Mining

Mining is a process by which new blocks are added to the blockchain. Blocks contain transactions that are validated via the mining process by mining nodes on the Bitcoin network. Blocks, once mined and verified, are added to the blockchain, which keeps the blockchain growing. This process is resource-intensive due to the requirements of PoW, where miners compete to find a number less than the difficulty target of the network. This difficulty in finding the correct value (also called sometimes the mathematical puzzle) is there to ensure that miners have spent the required resources before a new proposed block can be accepted. The miners mint new coins by solving the PoW problem, also known as the partial hash inversion problem. This process consumes a high amount of resources, including computing power and electricity. This process also secures the system against fraud and double-spending attacks while adding more virtual currency to the Bitcoin ecosystem.

Roughly one new block is created (mined) every 10 minutes to control the frequency of generation of bitcoins. This frequency needs to be maintained by the Bitcoin network. It is encoded in the Bitcoin Core client to control the "money supply."

Approximately 144 blocks, that is, 1,728 bitcoins, are generated per day. The number of actual coins can vary per day; however, the number of blocks remains at an average of 144 per day. Bitcoin supply is also limited. In 2140, all 21 million bitcoins will be finally created, and no new bitcoins can be created after that. Bitcoin miners, however, will still be able to profit from the ecosystem by charging transaction fees.

Tasks of the miners

Once a node connects to the Bitcoin network, there are several tasks that a Bitcoin miner performs:

1. Synching up with the network: Once a new node joins the Bitcoin network, it downloads the blockchain by requesting historical blocks from other nodes. This is mentioned here in the context of the Bitcoin miner; however, this not necessarily a task that only concerns miners.
2. Transaction validation: Transactions broadcast on the network are validated by full nodes by verifying and validating signatures and outputs.
3. Block validation: Miners and full nodes can start validating blocks received by them by evaluating them against certain rules. This includes the verification of each transaction in the block along with verification of the nonce value.
4. Create a new block: Miners propose a new block by combining transactions broadcast on the network after validating them.
5. Perform PoW: This task is the core of the mining process and this is where miners find a valid block by solving a computational puzzle. The block header contains a 32-bit nonce field and miners are required to repeatedly vary the nonce until the resultant hash is less than a predetermined target.
6. Fetch reward: Once a node solves the hash puzzle (PoW), it immediately broadcasts the results, and other nodes verify it and accept the block. There is a slight chance that the newly minted block will not be accepted by other miners on the network due to a clash with another block found at roughly the same time, but once accepted, the miner is rewarded with 12.5 bitcoins and any associated transaction fees.

We've discussed the tasks—let's now consider the rewards for performing them.

Mining rewards

Miners are rewarded with new coins if and when they discover new blocks by solving the PoW. Miners are paid transaction fees in return, for the transactions in their proposed blocks. New blocks are created at an approximate fixed rate of every 10 minutes. The rate of creation of new bitcoins decreases by 50% every 210,000 blocks, which is roughly every 4 years. When Bitcoin started in 2009, the mining reward used to be 50 bitcoins. After every 210,000 blocks, the block reward halves. In November 2012 it halved down to 25 bitcoins. Currently, since May 2020, it is 6.25 bitcoins per block. This mechanism is hardcoded in Bitcoin to regulate and control inflation and limit the supply of bitcoins.

In order for miners to earn the reward, they have to show that they have solved the computational puzzle. This is called the PoW.

Proof of Work

This is a proof that enough computational resources have been spent in order to build a valid block. PoW is based on the idea that a random node is selected every time to create a new block. In this model, nodes compete with each other in proportion to their computing capacity, in order to be selected. The following equation sums up the PoW requirement in Bitcoin:

H ( N || P_hash || Tx || Tx || . . . Tx) < Target

Here, N is a nonce, P_hash is a hash of the previous block, Tx represents transactions in the block, and Target is the target network difficulty value. This means that the hash of the previously mentioned concatenated fields should be less than the target hash value.

The only way to find this nonce is the brute force method. Once a certain pattern of a certain number of zeroes is met by a miner, the block is immediately broadcast and accepted by other miners.

The mining algorithm

The mining algorithm consists of the following steps:

1. The previous block's header is retrieved from the Bitcoin network.
2. Assemble a set of transactions broadcast on the network into a block to be proposed.
3. Compute the double hash of the previous block's header, combined with a nonce and the newly proposed block, using the SHA256 algorithm.
4. Check if the resulting hash is lower than the current difficulty level (the target), then PoW is solved. As a result of successful PoW, the discovered block is broadcasted to the network and miners fetch the reward.
5. If the resultant hash is not less than the current difficulty level (target), then repeat the process after incrementing the nonce.

