What You Should Know About Bitcoin Mining

Editor: Toju kaka
Author: Ming Guan
Translator: Li Xiang Ron

On Mar 2nd, 2020, the CKB mining machine — Antminer K5, developed by Bitmain was officially launched. Bitmain sold 2700 units at $1,400 in 2 minutes. Many people were amazed by this result and therefore reached out to us to explain cryptocurrency mining. Today, we’ll share some insights about BTC mining and other related concepts.

1. Mining

Mining is commonly known as the process of extracting valuable materials from the earth but after the creation of Bitcoin in 2009, the term mining also became ascribed to the production of new Bitcoin.

Bitcoin mining is similar to mining for minerals in the sense that it involves the process of producing or extracting a scarce commodity. Bitcoin is designed by Satoshi Nakamoto in such a way that anyone could mine them with their computers similar to the way people could do mining of minerals with a spade or shovel.

To understand the mechanism of BTC mining, two factors are important to consider.

1. BTC’s underlying technology — Blockchain is a decentralized database or a distributed ledger. It consists of blocks that contain multiple transactions. These transactions have to be processed and packed into blocks in order to be verified.

2. Every 10mins, a new block is created and a reward is given to a miner who is able to successfully solve a math problem which resulted to the creation of the block.

Initially, miners were rewarded 50 BTC per block mined. By Design, this amount is halved after every 210,000 blocks (usually 4 years). So far there have been three halvings. The latest halving happened less than a month ago. Block reward is now 6.25 new BTC and following these rules, the total supply of BTC will be mined over in the year 2140.

From the concepts above, you may see that the purpose of mining is to record and pack transactions on the BTC network. It works like bookkeeping. Another question to ask that ‘if everyone wants to get rewards from mining, what principles are set up by the system to select winners to create new blocks?’

This brings a new concept called POW- Proof of Work. POW is a system to confirm miners’ work. In POW, the chance of creating a block is based on the miner’s ability to solve a mathematical equation with a computer.

How POW works in the BTC system:

Satoshi Nakamoto designed an encryption method that could automatically adjust complexity and with it, miners could get the right of adding blocks to the Bitcoin network when they decipher a pseudo-random number which is created by the system.

This pseudo-random number from this encrypted method can’t be cracked by a fixed algorithm so miners have to do exhaustive tests to crack the code. They have to try and verify all the time to get the right answer. The two factors which determine which miner will successfully get the answer and add a block to the network are computing power and luck.

Computing power refers to the speed of a computer during computing. Faster speed gives more chances to try more answers and creates more opportunities to get the right answer. At the same time, when you have luck, you could find the right answer after the first try even though your computing power is not enough. Putting all of your hope on luck is obviously not the best way to do it.

2. Mining Machine

Mining machines have experienced three generations of development.

In the early days after Bitcoin’s creation, there were no mining machines. Miners worked from home using their normal computer’s CPU. This is called the first generation of mining machines.

In the second generation of mining machines, processing was transferred from CPU to GPU. This is because more people discovered BTC and they started to do mining and that added more competition to the system. This also decreased mining rewards. The first GPU mining software was launched on 18th Sep 2010 and it got popular immediately. However as time went by, professional miners were not content with using normal computers to mine, they started to assemble mining machines that had lots of high-end GPU.

The first ASIC mining producer — BFL ASIC — was launched in December of 2012. With the professional mining machine coming into people’s sight, BTC mining stepped into the third generation. ASIC mining machine involves using ASIC as the core computing power and the chip of ASIC is specially designed for computing BTC’s SHA256. The efficiency is super even up to hundreds of thousand times more than medium/high-end GPU because it focuses on BTC. At this time, the chip in the mining machine is confirmed and the following updates were on the improvements in computing power, temperature, and energy-consuming, etc. of ASIC. Now the famous mining producers in China are Bitmain ( Antminer), Canaan(Avalonminer), Microbt(Whatsminer), and Ebang (Ebitminer). Among them, Bitmain is the biggest mining producer in the world.

Besides the three generations of mining machines described above, there is one more FPGA mining machine. It was created at the same time as ASIC mining machine and its core is FPGA programmable chip. FPGA chip is a universal hardware substrate and widely used in engineering applications and scientific researches, users can write programs that fit their own needs. Hence some people started to use FPGA to mine and miners could write proper programs for various coins. However, the cost of flexibility is sacrificing efficiency. The gap of efficiency between FPGA and ASIC is big and in the crypto mining industry, flexibility is not an attractive feature for miners. FPGA eventually faded away after 6 months of service.

3. Miners

Miners compete to produce blocks. Generally speaking, mining areas and mining pools can also be called miners. They are miners with high computing powers. We will have a detailed introduction to the mining area and mining pools. This section focuses on the individual miner who is with low computing power.

From the total view of the whole mining industry, the mining is no doubt at the top of this industry chain. But individual miners are at the bottom of this chain. Many things like mining producers, fluctuations of BTC computing power, marketing price of BTC, and electricity cost, can limit the earning potential of miners. As the price of BTC rises, more and more people get to be involved in mining and the computing power from individuals is no longer sufficient to mine. That’s why mining areas and mining pools exist.

4. Mining area

The mining area aims to improve the competitiveness of computing power and to save electricity cost, it manages lots of mining machines at the same time. The area is usually located where the electricity is cheap and stable. If the place is rich in water, the cost of electricity would be cheaper in the ‘wet’ season. The scale of the mining area is usually not small, a big mining area could contain up to dozens of thousands of mining machines. All mining machines working at the same time and will produce loud noises and high room temperature. The machines could easily break down in such circumstances. Special management and maintenance are required for the mining area. Also, workers and specific measures will be active all the time to ensure all machines work well and intervene when there is a power failure.

Compared to individual miners, the mining area has higher computing power. However, it operates under certain limitations and thousands of machines mean huge costs and risks. To solve this problem, cloud mining was introduced. With the power of crowd-funding, it’s possible to raise fund from individuals who want to join in mining. The individual miner chooses either to purchase mining machines or lease mining machines. Owners of mining areas charge a certain fee from cloud miners for running, electricity cost and maintenance. Compared with running the mining area by individual owners, this method could mitigate risk and provide stable revenue. This method is also good for cloud miners, it brings more stability compared to individual miners. With cloud mining, miners only need only to pay a limited fee to gain stable BTC and it is a win-win situation.

5. Mining pool

Mining area and cloud mining are ways to solve the troubles of individual mining. However, the miner who insists on using his own mining machine may prefer to join a mining pool.

A mining pool is a unit comprising many computing powers combined. Individual miners register in a mining pool with their information and then start mining by connecting the individual mining machine to a mining pool network. When more miners participate in a mining pool, they will get a higher computing power and they will be able to have a greater opportunity to produce blocks and win more BTC rewards. In the mining pool system, the pool takes charge of packing and integrates computing power from individual miners. They divide the BTC reward based on certain rules (like computing power) to each miner when they win.

The advantage of a mining pool is that it is stable and easy to participate in. As long as your computer is able to mine, connect it to a mining pool and you will be rewarded in BTC. For now, the mining pools with the biggest computing powers are BTC.com, F2pool, Poolin, and AntPool, etc.

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This article was written by excellent volunteers in the TP community and sponsored by TokenPocket. TokenPocket is one of the leading digital wallets in the world that provides reliable digital asset management for millions of users. All rights are reserved by TokenPocket.