate a more expedited payment confirmation. What do the miners gain from dedicating the use of the hardware and electricity they have purchased? They gain a block reward equal to a predetermined amount of bitcoins as specified within the Bitcoin protocol. The current block reward is equal to 25 bitcoins, or 3,600 coins each day distributed among the entire network, and this reward halves every four years. This reduction in reward is believed to behave in an inversely proportional manner to that of Bitcoin’s value as its adoption increases over time to a wider audience.

The cryptographic Bitcoin protocol may sound like a mouthful, but essentially it’s a security-related function based upon a complex mathematical algorithm that needs to be solved, and the mining hardware completes that task autonomously. It authenticates the wealth transfer as sales take place, or money is sent from one wallet to another. For all intents and purposes it is a digital signature hidden behind code that authenticates the originator and the recipient of the transaction that has taken place. The mining hardware must solve an algorithm to create a block, and that occurrence is then verified by other miners. A block is solved about every 10 minutes on average, with slight variance as an increasing or decreasing amount of computational power comes online. As a result, the complexity of the problem varies with the cumulative amount of computational power of the Bitcoin network. Simply put, the larger and more widely distributed the network, the more secure it becomes for the general public to utilize as a means of payment. Unlike traditional banking, it is incredibly open, as everybody knows, and eventually confirms every transaction that has taken place.

“The cryptographic Bitcoin protocol may sound like a mouthful, but essentially it’s a security related function based upon a complex mathematical algorithm that needs to be solved, and the mining hardware completes that task autonomously.”

Each transaction that occurs is recorded within a block, and each block­ is represented in the blockchain: a digital ledger of every transaction that has ever happened between every wallet and every bitcoin. As this ledger grows over time, so does the demand on the computational hardware responsible for maintaining and updating the blockchain.

The hardware itself has undergone various iterations, starting with using the humble brain of your computer, the CPU. The processor found solving the complex 3D imaging algorithms within a graphics card became the subsequent evolution for miners. Aside from being able to process Bitcoin’s transactions faster and more efficiently, their arrangement within desktop PCs meant more than one graphics card could be housed on a motherboard. This was already a feature of high-end gaming and 3D design rigs. As such, Bitcoin’s popularity grew with those associated within such fraternities, as they could dedicate their machines to mine bitcoins, and thus cover the cost of their hardware.

Alas, this wasn’t the most power-efficient option, as both CPUs and GPUs were very efficient at completing many tasks simultaneously, and consumed significant power to do so, whereas Bitcoin in essence just needed a processor that performed its cryptographic hash function ultra-efficiently.

Enter the Field Programmable Gate Array (FPGA), which was capable of doing just that with vastly less demand for power. There was one issue: due to the reprogrammable nature of the chip, it had a significantly high
cost-per-chip outlay for something that solved blocks on par, somewhat greater than a GPU. Its real virtue was the fact that the reduced power consumption meant many more of the chips, once turned into mining devices, could be used alongside each other on a standard household power circuit.

As Bitcoin’s adoption and value grew, the justification to produce more powerful, power-efficient and economical per-chip devices warranted the significant non-recurring engineering costs that entail developing the final and current iteration of Bitcoin mining semiconductors: the Application Specific Integrated Circuit, or ASIC. ASICs are super-efficient chips whose hashing power is multiple orders of magnitude greater than the GPUs and FPGAs that came before them. Succinctly, it’s a bespoke Bitcoin engine capable of securing the network far more effectively than before.

The year 2013 was very much a land race for Bitcoin ASIC technology. Two years later, we find ourselves in the midst of an ensuing race for the mining of alt-coins using the Scrypt algorithm.

Unlike Bitcoin’s SHA-256 algorithm, Scrypt requires memory available to hash the encrypted data. This requirement was developed as a means to limit the disruptive aspect of ASIC technology.

This time around the disruptive effect of ASIC technology on the alt-coin network should be less dramatic. However, with a larger variety of coins using the Scrypt algorithm, with varying popularity, liquidity, age and consequent market capitalization, the risk of a 51 percentr attack on some of these coins is far greater than Bitcoin experienced. In fact some companies have been asked to accept orders from entities intent on doing just that.

On this occasion it won’t be the fastest to the market that wins the race, but those competent enough to offer refined and optimized silicon design. This is something that wasn’t a necessity in Bitcoin due to the effect ASIC-utilizing cutting edge silicon could have on a non-memory intensive hashing algorithm with minimal competition.

Whatever the outcome, we are currently experiencing the twilight hours of GPU mining, as many miners still using GPUs cannot profitably justify the electricity expenditure required to run their old equipment.

By Alexander Lawn

Hailing from London, Alex Lawn is a well known character in the cryptocurrency scene. Responsible for not only the fundraising and building some of the most successful branding in Bitcoin, specifically in hardware, but for bringing journalists in many of the world’s financial and tech press up to speed on the subject of cryptocurrencies. An effort to ensure a balanced and fair foundation within the subject exists. Currently Lawn works within disruptive finance alongside the principals of Bourne Capital.