In traditional fiat money systems, governments simply print more money when they need to. But in bitcoin, money isn’t printed at all – it is discovered. Computers around the world ‘mine’ for coins by competing with each other. With paper money, a government decides when to print and distribute money. Bitcoin doesn't have a central government. With Bitcoin, miners use special software to solve math problems and are issued a certain number of bitcoins in exchange. This provides a smart way to issue the currency and also creates an incentive for more people to mine. since Bitcoin is Secure, Bitcoin miners help keep the Bitcoin network secure by approving transaction. Mining is an important and integral part of Bitcoin that ensures fairness while keeping the Bitcoin network stable, safe and secure.
History:
Bitcoin's public ledger (the 'block chain') was started on January 3rd, 2009 at 18:15 UTC presumably by Satoshi Nakamoto. The first block is known as the genesis block. The first transaction recorded in the first block was a single transaction paying the reward of 50 new bitcoins to its creator.
Mining is the process of adding transaction records to Bitcoin's public ledger of past transactions. This ledger of past transactions is called the block chain as it is a chain of blocks. The block chain serves to confirm transactions to the rest of the network as having taken place. Bitcoin nodes 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 steady. Individual blocks must contain a proof of work to be considered valid. This proof of work is verified by other Bitcoin nodes each time they receive a block. Bitcoin uses the hashcash proof-of-work function.
The primary purpose of mining is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus. Mining is also the mechanism used to introduce Bitcoins into the system: Miners are paid any transaction fees as well as a "subsidy" of newly created coins. This both serves the purpose of disseminating new coins in a decentralized manner as well as motivating people to provide security for the system.
Bitcoin mining is so called because it resembles the mining of other commodities: it requires exertion and it slowly makes new currency available at a rate that resembles the rate at which commodities like gold are mined from the ground.
Difficulty
The Computationally-Difficult Problem: Mining a block is difficult because the SHA-256 hash of a block's header must be lower than or equal to the target in order for the block to be accepted by the network. This problem can be simplified for explanation purposes: The hash of a block must start with a certain number of zeros. The probability of calculating a hash that starts with many zeros is very low, therefore many attempts must be made. In order to generate a new hash each round, a nonce is incremented. See Proof of work for more information.
The Difficulty Metric: The difficulty is the measure of how difficult it is to find a new block compared to the easiest it can ever be. It is recalculated every 2016 blocks to a value such that the previous 2016 blocks would have been generated in exactly two weeks had everyone been mining at this difficulty. This will yield, on average, one block every ten minutes. As more miners join, the rate of block creation will go up. As the rate of block generation goes up, the difficulty rises to compensate which will push the rate of block creation back down. Any blocks released by malicious miners that do not meet the required difficulty target will simply be rejected by everyone on the network and thus will be worthless.
Reward: When a block is discovered, the discoverer may award themselves a certain number of bitcoins, which is agreed-upon by everyone in the network. Currently this bounty is 25 bitcoins; this value will halve every 210,000 blocks. See Controlled Currency Supply.
Additionally, the miner is awarded the fees paid by users sending transactions. The fee is an incentive for the miner to include the transaction in their block. In the future, as the number of new bitcoins miners are allowed to create in each block dwindles, the fees will make up a much more important percentage of mining income.
Bitcoin mining: The growth of black chain
People are sending bitcoins to each other over the bitcoin network all the time, but unless someone keeps a record of all these transactions, no-one would be able to keep track of who had paid what. The bitcoin network deals with this by collecting all of the transactions made during a set period into a list, called a block. It’s the miners’ job to confirm those transactions, and write them into a general ledger.
This general ledger is a long list of blocks, known as the 'blockchain'. It can be used to explore any transaction made between any bitcoin addresses, at any point on the network. Whenever a new block of transactions is created, it is added to the blockchain, creating an increasingly lengthy list of all the transactions that ever took place on the bitcoin network. A constantly updated copy of the block is given to everyone who participates, so that they know what is going on. But a general ledger has to be trusted, and all of this is held digitally.
How can we be sure that the blockchain stays intact, and is never tampered with? This is where the miners come in.
When a block of transactions is created, miners put it through a process. They take the information in the block, and apply a mathematical formula to it, turning it into something else. That something else is a far shorter, seemingly random sequence of letters and numbers known as a hash. This hash is stored along with the block, at the end of the blockchain at that point in time.
