You probably heard many times that Bitcoin is ‘Decentralized’ and has no central entity that governs it. If that’s the case, who is responsible for validating the transactions?
Mining is a process of validating new transactions for certain decentralized blockchains like Bitcoin that have no central entity that validates transactions on the network. In order to validate transactions, the algorithm has a built-in incentive for validators/participants which is called a “Block reward”.
How does it work?
Mining is a process where high-powered computers solve complex computational math problems. These problems are so complicated that a person cannot solve them by hand.
By solving these complex computational puzzles, miners receive block rewards which is how some blockchains create newly circulating coins. The blocks that are mined or “validated” are added to the blockchain forever. It is crucial in order to maintain the ledger of transactions, on which crypto is established.
Miners assure the safety and trustworthiness of the network by verifying its transaction information. They are also becoming increasingly smarter. They are using complex machinery so they can mine progressively faster.
The miners receive a “block reward” when they mine bitcoin. This block reward consists of the number of bitcoins the miners receive when they mine a block. The block reward is halved approximately every 4 years.
How difficult is it to mine bitcoin?
Mining bitcoin is not easy. It demands an enormous amount of energy and therefore high-powered computers. The difficulty level as of August 2020 is more than 16 trillion. So, it can be stated that it is difficult to mine bitcoin.
To increase the chance of successfully mining a new block, mining pools were invented. Mining pools consist of people who mine crypto and combine their computational resources. If the pool is successful, the block reward is divided between the individuals in the mining pool. The division considers the processing power each individual contributed, compared to the processing power of the other individuals in the group.
Is it profitable to mine bitcoin?
It depends. There are multiple factors to determine the profitability of bitcoin mining namely:
- The price of a high-powered computer that can solve complex computational math problems
- The costs of electricity (for the high-powered computer systems)
- And the number of miners that are active on the market, because the difficulty increases when more miners have entered the market.