How Bitcoin Mining Works

Although bitcoin mining does not need hard helmets, soot, or nonmetaphorical canaries, the cacophony inside Edward Weniger’s modified shipping container in Omaha, Nebraska, resembles massive equipment excavating into the earth’s core.

The scores of “rigs” — literally hot-rodded computers — mining bitcoin inside contribute to the cacophony.

What keeps the rigs from melting produces the most decibels: “Just a bunch of industrial fans that turn on and kick off and are noisy,” said Weniger, who leases out the space to other miners and performs part of his own mining.

Weniger racks up a high power bill, “in the neighborhood of around $8,000 a month,” even in Nebraska, where electricity is relatively inexpensive compared to other areas of the nation.

So, what are those rigs doing exactly? And why do they use so much energy that Congress is suddenly worried about the effect of cryptocurrency on electricity networks and carbon emissions?
Let’s have a look at a simplified version of how a bitcoin transaction works to see what I mean.

Step 1: Don’t put your faith in anybody. Verify.

Professor Robert Farrokhnia of Columbia’s Business and Engineering Schools agreed to instruct me for the price of one hypothetical bitcoin, which is now worth about $40,000.

If I sent Farrokhnia a paper check, someone at a financial institution would have to verify that I had $40,000 in my account before the transaction could be completed. Bitcoin, on the other hand, has nothing to do with banks; the entire objective is to avoid a centralized financial authority.
“How can we secure the integrity of this decentralized system if there is no central authority we can trust to maintain the integrity of transactions?” Farrokhnia expressed herself.

Miners and other computers in the bitcoin network (known as “nodes”) verify that a pending transaction is valid to ensure I’m not writing a bogus bitcoin check. They accomplish this by checking a financial ledger, much like a bank.

However, unlike Wells Fargo’s data, the bitcoin ledger is open to the public and may be found on your computer, mine, or anybody else’s. The bitcoin blockchain is seen here. Imagine 700,000 stone tablets — the blocks — all lined up together, each containing every bitcoin transaction etched into it.

“They look at all of your previous transactions from the day you joined the bitcoin network to verify you have at least one bitcoin you can use to pay for my services,” Farrokhnia said.

Miners go through the blockchain ledger (or, in some cases, a subset of the ledger) and if they find a transaction that indicates, “Yeah, he has the bitcoin he claims he has,” it goes into the “mempool.”

Step 2: Make your way to the mempool.

Farrokhnia still can’t spend the bitcoin that was provided to him after that verification since there’s additional work to be done.

Our transaction gets placed in the mempool, which is essentially a storage space. Consider it the bitcoin DMV. Thousands of pending transactions from across the globe, at a rate of three to five per second, are waiting for a number to be called.

In bitcoin purgatory, all bitcoin transactions are waiting for a miner to call their number. It’ll take at least ten minutes. “Transaction fees,” which you might view of as tips to miners to prevent lengthier delays, are often included by Bitcoin payers.

Let’s pretend Edward Weniger in Nebraska picks our transaction out of a slew of 2,000 or so others. He begins to carve the specifics of our transaction into his own block, which he will then add to the blockchain. He isn’t the only one, however.

“It’s highly likely that many miners will choose your transaction out of a slew of others and include it in a block,” Farrokhnia added.

Miners from all over the globe, from Kazakhstan to Florida, want their block to be included to the blockchain. There can only be one, however.

Step 3: The bitcoin lottery math puzzle

So, who comes out on top?

“Miners in the bitcoin protocol must solve a mathematical challenge that is essentially a search for a [random] number,” Farrokhnia said.

The problem is more like to a lottery. Going to a casino may be the simplest technique to grasp it. Farrokhnia replied, “Imagine a slot machine.” “However, instead of having three bars, it has 64 bars, so you can appreciate how slim the chances of success are.”

A miner’s chances of winning the jackpot are infinitesimally minuscule for every one guess – one draw of the slot machine arm. It’s almost certain that you’ll be hit by lightning.

The payout, as well as the incentive for miners to perform all of this, is presently 6.25 bitcoins, or around $250,000. The jackpots are granted every 10 minutes or so, and this is how the majority of the money is distributed among the miners.

Professor Farrokhnia may finally spend his imaginary bitcoin when the winning miner’s tablet is put to the blockchain (although, to be extra safe, he should wait until a few more blocks are added).

Work evidence and energy consumption

Why is this procedure so time-consuming? Farrokhnia explained, “Proof of employment.” “I need to be sure you did the job, the verification properly, by assigning you a task complex enough to need the use of power, money, time, and so on.”

The assumption behind bitcoin mining is that if Edward Weniger in Nebraska was attempting to rig the system, he wouldn’t go to all of this trouble. Other miners can readily verify the proper solution to the arithmetic problem, and a block with erroneous transactions in it should ultimately be found when additional blocks are added.

However, the initial concept was that miners would be nothing more than geeks with a computer and some free time, with each miner having their own slot machine.

“However, it turned out that people recognized, ‘Hey, you have two, I have another five at home — if we pool our resources, we have a better chance of winning,'” Farrokhnia said.

The value of the mining jackpot has risen in tandem with the price of bitcoin in recent years. Multinational mining corporations began creating more powerful rigs and pooling tens of thousands of them.

Erik Franklin, a climate change researcher at the University of Hawaii, is concerned about this.

“You can practically have the same amount of energy demand in a single day that I would have to operate my three-bedroom home in Hawaii if you had a high-end setup,” Franklin said.

Bitcoin proponents believe that the rigs may easily be powered by renewable or alternative energy sources. Plus, mainstream banking isn’t exactly carbon-neutral.

However, cryptocurrencies use more energy than some whole nations, according to Franklin.

“Don’t look at where it is now; look at where it is going.” That influence was nil ten years ago, and now we’ve added another nation on the magnitude of Poland,” Franklin remarked.

Ethereum and other platforms are experimenting with less energy-intensive mining techniques. But, for now, the bitcoin approach is the most popular.

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