Thursday, September 10, 2015

What Is 'Mining' of Bitcoin ?

Bitcoin is a form of decentralized digital currency. It is not printed like dollars or euros. It is created by people by running software that solves mathematical problems.

As we already discussed in my previous articleBitcoins are created by a community of people by running a software that solves certain mathematical problems. This process of creating bitcoins by running some software is called 'mining' of Bitcoins.

What do Bitcoin miners do?

Bitcoins are traded digitally along the bitcoin network. Someone has to keep track of all these transactions. The bitcoin network does this by collecting the set of transaction during a certain period of time and keeping them in a list called 'block'. A list of blocks is called 'blockchain'. It is the miners' job to add a block in the blockchain.

How easy is mining of Bitcoin ?

It is not easy. The miners have to keep track of all the transactions that take place during a certain period of time and apply some mathematical formula on it, the result of which is kept in the blockchain. This mathematical problem is not easy to solve.

What is the mathematical problem that Bitcoin miners solve ?

All Bitcoin transactions are maintained in blocks and the blocks are linked to each other to form a blockchain, with each block linked with its previous block.

Miners have to perform a cryptographic hash of the previous block in the chain and find a number called nonce, such that if the content of the block is hashed along with the nonce, the resultant value is less than the network's difficulty target. It takes lots of computation power to solve this mathematical problem. The bitcoin miners normally find a nonce, creates a hashed value and compares with the network's difficulty targer, and if the result is not satisfactory, they keep trying with different nonce values.

What are the rewards of mining of Bitcoin ?

Every time a bitcoin miner successfully adds a block in the block chain, he is rewarded with certain number of bitcoins. This reward called block reward is halved after every 2,10,000 blocks. The block reward started with 50 bitcoins in 2009, and from 2014, it is 25 bitcoins now.

There is something called transaction fees also, this is optional though. Payers may include transaction fees to speed up the confirmation of transactions. Miners can choose which transaction to process and prioritize them based on the transaction fees.

And there is something called 'wallet' also. It stores all the necessary information of transactions of bitcoins. Perhaps a better way to describe a wallet is something that stores the digital credentials for your bitcoin holdings and allows you to access and spend them. Bitcoin uses public key cryptography, which generates a pair of public key and private key. You can say, a wallet is a collection of these keys.

To know more on how mining of Bitcoin is done actually :

How does mining of bitcoin work actually?


What is Blockchain and how is it used in Bitcoin ?

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