How Bitcoin Mining Works: This Is Where Bitcoins Come From

As a bitcoin user, it’s responsive that you have the basics understanding of where bitcoins (your digital money) comes from, and how they are being produced into the market. As users of fiat money we know that the central bank and the federal government partner together to decide when to print and distribute money. 

With bitcoin, this is quite different as bitcoin are only produced through a method and process called mining. People who engage themselves by using special software and hardware to solve a mathematical problem in other to mine bitcoin are called miners and usually these people get reward a certain number of bitcoin in exchange for their service.

How Bitcoin Mining Take Place

Transactions are being carried out daily within bitcoin users who send and receive money from each other, and since bitcoin is open source and decentralize no one person or a central body confirms this transactions and keep their record. So the bitcoin network deals with this by collecting all of the transactions made during a set period into a list, called a block. It’s the miners’ job to confirm those transactions and write them into a general ledger.   

The public ledger is referred to as the blockchain because transactions are grouped together in blocks. These blocks connect with every other block previously recorded on the blockchain, and provide validity for every new transaction. This is done through a process called mining, which requires tremendous computer power to solve a complex cryptographic math problem. 
 

The math is built off all previous blocks on the chain, and the computers in the network race to find the right answer. The first computer to find the right combination of numbers (also known as its hash code) is rewarded with a block of Bitcoins. The more computers that are mining on the network, the more difficult the math problem becomes. 

A simple analogy is to think of a group of computers all competing to find a winning lottery number. They do this by broadcasting billions of number combinations per second, and when the right combination is found, the winning computer gets rewarded with new Bitcoins. We call this process Proof-of-Work, or POW. Mining is purposely designed to be resource intensive and difficult so that the number of Bitcoins created daily is controlled by the program. 

The program is designed to create new Bitcoins every ten minutes. Right now 25 Bitcoins are rewarded for every block found. There will only ever be 21 million Bitcoins ever created and the Bitcoin protocol reduces the mining rewards in half every four years. The last Bitcoins will be mined in 2140. When Bitcoin first came out, it was possible to mine blocks with a simple home computer. As more computers joined the network, the difficulty for solving blocks increased, and miners had to find more efficient ways to participate. 

Miners soon discovered that specialized mining rigs could be created by combining multiple graphics cards on a computer. 

Eventually, when the price of Bitcoin started to climb, companies invented specialized mining machines. These computers are designed to be single-purpose machines called Application Specific Integrated Circuits (ASICs). Their function is to generate random hashes to solve a cryptographic math problem as quickly as possible, while using the least amount of electricity. Since the creation of ASICs, mining has become highly industrialized because the mining cost is reduced if done in a data center. China is currently leading the way in Bitcoin mining.

The Mining Ecosystem

Hardware

 
Users have used various types of hardware over time to mine blocks. Hardware specifications and performance statistics are detailed on the Mining Hardware Comparison page.

CPU Mining

Early Bitcoin client versions allowed users to use their CPUs to mine. The advent of GPU mining made CPU mining financially unwise as the hashrate of the network grew to such a degree that the amount of bitcoins produced by CPU mining became lower than the cost of power to operate a CPU. The option was therefore removed from the core Bitcoin client's user interface.

GPU Mining

GPU Mining is drastically faster and more efficient than CPU mining. See the main article:Why a GPU mines faster than a CPU . A variety of popular Mining rig  have been documented.

FPGA Mining

FPGA mining is a very efficient and fast way to mine, comparable to GPU mining and drastically outperforming CPU mining. FPGAs typically consume very small amounts of power with relatively high hash ratings, making them more viable and efficient than GPU mining. See Mining Hardware Comparison  for FPGA hardware specifications and statistics

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ASIC Mining

An application-specific integrated circuit, or ASIC, is a microchip designed and manufactured for a very specific purpose. ASICs designed for Bitcoin mining were first released in 2013. For the amount of power they consume, they are vastly faster than all previous technologies and already have made GPU mining financially unwise in some countries and setups.

Mining services (Cloud mining)

Mining contractors provide mining services with performance specified by contract, often referred to as a "Mining Contract". They may, for example, rent out a specific level of mining capacity for a set price for a specific duration.

Pools

As more and more miners competed for the limited supply of blocks, individuals found that they were working for months without finding a block and receiving any reward for their mining efforts. This made mining something of a gamble. To address the variance in their income miners started organizing themselves into pools so that they could share rewards more evenly.

History

Bitcoin's public ledger (the 'block chain') was started on January 3rd, 2009 at 18:15 UTC presumably by Satoshi Nakamoto. The first block is known as the genesis block. The first transaction recorded in the first block was a single transaction paying the reward of 50 new bitcoins to its creator.