Mining Bitcoin

In order to send bitcoins, you need to reference an incoming transaction to your own wallet. This applies to every single transaction across the network. So, where do bitcoins come from in the first place?

As a way to balance the deflationary nature of bitcoin due to software errors and wallet password loss, a reward is given to those who solve the mathematical problem of each block. The activity of running the bitcoin blockchain software in order to obtain these bitcoin rewards is called “mining” — and it’s very much like mining gold.

Rewards are the main incentive for private people to operate the nodes, thus providing the necessary computing power to process transactions and stabilize the blockchain network.

Because it takes a long time for a typical computer to solve a block(about one year on average), nodes band together in groups that divide up the number of guesses to solve the next block. Working as a group speeds up the process of guessing the right number and getting the reward, which is then shared among group members. These groups are called

Some of these mining pools are very large, and represent more than 20 percent of the total network computing power. This has clear implications for network security, as seen in the double-spend attack example above. Even if one of these pools could potentially gain 50 percent of the network computing power, the further back along the chain a block goes, the more secure the transactions within it become.

However, some of these mining pools with substantial computing power have decided to limit their members in order to safeguard overall network security.

Since the overall network computing power is likely to increase over time due to technological innovation and the increasing number of nodes, the blockchain system recalibrates the mathematical difficulty of solving the next block to target 10 minutes on average for the entire network. This ensures the network’s stability and overall security.

Moreover, every four years the block reward is cut in half, so mining bitcoin (running the network) gets less interesting over time. To encourage nodes to keep operating, small reward fees can be attached to each transaction; these rewards are collected by the node that successfully includes such transactions in a block and solves its mathematical problem. Due to this mechanism, transactions associated with a higher reward are usually processed faster than those associated with a low reward. What this means is that, when sending a transaction, you can decide if you’d like to process it faster (more expensive) or cheaper (takes more time). Transaction fees in the bitcoin network are currently very small compared with what banks charge, and they’re not associated with the transaction amount.

Blockchain Benefits and Challenges

Now that you have a general understanding of how the blockchain works, let’s take a quick look at why it’s so interesting.

Using blockchain technology has remarkable benefits:

• You have complete control of the value you own; there is no third party that holds your value or can limit your access to it.
• The cost to perform a value transaction from and to anywhere on the planet is very low. This allows micropayments.
• Value can be transferred in a few minutes, and the transaction can be considered secure after a few hours, rather than days or weeks.
• Anyone at any time can verify every transaction made on the blockchain, resulting in full transparency.
• It’s possible to leverage the blockchain technology to build decentralized applications that would be able to manage information and transfer value fast and securely.

However, there are a few challenges that need to be addressed:

• Transactions can be sent and received anonymously. This preserves user privacy, but it also allows illegal activity on the network.
• Though many exchange platforms are emerging, and digital currencies are gaining popularity, it’s still not easy to trade bitcoins for goods and services.
• Bitcoin, like many other cryptocurrencies, is very volatile: There aren’t many bitcoins available in the market and the demand is changing rapidly. Bitcoin price is erratic, changing based on large events or announcements in the cryptocurrencies industry.

Overall, the blockchain technology has the potential to revolutionize several industries, from advertising to energy distribution. Its main power lies in its decentralized nature and ability to eliminate the need for trust.

New use cases are arising all the time — like the possibility of creating a fully decentralized platform that runs smart contracts like Ethereum. But it’s important to remember that the technology is still in its infancy. New tools are being developed every day to improve blockchain security while offering a broader range of features, tools, and services.