What Is Bitcoin Mining?
Bitcoin mining is simply a process in which bitcoin network participants, known as miners, validate bitcoin transactions to maintain network security and earn a reward (Bitcoins) for their efforts. Bitcoins are created as a result of mining, and miners receive this reward for keeping the network secure and validating transaction blocks. Bitcoin mining, in more technical terms, is the process of validating transactions on the bitcoin ledger by using hardware processing power and software to solve a complex algorithm and earn bitcoins as a reward for validating transactions.
How Bitcoin Mining Works?
Bitcoin mining has been prevalent since the conception of bitcoin; bitcoin is incomplete without miners. These miners are also called network validators; anyone can be a bitcoin miner. Decades ago, when bitcoin was new, any user could connect to the network and use computers to validate bitcoin transactions and earn bitcoin as a reward as simple as that. Bitcoin is an open-source network; the validators are not constrained to limited participants and the transaction ledgers are also open-source; you can be a bitcoin miner. Whereas it’s difficult to mine bitcoins because you have to compete with other miners to verify a transaction to earn bitcoin as a reward. High-performance specialized hardware devices are used by mining farms to compete with other miners to gain these rewards by validating transactions. These high-performance specialized hardware devices perform complex computations required to verify and record each new bitcoin transaction to prevent double-spending and ensure the blockchain's security. In this computation, every computer known as a bitcoin network node competes to guess a hexadecimal number known as the transaction hash. The computer that obtains the transaction hash the quickest updates the bitcoin blockchain ledger with the newly verified transaction and earns newly minted bitcoin for this task. This averagely happens every ten minutes.
Verifying blockchain transactions requires an enormous amount of computing power, which miners voluntarily contribute. Bitcoin mining also requires a lot of data due to thousands of transaction ledgers getting saved locally in the miner's computer, which isn’t cost-efficient for individual miners. Bitcoin mining these days is done by mining farms. These mining farms buy costly, highly efficient mining hardware and pay for the electricity needed to keep it running. Miners have to calculate to check if the earned coins are higher than the cost of running the mining farms. The larger the number of miners, the harder it gets to earn a reward and the more secure the bitcoin network is. Bitcoin mining uses a mining consensus known as the proof-of-work consensus.
What Is Proof-Of-Work Consensus?
Proof-of-Work (PoW) is a blockchain network consensus in which computers, known as nodes, validate transactions in a decentralized way to prevent double-spending and gain rewards. Proof of Work has been extensively used by blockchain networks as a consensus protocol that helps provide security in the blockchain network and securely and accurately validate transactions. The proof-Of-Work consensus then rewards the miners that validate transactions and secures the network with the blockchain-native crypto. This consensus differs from other consensus processes, such as Proof of Stake and Delegated Proof of Stake etc. Proof-of-Work consensus and other blockchain consensus achieve the same goal: transaction validation to prevent double spending, decentralization, and network security in different ways. A Proof of Work blockchain uses a mining protocol to reach consensus, while stakes are used in Proof of Stake blockchains to reach consensus. There are a lot of other consensuses that are used in other blockchains to maintain security, decentralization, and validate transactions.
Proof-of-Work blockchains are energy intensive and because of this, POW blockchain networks are limited in terms of speed and scale. Regardless of their speed and scalability limitations, PoW blockchains have historically provided better security while retaining full decentralization. Due to the distributed nature of proof-of-work blockchains, it is extremely difficult for a malicious attacker to dominate the majority of computing power on the network and thus take control of the blockchain.
There are a lot of blockchains that use proof-of-work consensus aside from bitcoin; examples of famous blockchains are Ethereum, Litecoin, Monero, Bitcoin Cash, Zcash, etc. Ethereum upgraded to Proof-of-Stake consensus in September 2022.
Advantages of Bitcoin Mining
- Bitcoin mining is used to prevent double-spending attempts.
- Bitcoin mining consensus is the most secure consensus mechanism.
- Bitcoin mining is used to secure the blockchain and to enable blockchain transparency.
- Bitcoin miners earn rewards in bitcoin for keeping the network secure.
- Anyone can be a bitcoin miner; bitcoin mining is not constrained to several people.
Disadvantages of Bitcoin Mining
- Bitcoin mining isn’t cost-efficient as it requires extremely powerful hardware.
- Bitcoin mining isn’t environmentally friendly due to the high amounts of carbon gases emitted by bitcoin mining farms.
- In bitcoin mining, energy consumption is out of control as a result of high mining participation.
- The majority of bitcoin mining pools are controlled by single entities, which makes the blockchain prone to centralization.
- Bitcoin mining model is prone to 51% attacks; if a single entity can control 51% of the mining power, it makes it prone to attacks.
Bitcoin Mining Ban
A growing number of countries are now prohibiting or planning to prohibit bitcoin mining, owing to the risk of having insufficient energy for both consumers and larger industries. According to finextra.com, authorities in China, home to 70% of the world's miners, have banned mining. Whereas the majority of crypto mining has shifted to countries with lower energy costs.
Summary
In summary, bitcoin mining is needed to keep the bitcoin blockchain running, secure, decentralized, transparent, and less prone to attacks and hacks. Regardless, bitcoin mining isn’t cost-efficient and also isn't environmentally friendly. A lot of consensuses have been created to substitute proof-of-work consensus in which bitcoin operates. Proof-of-Stake consensus has become so viral and accepted, but it is less decentralized compared to the proof-of-work consensus in which bitcoin operates. Ethereum, which is the second top cryptocurrency next to bitcoin by market capitalization, will be migrating to the proof-of-stake consensus. Factoring in the cons of the proof-of-work mining technique, Ethereum decided to migrate to a proof-of-stake consensus where validators stake their ether to secure and validate transactions in the Ethereum network.
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