Last week I said that in this weeks newsletter I would talk about mining. What is Bitcoin mining and why do we need it? Since you all know by now that Bitcoin is a completely digital currency the word "miner" is both a misleading and spot on term.
Before I get into Bitcoin mining, let's talk about good ol' traditional gold mining for a minute. The main reason fiat currencies1 used to be backed by gold throughout history is because gold is physically hard to take out of the ground. It requires a lot of man power and machinery. It also takes a lot of time it takes to search for it. Every year a predictable 2,500-3,000 tons of gold is extracted from the ground. That means that you can accurately know how much gold will be in the market which makes it reliable and predictable. Unlike fiat currencies which governments can print as much as they want.
As we've discussed each block in the blockchain contains a string of numbers and letters called a hash which is kind of like the name for that block. The next block in the chain also stores that hash in order to keep chaining the blocks together. Next up, there is another string of numbers and letters created in each block called a difficulty target. This string is what the miners are trying to work towards in order to win the block reward2. Using these strings the miner (a company or person with many high powered computers) literally guesses at what the name (hash) of the block will be. This is extremely difficult and so the computers have to guess billions and trillions of times before they get the right hash name. If you were doing this on your computer right now, it would get so hot it would melt...
When the miner guesses the correct name and wins the block they win bitcoin in two different ways. The first is the block reward that is a set amount amount of Bitcoin that is created by the Bitcoin code for each new block. The second is transactions fees. That's the small network fee you and I pay whenever we send Bitcoin to someone. We pay this small fee to encourage miners to, well mine!
We need miners to create new blocks for the network so that people can put their transactions into a block and get them verified on the blockchain. Also what the miner is doing is verifying that all the transactions in the block are valid transactions. So they are actually securing the network from any fraud! So the entire system from miners to people like you and me sending Bitcoin to our friends and family are all incentivized in the right way to use the Bitcoin network.
1 “fiat currency” is typically what you would think of as currency today. Paper bills that a government prints and distributes to its citizens.
2 “block reward” is an amount of Bitcoin that goes to whichever miner guessed the correct hash (name) for the block. A miner is usually a company that has a bunch of high powered computers. It takes a lot of electricity to run these computers so it costs the company a lot of money. So they deserve a reward!
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