With traditional currency, the government decides when to print money. But with bitcoin, there is no central government and currency must be created through a process called mining. Its name comes from its similarity to mining for other commodities — it requires exertion like mining, and also introduces new currency into the market at a rate similar to commodities like gold.
Miners use software to solve blocks of math problems and they are then issued a certain number of bitcoins in exchange for that work. This method of issuing currency acts as a mining incentive as miners add transaction records to Bitcoin’s public ledger of past blockchain transactions. The blockchain confirms transactions that have happened throughout the network. Legitimate transactions are distinguished through nodes. Miners are paid transaction fees and a “subsidy” of newly created coins.
The purpose of bitcoin mining
Mining’s main role is to allow Bitcoin nodes to reach a secure, tamper-resistant consensus, it is also the mechanism by which bitcoin is introduced into the system. These actions not only produce new coins in a decentralized manner, but motivate people to provide security for the system.
Mining is intentionally designed to be resource-intensive and difficult, so there will be a continuous stream of blocks to be tackled by miners. Individual blocks must contain a proof of work to be considered valid and this proof of work is verified by other bitcoin nodes each time they receive a block.
Proof of Work
Proof of work is a piece of data which satisfies set requirements for blocks. Producing a proof of work is a random process with low probability, meaning trial and error is required to generate it. The proof of work for bitcoin is called a “hashcash.”
Mining and difficult problem solving
Mining a bitcoin block is difficult because the SHA-256 hash of a block’s header must be lower than or equal to the target for the block to be accepted by the network. The hash of a block must start with a certain number of zeros and the probability of calculating a hash that starts with many zeros is very low, therefore many attempts must be made. To generate a new hash each round, a nonce is incremented.
Bitcoin network difficulty
Bitcoin mining network levels of difficulty measure the challenge of finding a new block in one moment, as compared to the easiest it will ever be. Difficulty is recalculated every 2016 blocks, equal to a value that the previous 2016 blocks would have generated in two weeks if all miners were working at that difficulty level. At this rate, every 10 minutes would yield a block.
As more miners join the network, block creation rates increase, and as the block generation rate increases, difficulty levels also rise, pushing block creation levels down. Blocks released by miners who do not reach the difficulty target will be rejected by the network.
When a block is discovered, the finder is awarded a certain number of bitcoins, which is agreed-upon by the network. The current bounty is 25 bitcoins, a value that will decrease by half every 210,000 blocks.
Additionally, miners are awarded fees by users sending transactions and fees are incentives for miners to include transactions in their block. As the number of new bitcoin miners allowed to create in each block decreases, fees will become a larger percentage of mining incomes.