Cryptocurrencies Finance

What is cryptocurrency mining?

Blockchain is the great technological revolution that makes Bitcoin unique and disruptive. It is a decentralized ledger that tracks every transaction in the history of bitcoin.

The fact that it is a decentralized network makes bitcoin virtually impossible to hack. There is no central computer or group of computers that can be attacked. Computers running on the network are scattered around the world. Unlike AirBnB and Uber, bitcoin is not a company or entity.

The best way to think about bitcoin is in relation to email, which is a point-to-point technology that exists for free on the Internet with the aim of transmitting information more efficiently. Satoshi Nakamoto programmed the algorithm that underpins bitcoin to work in a way that transactions are grouped into a block every 10 minutes. He also designed a smart rewards system to incentivize those who validate transactions being incorporated into the blockchain, in this case miners.

Each time a new block is resolved, which means that the miner has verified all transactions in the block and that these have been proven valid for more than 50% of the rest of the miners, that mined block is added to the ledger, following all other blocks that have been miners in the past.

Automatically, the records of all miners are updated to reflect that latest addition to the blockchain, and that miner who performed the last verification job is rewarded. The bitcoin code is programmed to automatically release a certain amount of bitcoins to the miner who works the fastest in those last 10 minutes. This is how new bitcoins come into circulation, without the need for a central authority to control their supply, as with traditional currencies.

The reward amount was programmed to halve every 210,000 blocks mined, or every four years. This mechanism was designed by Satoshi Nakamoto with the aim of controlling supply and limiting currency inflation. When bitcoin launched in 2009, the miner was paid 50 bitcoins per mined block. In 2012, block number 210,000 was mined and the reward dropped to 25 bitcoins, which means that every 10 minutes 25 new bitcoins come into circulation.

It is possible to predict when the new reward reduction will take place. On July 23, 2016, when block 420,000 is mined, the reward will drop again, this time to 12.5 bitcoins.

It is expected that by 2140, the reward per mined block will reach zero and the total amount of bitcoins will reach its maximum supply, which according to the code created by Satoshi Nakamoto, will be 21 million bitcoin units.

No other bitcoins can be created after that. This means that the reward for the individuals responsible for verifying the transactions, in this case the miners, will have to change from a system of rewards per mined block, to a scheme based on transaction fees. There are currently just over 15 million bitcoin in circulation.

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