Imagine if you found out that your property had a treasure of gold beneath it, greed would crawl over, and you would want to mine every last bit of that precious metal. The same applies to Bitcoin; investors want to collect this "free cash" from Bitcoin network that is open to all.
Before we start with what Bitcoin mining is, let us understand some basics around the concept.
Why is Bitcoin highly valued?
The answer to this is similar to why gold or petrol is highly valued. The answer is: the supply is limited.
When something is scarce, it is valued more. So just like there is a limit to how much gold you can mine and how much petrol the world can use before the oil wells are completely consumed, there is a limit to the number of bitcoins that can be circulated. And, the number is 21 million bitcoins.
As of today, around 16.8 million bitcoins are in circulation, which is about 80% of the total. So miners around the world can still mine 20% more bitcoins.
Who are bitcoin miners?
Bitcoin works on blockchain technology which is a decentralized system for exchanging currencies. Unlike centralized system, there is no regulatory body validating transactions; it is done by "miners."
Also Read: How Does Blockchain Technology Work?
Bitcoin works on a peer-to-peer network. Peer-to-peer network divides the workload between peers (miners in this case). Transactions in bitcoins require adding blocks to the blockchain in a way that it is not duplicated (one cannot use the same bitcoin to make two pay twice).
How does mining work?
Every ten minutes or so miners around the world get a few hundred transactions to process. Now, these are 'blocks' that are like mathematical puzzles, and they require to be solved using algorithms.
The first miner to find the solution will send the result to other miners in the network who will check if the sender of bitcoins can spend the coins and if the result of the puzzle is correct.
When a significant amount of miners agree to the solution, the block is cryptographically added to the blockchain.
How are new bitcoins formed?
In the above process, the miner who found solved the puzzle will get some bitcoins in reward from the system but only after the completion of 99 more blocks, forming a 100. This is how new bitcoins are mined.
The reward was 25 bitcoins in 2014 and halved to 12.5 in 2017. The number will be halved again in 4 years. So the miners now need to add more blocks in order to mine more bitcoins compared to a few years ago.
Why is mining important to Bitcoin?
The growing valuation of bitcoin and the greed to mine all the leftover bitcoins are obvious reasons to motivate the miners to continue adding blocks to the blockchain.
But, the essential reason is that miners keep the system secure. By secure I mean the cryptography does not allow a person to spend the same bitcoin twice and if someone wanted to rob the bitcoins (like robbing all the cash from a bank), they would need to rewrite the whole blockchain which takes more than half of the puzzle solving capacity of the whole network.
Attaining such a capacity is highly expensive as bitcoin mining power that the miners have in the complete network is tens of thousands times more than 500 supercomputers of the work combined.
Earlier, mining was done on a small-scale by individual miners for rewards. As more and more bitcoins were mined, the complication of the puzzles intensified, requiring computers with higher processing powers. New computer chips and software were designed to mine bitcoins.
With growing popularity of bitcoins, the numbers of miners increased and so did the complications of the math problems. That when the idea of "pool mining" came into being.
Why were “mining companies” formed?
The "mining" business that companies are performing has miners working in "pools," which a group of miners working together by combining their computing power. This way they can solve more puzzles and share the rewards equally among them.
Can you become a “miner”?
If you are Tech-savvy, yes you can become a miner as the network is open to all. You will require a mining software that can be downloaded free of cost online and specialized hardware - Bitcoin wallet, to hold your bitcoins earned.
Also Read: What is a Bitcoin Wallet?