Bitcoin Mining 101

Bitcoin mining is the process by which transactions on the Bitcoin blockchain are validated and secured through the extensive use of computational power, also known as hashrate (read more in our Hashrate 101 article), to solve intricate cryptographic puzzles. This energy-intensive process, also known as Proof of Work, is crucial for maintaining the integrity and accuracy of the Bitcoin blockchain, which is a decentralized digital record of all transactions in the network.

The role of Bitcoin miners

Bitcoin miners play a crucial role in the Bitcoin network by verifying transactions and updating the blockchain ledger. To compete effectively, miners invest in specialized mining machines known as Application-Specific Integrated Circuit (ASIC) chips, which require substantial energy consumption.

Miners are rewarded for their efforts according to their efficiency in solving the complex cryptographic puzzles. The first miner to solve the puzzle can update the ledger and is rewarded with a prize of newly minted Bitcoins in addition to transaction fees that help offset energy and equipment costs. The prize is halved around every 4 years, as coded into Bitcoin's protocol. In May 2020, the reward for each winner was halved from 12.5 Bitcoins per block to 6.25 Bitcoins, and in April 2024, the reward dropped further to 3.125 Bitcoins per block¹. This financial reward incentivizes miners to continue securing the network and validating transactions.

How Bitcoin mining works: A step-by-step overview

1. New transactions: Bitcoin transactions are broadcast across the network
2. Transaction pool & block formation: Unconfirmed transactions are collected into a pool. Miners select transactions from this pool to create a candidate block
3. Mining: Miners compete to solve a complex cryptographic puzzle to generate the correct hash that secures the network, requiring substantial computational power, often referred to as hashrate or hash power  (Read our Hashrate 101 article for further information)
4. Block creation: The first miner to find a valid solution is allowed to broadcast their block to the network for validation. This energy-intensive process is akin to actual mining, hence the term "miners”
5. Block validation & verification: Other miners verify the correctness of the block. Once confirmed, it is added to the permanent ledger of the blockchain
6. Mining rewards: The first miner who successfully adds the block receives rewards in the form of newly minted bitcoins and transaction fees
7. Difficulty adjustment: The network automatically adjusts the mining difficulty based on the time taken to mine previous blocks, ensuring that new blocks are created roughly every 10 minutes. This helps to maintain a steady and predictable issuance of new Bitcoin, while ensuring a consistent pace of transaction confirmations that adapts to fluctuations in mining power

The Importance of Bitcoin Mining

Bitcoin mining is essential for the cryptocurrency's decentralized network. Miners verify and secure the blockchain, enabling the network to operate without centralized oversight. Critically, the mining process incentivizes participants to contribute their substantial hash power. The higher the hashrate, the more secure the network becomes. Since miners have to spend energy & computational power to solve these puzzles, it becomes nearly impossible for any single entity to gain control of the network.

_{1 Coinbase; "The Bitcoin Halving (https://www.coinbase.com/bitcoin-halving)}