MINER PRIMER (INTRODUCTION TO MINING) Get ready to get down to the nuts and bolts of Bitcoin.
WHERE DO BITCOINS COME FROM? Hash rates and hardware are just the start for our journey into the realm of Bitcoin creation. In order to understand Bitcoins, it is very helpful to understand how they are created and circulated.
In understanding their creation you gain an understanding of the security behind the Bitcoin system and why it works. What is a Bitcoin? A Bitcoin is a value that is represented by a unique piece of data. Each Bitcoin can be divided into fractions. Bitcoin fractions are also unique pieces of data and can be transferred in the same way. Bitcoins have value because each piece of data is unique and they can be exchanged reliably through a decentralized system. The decentralized system manages all of the Bitcoins in circulation and manages their exchange.
Because Bitcoins are exchanged using a decentralized distribution method it is important to be absolutely certain that the data being circulated is the exact information required to complete a transaction. The security of the data being transferred is the most important part of the system.
The data being transferred is handled using special encryption methods to ensure the safety and security of the Bitcoin data. What is the Bitcoin network? The Bitcoin network is a collection of computers using a type of peer-to-peer software that manages the activities that surround the core functionality of the Bitcoin network. The network uses peer-to-peer communications in order to decentralize the distribution of the network.
The functionality includes the creation of Bitcoins and the circulation of Bitcoins within the network. These transactions are carefully structured and managed using a sophisticated cryptographic method. The encryption methods used to make Bitcoins safe are very complex and require an extensive amount of computing power to achieve. To generate the data needed for Bitcoins, the cooperative efforts of many systems dedicated specifically to this task are needed.
The computer systems that are used to create Bitcoin data are called “miners”. WHAT IS MINING? Bitcoins are created through “mining”. Mining is the metaphorical name given to the process involved with generating the data that is used in the Bitcoin network.
Mining Bitcoins requires specialized hardware and software. The software is openly available and can be used freely by anyone with a system that meets the requirements. The software runs on commonly obtained computer hardware but specialized hardware dedicated to mining is becoming increasingly promising. To encourage people to contribute to mining, a reward is generated by the system for people who participate.
In a process that is similar to a continuous lottery, mining computers on the network are awarded Bitcoins each time they find the solution to a specific mathematical problem, resulting in the creation of a “block”. The reward for solving a block is automatically adjusted so that in roughly the first four years of operation of the Bitcoin network, 10,500,000 BTC will be created. This amount is halved each four years, so it will be 5,250,000 over years 4-8, 2,625,000 over years 8-12 and so on. Thus the total number of bitcoins in existence will not exceed 21,000,000.
The difficulty involved with the process for creating Bitcoins is directly proportionate to the number of people who are using Bitcoins. As Bitcoins grow in popularity the ability to create them becomes more difficult resulting in a proportionate growth. As the amount of processing power directed at mining changes, the difficulty in creating new Bitcoins changes. This difficulty factor is calculated every 2016 blocks and is based upon the time taken to generate the previous 2016 blocks. Even before the creation of Bitcoins ends, the use of transaction fees will likely make creating new blocks more valuable from the fees than the new Bitcoins being created. When Bitcoin generation ends, these fees will sustain the ability to use Bitcoins and the Bitcoin network.
There is no practical limit on the number of blocks that will be mined in the future. Mining keeps the network going and can make you money if you want to participate. (Some source material from http:// en.wikipedia.org/wiki/Bitcoin )