Bitcoin mining: a non-technical overview
The blockchain technologies that you hear and read about, such as Bitcoin, Litecoin, and Ethereum, are all based on the concept of a decentralized network. This means that, for example, instead of a major bank managing transactions between you and a vendor, on the blockchain there is no “middleman.” You pay the vendor directly without the oversight of a central authority such as a bank. But this begs the question: someone has to process your transaction, and with the middleman gone, who is left to do it? Enter miners.
Blockchain networks are comprised of thousands of nodes. Each node is basically just a computer that processes transactions. But processing a transaction on the blockchain is much more difficult than entering numbers into a spreadsheet like a banker might do. On the blockchain, nodes must perform a vast amount of random cryptographic operations designed to maintain the overall security of the network, and your transaction gets processed as part of these operations. This process is called mining for reasons that will become clear below. The specialized computers that perform these cryptographic operations at the heart of the system are referred to as miners.
All those cryptographic operations that miners must perform are expensive. Literally. Running only one typical Bitcoin miner, for example, consumes more power than the average US household. If you tried to run just a handful of miners in your basement, your monthly electric bill would multiply rapidly. Soon, you’d find that you needed to call the power company for an upgrade, including your own industrial transformer installed on a platform outside the house!
Mining may be expensive and complicated to operate, but it is also the backbone of the blockchain. Without miners, nothing happens. So how does the Bitcoin network incentivize people to purchase and operate miners? The answer is: by rewarding miners with “free” Bitcoin. Successfully processing (mining) a block of transactions yields two types of rewards for a Bitcoin miner. First, each block of transactions contains fees that the senders pay in order to have their transactions processed. These are like bank fees, but instead of going to a bank they go to the miner that processes the transaction block successfully. Second, during the early years of Bitcoin, miners are allowed to “mint” extra Bitcoin for each block they process. Currently, each miner can mint 12.5 brand-new Bitcoin to keep for himself every time he successfully processes a transaction block. These rewards for processing a transaction block are why the process is called mining. Like physical mining, the task is arduous and complex, but the valuable output makes it all worth it.
While mining can be very profitable in an optimal environment (i.e. low power costs, naturally cool weather, and necessary infrastructure), it is a great way to lose time and money if you’re in a state like California with high energy costs, or if you aren’t technically savvy enough to properly set up and monitor your mining operation.