I started the 100 Days of Bitcoin series to chronicle an experiment where I “invested” about $50 worth of bitcoin in a site offering 10% daily interest. For more info I suggest reading the first post. You can also take a look at the whole series.
Mining Digital Currency
It is easy to understand how to mine gold. You can dig for it and find it in the ground. But, no one has ever found raw bitcoin in the dirt.
So if bitcoin doesn’t exist physically, how can it be mined?
To answer that I am going to need to get a little technical, but I will try to only go as deep as needed.
There is a master record of all bitcoin transactions that have ever happened, it is called the blockchain. You can think of the blockchain as an old bank ledger written on paper.
If the blockchain is seen as a ledger then each page of the ledger in Bitcoin terms is called a block.
Extending the bank analogy from above…
When I send 0.00529421 from my “investment” to my bitcoin address, as I did a short while ago, I am asking a banker (any banker) to transfer the money.
I can’t force the bankers to transfer the money, all I can do is ask. But, I can incentivise them by offering a voluntary fee.
Building a Block
Any banker who knows about my transaction can choose to add it to a new blank ledger page.
Once the page has as many transactions on it as the banker would like to include, she signs it and shouts to the whole bank “I have a page!” That page then gets added to the ledger and becomes as official as anything ever is with Bitcoin.
If more than one banker makes a page with the same page number then everyone in the bank votes on which one to accept and generally the one that finished first gets included and the other one gets thrown out.
The banker is awarded all of the fees paid by all of the transactions on the page plus is awarded a pre-determined fee by the bank itself. In fact the page includes where these fees go, usually to the banker’s own account.
So a Block is Just a List of Transactions?
Yes, a signed list of transactions.
Believe it or not, the hard part is the signature.
The Bitcoin rules specify certain requirements for the electronic signature on each block. It requires that the signer guess a number which, when combined with all the data of the block, will have a certain mathematical result that is easy to verify.
It is difficult to find a number that works for any given block. So, computers are used to try billions of billions of different values to find one that works.
Bitcoin Mining is therefore, the process of finding the right values to sign a block of bitcoin transactions.
How Long Does it take?
The average time for the entire world to produce a block is 10 minutes. That is actually built into the rules of the Bitcoin system.
Worldwide this month there averages about two-billion-billion attempts to make a block every second. So, on average it takes 1,200-Billion-Billion attempts to make one valid block.
The Value of a Block
The 30 day average Bitcoin fees awarded per block is about Ƀ 0.56.
In addition to that there are a certain number of new Bitcoins created by each block which is calculated in the bitcoin rules based only on the page number (called the Block Height for the geeks out there).
Right now that amount is Ƀ12.5. It started at Ƀ50 and is cut in half every 210,000 blocks (about ever 4 years) until it finally goes to zero at block 6930000. That is expected to happen in about 2040.
Decoding the Bank Analogy
Here are how the elements of our proverbial bank relate to their counterparts in the Bitcoin world.
The worldwide community of Bitcoin users and minors
The master ledger book
A ledger page
A ledger page in the maser book
A block generally accepted as part of the blockchain
A page number
The block number, also known as the block height
A bitcoin miner or group of minors working together
I am easily on track to break even tomorrow.
“Earnings”: Ƀ 0.02647102 ($19.47)
Reinvestment: Ƀ 0.02117681 ($15.58)
Withdrawal: Ƀ 0.00529421 ($3.89)
Net Loss to Date: Ƀ 0.00476462 ($3.50, 7%)