The Digital Miner
This article will guide you through the sequence of events that it takes to mine Bitcoin, as well as, it's innate characteristics that enable such economic/environmental salience.
Introduction
Bitcoin mining is the process of a network of systems running code to ensure structural legitimacy, security and neutrality. A network of operations incentivized economically to pursue computational work. The one initial caveat which came to my mind was that the mining industry is a power intensive process, an additional energy consumer. However, through my findings, miners can in fact have a positive effect on the energy grid; providing ways in which operations can improve the economics of energy productions. In the study, Arcane research provided a few of these positive attributes:
1. Strengthening electricity grids with bitcoin mining
2. Improving the economics of renewable energy with bitcoin mining
3. Mitigating natural gas flaring with bitcoin mining
4. Repurposing waste heat from bitcoin mining
It should come as no surprise that this autonomous industry is accompanied by political skepticism - those who feel monetary entitlement belongs to a select few. This is why I felt the need to dive into the underlying truths; bitcoin mining has revealed to be a very dynamic, fair and elaborative industry. However, because there are a multitude of topics to dissect here, this article will direct it’s focus on the mechanical aspect of bitcoin mining.
My goal in this article: Provide an understanding of the underlying mining mechanism - the process to mine a block and why it works.
A positive feedback loop
At this moment, there are millions of machines attempting to solve algorithms in order to generate revenue (block rewards). This is what is known as the proof of work (PoW) mechanism; a system with sound economic principles that incentivizes miners while simultaneously sourcing network security.
We'll get to that part soon, but first, let’s take look into how this system actually work, step by step!
The Process:
In order for a miner to receive a block, miners must compute a SHA256 hash function and solve a puzzle. A hash function takes any length of data input and produces an output of a set length.
The computation winner is able to store their transaction into the mempool (waiting room) and get paid block rewards but…
Before you are paid for service, the transaction of your block is sent to every node (i.e participant) on the network. Nodes relay and broadcast the transaction information and determine whether it adheres to the consensus rules. This is a process that bridges faulty transactions (i.e. double spending).
“Nodes are the central nervous system of the bitcoin network. They act both as gateways to the network and an information superhighway to relay network data to all participants.” (River Financial)These unconfirmed transactions are then kept in what’s called a mempool, which you could think of as a waiting room until miners have selected their choice of block. Miners will receive both block subsidy (newly minted Bitcoin) and transaction fees for their work. On a side note, a mempool will subsidize the miners with rewards based on how much hash they contributed.
The selection of the transactions is dependent on the state of storage limitations and fees. Miners will prioritize transactions with highest fee-to-data ratio.
A confirmation only occurs once that Bitcoin transaction is added to the chain of blocks. The transactions are then cleared from the mempool and added onto the chain, ready to be picked up by a new miner. Subsequent blocks are added to the chain over time which provides the immutability aspect of this mechanism.
The feedback loop repeats.
Proof of Work (PoW)
With this ecosystem, there is no central governance that decides block validity or set of transactions. Work is the arbiter of truth and for that reason, Bitcoins security becomes scalable over time. As the network expands, so do the technological developments to compete for block rewards, which partly why we have seen this rise in hash rate over time (Figure 2.0). For example, the latest hardware model Antminer s19 pro provides the highest hash rate to power efficiency ratio, was a technological improvement specifically designed to perform 256 hash functions.
At the power efficiency of 29.7 J/TH, this crypto mining hardware generates a profit of $12 daily with an electricity cost of $0.1/kilowatt - Software testing help
The way I see it, the exponential rise in hash power is due to the dollar denominated value of bitcoin becoming increasingly lucrative, creating incentive to expand the system and operations within it.
We can get a good estimate of the aggregate energy consumption on the network via hash rate (Units of hashes / second (h/s, often quoted in terra hashes). It is the estimated number of SHA256 computations performed by all miners every second.
Hashpower = ((blocks 24h / blocks expected) * work) / 600
Democratic Monetary System
This is a common monetary phenomenon known as Cantillon effect - which, “refers to the idea that changes in the money supply in an economy causes redistribution of purchasing power among people, disturbs the relative prices of goods and services, and leads to the misallocation of scarce resources” (SWFI, 21).
Fortunately, the only obvious way of cheating the PoW system is by gaining control over 51% of the hash power, re-organize those blocks and perform a double-spend transaction. However, this approach is methodically improbable. For one, it would require a mass amount of computational power. Secondly, there is no economic incentive in falsifying a block.
Satoshi must have understood the current problems existing in the fiat standard, hence why he wanted to create a system that is devoid of the Cantillon effect. How was this done? The inherent system is governed by two innate protocols: difficulty adjustment and block intervals.
Deterministic Supply Issuance
When a miner hashes the information, they encode a block timestamp into the block header. The system averages these block intervals (i.e. the time it took the miners to compute a hash function). An automated difficulty adjustment will then proceed to act in response to time it took to mine a block - it will adjust to a predetermined target zone of 600s (10 min). Just note, the actionable response to the average block interval occurs roughly every 2 weeks (2016 blocks) and in a longer time frame, every 210,000 blocks (roughly 4 years). This design is what allows for this deterministic and fluid supply issuance over time.
As you can see (Figure 3.0) hash rate and difficulty rise monotonically. Just keep in mind, difficulty responds to the functional change of computational power (hash output). In an instance when a block is produced at a faster rate than the average base rate, difficulty will increase as a response. This helps to avoid congestion, rapid accrual of bitcoins, and ultimately allow this systemic issuance of bitcoin overtime.
These cyclical adjustments have a significant influence on profit margins as many participants have invested a great deal of their conviction (Capital expenditures - CAPEX) into these operations. Therefore, miners watch these momentary opportunities diligently.
To reiterate a common example, in 2021 there was the unexpected mining ban in China. In response to the news, mining rigs were turned off in large numbers. This historic circumstance would provide a cost benefit opportunity. Following those events, miners went online in strength and in numbers. This response highlighted the current resilience of the network as well as the willingness and conviction in miners to continue their operations.
Food For Thought
Bitcoin is such a dynamic system- a self governed autonomous monetary network that is capable of displaying so many valuable solutions to so many existing economical and environmental problems in our world. Something this rich in value would be a shame to dismiss or misrepresent. I simply love the idea and believe this system can fuel opportunity to a broken fiat standard, one hindered by the very nature human greed and desire for monetary entitlement. I think many people globally have had or will share a tangible experience with economic distress. My idea here is that these turbulent times will bring forth a new paradigm shift, is Bitcoin demonstrate its true potentials, or will the government resist and continue its monolith.
I believe we undermine the strength of a decentralized force like Bitcoin, and people will begin to see the transparent nature of this dynamic force. Until then, I will do my best to find research that challenges my views, and provide further objectivity to nuanced topic, one that I believe deserves the time to understand and represent.
Please do comment and/or share !
Patrick Rychter,
AI Art Creatior: @bird_fatal_22
Wonderful read. As someone who knows almost nothing on the topic, it was very insightful. Interested to see where mining goes in the future! I could see companies jumping on the opportunity to recycle their wasted energy.