Hashes have some interesting properties. It’s easy to produce a hash from a collection of data like a bitcoin block, but it’s practically impossible to work out what the data was just by looking at the hash. And while it is very easy to produce a hash from a large amount of data, each hash is unique. If you change just one character in a bitcoin block, its hash will change completely.
Miners don’t just use the transactions in a block to generate a hash. Some other pieces of data are used too. One of these pieces of data is the hash of the last block stored in the blockchain.
Because each block’s hash is produced using the hash of the block before it, it becomes a digital version of a wax seal. It confirms that this block – and every block after it – is legitimate, because if you tampered with it, everyone would know.
If you tried to fake a transaction by changing a block that had already been stored in the blockchain, that block’s hash would change. If someone checked the block’s authenticity by running the hashing function on it, they’d find that the hash was different from the one already stored along with that block in the blockchain. The block would be instantly spotted as a fake.
Because each block’s hash is used to help produce the hash of the next block in the chain, tampering with a block would also make the subsequent block’s hash wrong too. That would continue all the way down the chain, throwing everything out of whack.
Competing for coins
Butterfly Labs Bitforce mining rigSo, that’s how miners ‘seal off’ a block. They all compete with each other to do this, using software written specifically to mine blocks. Every time someone successfully creates a hash, they get a reward of 25 bitcoins, the blockchain is updated, and everyone on the network hears about it. That’s the incentive to keep mining, and keep the transactions working.
The problem is that it’s very easy to produce a hash from a collection of data. Computers are really good at this. The bitcoin network has to make it more difficult, otherwise everyone would be hashing hundreds of transaction blocks each second, and all of the bitcoins would be mined in minutes. The bitcoin protocol deliberately makes it more difficult, by introducing something called ‘proof of work’.
The bitcoin protocol won’t just accept any old hash. It demands that a block’s hash has to look a certain way; it must have a certain number of zeroes at the start. There’s no way of telling what a hash is going to look like before you produce it, and as soon as you include a new piece of data in the mix, the hash will be totally different.
Miners aren’t supposed to meddle with the transaction data in a block, but they must change the data they’re using to create a different hash. They do this using another, random piece of data called a ‘nonce’. This is used with the transaction data to create a hash. If the hash doesn’t fit the required format, the nonce is changed, and the whole thing is hashed again. It can take many attempts to find a nonce that works, and all the miners in the network are trying to do it at the same time. That’s how miners earn their bitcoins.
First thing you need to do is get a “Bitcoin Wallet”. Because Bitcoin is an internet based currency, you need a place to keep your Bitcoins. Got to BITCOIN.ORG and download the Bitcoin client for your Operating System. Install it the client will begin to download the blockchain. Downloading the blockchain can take a long time and will be over 6GB of data. If you have data caps, I would recommend ordering a copy of the blockchain on DVD to keep from going over as it is growing exponentially. Click to order the bitcoin blockchain by mail. Once the client is up to date, click “New” to get your wallet address. It will be a long sequence of letters and numbers. One of most important things you can do is make sure you have a copy of the wallet.dat file on a thumb drive and print a copy out and keep it in a safe location. You can view a tutorial on how to create a secure wallet by clicking the link on the top of the page. The reason is that if you computer crashes and you do not have a copy of your wallet.dat file, you will lose all of your Bitcoins. They won’t go to someone else, they will disappear forever. It is like burning cash.
Now that you have a wallet and the client, you are probably roaring to go, but if you actually want to make Bitcoin (money), you probably need to join a pool. A pool is a group that combines their computing power to make more Bitcoins. The reason you shouldn’t go it alone is that Bitcoins are awarded in blocks, usually 50 at a time, and unless you get extremely lucky, you will not be getting any of those coins. In a pool, you are given smaller and easier algorithms to solve and all of your combined work will make you more likely to solve the bigger algorithm and earn Bitcoins that are spread out throughout the pool based on your contribution. Basically, you will make a more consistent amount of Bitcoins and will be more likely to receive a good return on your investment. If you feel like you want to make more Bitcoins, you might want to invest in mining hardware. To see how much your current hardware will earn mining Bitcoins, head over to the Bitcoin Profitability Calculator.
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