Cryptocurrency mining is an important step in the validation and processing of transactions within a blockchain network. Most commonly associated with Bitcoin, mining is ubiquitous to every proof-of-work (PoW) protocol. In PoW protocols, ‘blocks’ represent a number of transactions bundled together, which must be validated by miners before it can become part of the blockchain. Proof-of-work is a consensus mechanism, which ensures all node operators, or miners, agree on a single version of a blockchains’ history.
Essentially, miners use high-powered computers, called ASICs, to solve a difficult computational problem which validates a block. Miners are competing to be the first one to solve this cryptographic problem, and when they do so, they receive a ‘block reward’ – a bounty paid in the native token of that protocol. Block rewards can be highly lucrative, especially in the Bitcoin network, and as such many commercial operations have been established to mine BTC.
Because mining is so difficult, and the chance of a single machine validating a block is low. Therefore, miners either invest in multiple ASICs in large scale mining operations or group together and share the block rewards if that group validates a block. At its height in 2017, Bitmain, one of the largest mining groups that also manufactures its own ASICs, had an enormous 25,000 machines, using $39,000 worth of electricity to power them per day.
Bitcoin block rewards undergo a process known as ‘halving.’ This is because Bitcoin is a deflationary currency, with a fixed and finite supply of 21 million. For every 210,000 blocks which are processed, the Bitcoin network undergoes a halving. In 2020, the block reward will halve to 6.25 BTC. This makes BTC more scarce over time, but it also increases the mining difficulty. Each PoW blockchain network will have a similar permutation of this setup and block rewards.
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