Bitcoin – Explained

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Bitcoin – Explained

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Bitcoin. Everyone has been talking about it, but how does it really work? The underpinnings of bitcoin are based on blockchain technology. The blockchain is essential to the way many cryptocurrencies work, because it makes sure it cannot be abused. It is a ledger which has every Bitcoin transaction ever, sent between “addresses.”

So if someone buys 100 dollars of bitcoin, their address will receive a transaction that says they received the amount of bitcoin sent. This is shown on a public ledger which contains all transactions, so you are able to find who owns what bitcoin and where it has been. Due to the fact that the goal of bitcoin is to have a decentralized system in which people do not need to trust each other, it is necessary to secure the transactions in a way that requires an ability that can be proven that it is limited. Bitcoin uses computational power to prove to the network that you can secure it, which is limited by the computing hardware you have in exchange for an incentive if you “solve” a block.

This computation-intensive “puzzle” of using your computing power is accomplished through having “blocks” within the chain that require solving. Bitcoin’s protocol dictates that one block should be solved every 10 minutes. In order to limit the time period in this way, the amount of power needed to solve this puzzle, known as Bitcoin’s mining “difficulty” is changed based on how quickly or slowly blocks have been solved recently. This is accomplished through the mining process.

Mining involves one-way cryptographic functions, in this case, the NSA-developed SHA-256 algorithm, which generates a random hash of a length of 256 bits. To mine a block, miners will take all the transactions submitted to the network by users and place them in the block. Each transaction carries a “miner fee” to incentivize miners to process their transaction, paid in Bitcoin to the miner who solves the block. To solve a block, a miner must add their own transaction of the block reward plus all the miner’s fees to their own address. In addition to this, a 32-bit nonce is added in order to change the output. If the output is below a certain value determined by the difficulty, the block is valid and is sent to the rest of the network for review. After that, the miner receives 6.25 bitcoin, worth about $50,000, and another block is started. Bitcoin mining can be thought of as a giant raffle where 30 quintillion (30 billion billion) tickets are being entered every second to get lucky enough to win 6.25 Bitcoin, or roughly $50,000 reward.

So, with the idea of the chance at winning $50,000 every 10 minutes, many people want to know how they can start mining. Unfortunately for you, many other people also want to do the same. An average person mining as described above would have an extremely low chance of ever earning a single bitcoin. This is due to ASICs, or Application Specific Integrated Circuits, far outperforming your computer. These are machines that are created for the sole purpose of mining bitcoin.

Due to them, mining bitcoin on an average computer will literally cost more in electricity than it earns in bitcoin. One of the most powerful, the Antminer S9, a $1000 to $1500 machine, a machine that consumes one hundred times the power a Macbook needs and mines thousands of times faster, earns a measly $7.29 per day, as of writing, without factoring in power. It attempts this puzzle 13 trillion times per second and is the most advanced machine that Bitmain makes.

But how, of course, do you earn $7.29 if one block pays out $50,000? This is where mining pools come in. These are services that take all the hashrate submitted to them and “pools” it together. They distribute the bitcoin earned equally based on hashrate and not who found the block, charging a 0.5-2% fee for the service.

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