From the first cypherpunks to the modern “Bitcoin Maximalists” who seek to abandon the traditional financial system, there has always been one characteristic of Bitcoin that fascinates everyone: the fixed supply and controlled issuance of currency.
Unlike fiat currency, bitcoin is not printed and distributed by a central body such as a financial institution or government authority. Incorporated in its protocol there is an algorithm that regulates its issuance, in full contrast with the logic of traditional financial systems.
The two mechanisms that regulate the delicate balance between bitcoin supply and demand are mining and halving. If this balance were to fail, for example, with an excessive emission of new bitcoins, one of its main characteristics would be lost – scarcity.
Mining and halving, therefore, play a key role and make bitcoin comparable to a safe-haven asset such as gold. The more gold is mined, the harder it is to find what remains to be mined. As a result of this limited offer, gold has retained its value as a medium of exchange and deposit for over 6,000 years.
Mining is verifying and adding new transactions and, consequently, new blocks to a blockchain. The mining process maintains the integrity of the network and allows issuing new coins into the current circulating supply.
How Does Mining Work?
Precisely from this parallelism with gold, the term “mining” was coined to identify the process of creating new bitcoins. Actually, the “minting” of new currency is only a consequence of the miners’ work.
Miners, as a matter of fact, are in charge of validating transactions and keeping the network secure, by solving complex mathematical problems using dedicated and powerful hardware. When they are successful, they receive new bitcoins as a reward. This mechanism is a central point of the entire system. A potential reward ensures that nodes work together towards a single goal, discouraging the selfish behaviour of individuals and encouraging an increasing number of people to engage in mining. The more miners in a blockchain, the more secure the blockchain is.
Miners are those nodes that decide to participate in the network by providing their computing power to add blocks to the chain. For this purpose, they collect transactions, validate them and organise them into blocks.
The Miner’s Reward
The topic of mining arouses a lot of interest online for the revenue that can be derived from it. In fact, miners are rewarded for their contribution to the safety and functionality of the blockchain with a sum of newly minted coins and transaction fees paid by users. Besides Bitcoin, other derivative coins such as Bitcoin Scam Vision, Bitcoin Cash or Litecoin can be mined.
The reward per block is the number of coins a miner receives for completing an entire block with verified transactions before the other miners.
From this point of view, mining can also be defined as the creation of new coins through the validation work of miners.
The Issuance of Bitcoin
The gradual emission of new bitcoins is fundamental to maintain the scarcity and therefore the value bitcoin, as we have seen in the dedicated article.
Blocks are added to the bitcoin chain on average every 10 minutes, and each block currently issues a reward of 6.25 bitcoins. At an average rate of 144 blocks per day, 900 new bitcoins are added daily to the current offer.
As prescribed by the protocol, bitcoins show a decreasing emission rate, which will stop permanently when the number of bitcoins in circulation reaches 21 million bitcoins.
This will happen in 2140, however, since the block reward also decreases every 210,000 blocks (i.e. about every 4 years), the last bitcoins will be issued with decreasing frequency and 99% of the bitcoin offer will be minted by 2032.
The average time required to mine a block is part of the supply model of bitcoin. Satoshi Nakamoto decided it should be about 10 minutes. To keep this time constant, he made the difficulty level of the mathematical puzzles to be solved gradually increase (or decrease) over time.
Specifically, for Bitcoin, this happens every 2016 blocks created. The algorithm calculates whether the time taken to mine the last blocks was less than the target time, in this case, the difficulty must increase; vice versa the difficulty must decrease.
What makes mining complex is that it happens on an encrypted infrastructure, the Blockchain. This means that in order to record a transaction, verify it or add a block to the blockchain, miners have to perform complex mathematical calculations in order to solve a cryptographic function called the hash.
The Evolution of Mining and Mining Pools
At first, in the early years of Bitcoin, miners were able to solve these mathematical puzzles with the power of their home computer processors alone. They soon discovered that graphics cards (GPUs) used for video games were better suited for this kind of work. Graphics cards were faster, but they consumed a lot of energy and produced a lot of heat.
The first dedicated hardware released for bitcoin mining included chips programmed specifically for this task, so they were faster and reduced power consumption. As bitcoin’s popularity increased, the number of miners increased dramatically, making it harder and harder for individuals to solve mathematical puzzles.
To address the problem, miners have begun working together in what are called mining pools. Mining pools are able to verify and validate transactions much faster than individual miners, and each member of the pool is paid back in proportion to the amount of work done.
Precisely because of this arrangement, it is not easy to know exactly how many miners are participating each day. From the figure below, however, you can see that very little space is left to independent miners.
The great technological development combined with the interest of mining pools are the factors that can explain why the difficulty of mining has grown so much over the years.
To those who are attracted by the prospect of earning money with mining, therefore, let us remind them of the reasons why, as time goes by, it is less and less convenient.
The first entry barrier has always been to have the technical skills to set up a mining node and the resources to invest in it.
The second discouraging factor is that the bitcoins mined as a reward are less and less: from 50 BTC per block they have dropped to 6.25 BTC. This is because the currency must keep its value high, and to do so it must be scarce (read more about this in the next article).
Last but not least is the high competitiveness: most of Blockchain is controlled by giant mining pools working 24 hours a day and the rest are thousands of small pools or individual experienced miners. Since the reward given is proportional to the energy consumed, if the rest of the network has already verified all transactions thanks to their powerful devices, there is little left to profit from.
Considering the energy required, the meagre profit and the very name of mining, perhaps it is not so different from the analogical pickaxe-and-lamp counterpart.