A lot of people may have heard about Bitcoin, and even know what it is. But very few know the real reason behind Bitcoin mining, other than earning money. If you have no prior knowledge of Bitcoins and blockchains, I would recommend my previous posts here. In this post, I will be explaining what mining is, and how you can mine cryptocurrencies which are based on Bitcoin.

What is mining?

Blockchains use consensus protocols to ensure that a common, correct history of transactions are stored by all nodes. For this purpose, Bitcoin uses the Proof-of-Work consensus algorithm. In simple words, the consensus protocol used by blockchain requires some nodes to solve cryptographic puzzles, which are proof that some effort has been taken to create a new block of transactions. The reason for this is to make transactions immutable in a way that no entity can practically modify the history of transactions. To know more about consensus algorithms, check my post here. Mining is called so, because it is very similar to mining of other physical substances, such as gold and silver. Both gold as well as Bitcoins require some investment in terms of physical resources(mines for Gold, and computers for Bitcoins). A key difference between mining physical substances and Bitcoins is that the supply of Bitcoins does not depend on the amount of mining being carried out.

How to mine Bitcoins?

In the early days of Bitcoin, mining was possible using consumer grade hardware, such as gaming laptops. As mentioned, an important part of mining is finding a solution to a puzzle. This cryptographic puzzle involves finding a hash of the block header, which must be less than or equal to a target value. Bitcoin clients change the difficulty of this problem dynamically after every 2016 blocks. Over the years, due to increasing hardware performance and the use of special integrated circuits called ASICS, the difficulty has increased. This makes it impossible to mine using consumer-grade hardware, unless you can join a mining pool.

In a mining pool, multiple nodes get together to contribute processing power for creation of a block. The rewards of creating a block are split between members of the mining pool, according to their individual contributions. There are many approaches to pooled mining, such as Bitcoin Pooled Mining(BPM), Pay-per-Share, Eligius etc.

Another way to mine Bitcoin and its derivatives is using cloud mining. In this method, the mining hardware is managed by the company which provides the mining service. Users of this service become part of a mining pool, where they buy a certain amount of “hash rate”, i.e. how many hashes per second can be performed by the hardware. This requires an upfront payment. A higher hash rate means that you’ll be given a higher share of Bitcoins after mining, but this also means that you’ll need to pay more initially. Hash rates are important, because the puzzle to find a hash involves computing a hash multiple times, by varying a nonce, until the target is satisifed. The higher the hash rate, the more will be your share. This holds true for solo mining and mining pools too. To know more about hashes, check my post here.

Enfin

Cryptocurrencies derived from Bitcoin and which use Proof-of-Work as the consensus algorithm can be mined in similar ways. Currently, mining pools are the best way to earn Bitcoin. For those who feel that solo mining is more rewarding, here is a mathematical explanation to convince you otherwise.

Further Reading

• Mining
• Bitcoin mining is vulnerable
• Comparison of mining pools
• Approaches to pooled mining