As the hash rate of the Bitcoin network increased, the total amount of the 32-bit nonce was exhausted too quickly. In order to address this issue, the extra nonce solution was implemented, whereby the coinbase transaction is used to provide a larger range of nonces to be searched by the miners.

This process is visualized in the following flowchart:

Figure 6.19: Mining process

Mining difficulty increases over time and bitcoins that could once be mined by a single-CPU laptop computer now require dedicated mining centers to solve the hash puzzle. The current difficulty level can be queried through the Bitcoin command-line interface using the following command:

$ bitcoin-cli getdifficulty 

This generates something like the following:

12876842089683.48 

This number represents the difficulty level of the Bitcoin network. Recall from previous sections that miners compete to find a solution to a problem. This number, in fact, shows how difficult it is to find a hash lower than the network difficulty target. All successfully mined blocks must contain a hash that is less than this target number. This number is updated every 2 weeks or 2,016 blocks to ensure that on average, the 10-minute block generation time is maintained. Bitcoin network difficulty has increased in a roughly exponential fashion. The following graph shows this difficulty level over a period of one year:

Figure 6.20: Mining difficulty since late 2018

The preceding graph shows the difficulty of the Bitcoin network over last year, and it has increased quite significantly. The reason why mining difficulty increases is because, in Bitcoin, the block generation time always has to be around 10 minutes. This means that if blocks are being mined too quickly because of faster hardware, the difficulty increases accordingly so that the block generation time can remain at roughly 10 minutes per block. This phenomenon is also true in reverse. If blocks take longer than 10 minutes on average to mine, then the difficulty is decreased. The difficulty is calculated every 2,016 blocks (around two weeks) and adjusted accordingly. If the previous set of 2,016 blocks were mined in a period of less than two weeks, then the difficulty increases. Similarly, if 2,016 blocks were found in more than two weeks (bearing in mind that if blocks are mined every 10 minutes, then 2,016 blocks take 2 weeks to be mined), then the difficulty is decreased.

The Bitcoin miners have to calculate hashes to solve the PoW algorithm. If the difficulty goes up then a higher hash rate is required to find the blocks. The difficulty increases accordingly if more hashing power is added due to more miners joining the network. Now let's explain the hash rate in a bit more detail.

The hash rate

The hash rate basically represents the rate of hash calculation per second. In other words, this is the speed at which miners in the Bitcoin network are calculating hashes to find a block. In the early days of Bitcoin, it used to be quite small, as CPUs were used, which are relatively weak in mining terms. However, with dedicated mining pools and Application Specific Integrated Circuits (ASICs) now, this has gone up exponentially in the last few years. This has resulted in increased difficulty in the Bitcoin network.

The following hash rate graph shows the hash rate increases over time and is currently measured in exa-hashes. This means that in 1 second, Bitcoin network miners are computing more than 24,000,000,000,000,000,000 hashes per second:

Figure 6.21: Hashing rate over time (measured in exa-hashes), shown over a period of 1 year

Mining systems

Over time, Bitcoin miners have used various methods to mine bitcoins. As the core principle behind mining is based on the double SHA256 algorithm, over time, experts have developed sophisticated systems to calculate the hash faster and faster. The following is a review of the different types of mining methods used in Bitcoin and how they evolved with time.

CPU

CPU mining was the first type of mining available in the original Bitcoin client. Users could even use laptop or desktop computers to mine bitcoins. CPU mining is no longer profitable and now more advanced mining methods such as ASIC-based mining are used. CPU mining only lasted for around a year from the introduction of Bitcoin, and soon other methods were explored and tried by the miners.

GPU

Due to the increased difficulty of the Bitcoin network and the general tendency of finding faster methods to mine, miners started to use the GPUs or graphics cards available in PCs to perform mining. GPUs support faster and parallelized calculations that are usually programmed using the OpenCL language.

This turned out to be a faster option as compared to CPUs. Users also used techniques such as overclocking to gain maximum benefit of the GPU power. Also, the possibility of using multiple graphics cards in parallel increased the popularity of graphics cards' usage for Bitcoin mining. GPU mining, however, has some limitations, such as overheating and the requirement for specialized motherboards and extra hardware to house multiple graphics cards. From another angle, graphics cards have become quite expensive due to increased demand and this has impacted gamers and graphics software users.

FPGA

Even GPU mining did not last long, and soon miners found another way to perform mining using Field Programmable Gate Arrays (FPGAs). An FPGA is basically an integrated circuit that can be programmed to perform specific operations. FPGAs are usually programmed in hardware description languages (HDLs), such as Verilog and VHDL. Double SHA256 quickly became an attractive programming task for FPGA programmers and several open source projects were started too. FPGA offered much better performance compared to GPUs; however, issues such as accessibility, programming difficulty, and the requirement for specialized knowledge to program and configure FPGAs resulted in a short life for the FPGA era of Bitcoin mining.

Mining hardware such as the X6500 miner, Ztex, and Icarus were developed during the time when FPGA mining was profitable. Various FPGA manufacturers, such as Xilinx and Altera, produce FPGA hardware and development boards that can be used to program mining algorithms. The arrival of ASICs resulted in the quick phasing out of FPGA-based systems for mining. It should be noted that GPU mining is still profitable for some other cryptocurrencies to some extent, such as Zcoin (https://zcoin.io/guide-on-how-to-mine-zcoin-xzc/), but not Bitcoin, because the network difficulty of Bitcoin is so high that only ASICs (specialized hardware) running in parallel can produce reasonable profit.

ASICs

ASICs were designed to perform SHA-256 operations. These special chips were sold by various manufacturers and offered a very high hashing rate. This worked for some time, but due to the quickly increasing mining difficulty level, single-unit ASICs are no longer profitable.

Currently, mining is out of the reach of individuals due to the vast amounts of energy and money needed to be spent in order to build a profitable mining platform. Now, professional mining centers using thousands of ASIC units in parallel are offering mining contracts to users to perform mining on their behalf. There is no technical limitation—a single user can run thousands of ASICs in parallel—but it will require dedicated data centers and hardware, therefore the cost for a single individual can become prohibitive.

Examples of these four types of hardware are shown in the following photographs:

Figure 6.22: Four types of mining hardware (from left to right: a CPU, GPU, FPGA, and an ASIC)

Mining pools

A mining pool forms when a group of miners work together to mine a block. The pool manager receives the coinbase transaction if the block is successfully mined, and is then responsible for distributing the reward to the group of miners who invested resources to mine the block. This is more profitable than solo mining, where only one sole miner is trying to solve the partial hash inversion function (hash puzzle) because, in mining pools, the reward is paid to each member of the pool regardless of whether they (or more specifically, their individual node) solved the puzzle or not.

There are various models that a mining pool manager can use to pay to the miners, such as the pay-per-share model and the proportional model. In the pay-per-share model, the mining pool manager pays a flat fee to all miners who participated in the mining exercise, whereas in the proportional model, the share is calculated based on the amount of computing resources spent to solve the hash puzzle.

Many commercial pools now exist and provide mining service contracts via the cloud and easy-to-use web interfaces. The most commonly used ones are AntPool (https://www.antpool.com), BTC (https://btc.com), and BTC.TOP (http://www.btc.top). A comparison of the hashing power of all major mining pools is shown in the following pie chart:

Figure 6.23: Mining pools and their hashing power (hash rate) as of late 2019. Source: https://blockchain.info/pools

Mining centralization can occur if a pool manages to control more than 51% of the network by generating more than 51% of the hash rate of the Bitcoin network.

As discussed earlier in the introduction section, a 51% attack can result in successful double-spending attacks, and it can impact consensus and in fact, even impose another version of the transaction history on the Bitcoin network.

This event has happened once in Bitcoin history when GHash.IO, a large mining pool, managed to acquire more than 51% of the network capacity. Theoretical solutions, such as two-phase PoW, have been proposed in academia to disincentivize large mining pools.

This scheme introduces a second cryptographic puzzle that results in mining pools either revealing their private keys or providing a considerable portion of the hash rate of their mining pool, thus reducing the overall hash rate of the pool.

Various types of hardware are commercially available for mining purposes. Currently, the most profitable one is ASIC mining, and specialized hardware is available from a number of vendors such as Antminer, AvalonMiner, and Whatsminer. Solo mining is not very profitable now, unless a vast amount of money and energy is spent to build your own mining rig or even a data center. With the current difficulty factor (as of June 2020), if a miner manages to produce a hash rate of 60 trillion hashes per second (TH/s), they can hope to make 0.000478 BTC (around $0.01) per day, and around $4 a year, which is extremely low compared to the investment required to source the equipment that can produce 60 TH/s. Including running costs such as electricity, this turns out to be not very profitable at all.

For example, the Antminer S9 is an efficient ASIC miner that produces a hash power of 13.5 TH/s and seems like it can produce some profit per day, which is true. However, a single Antminer S9 costs around 1,700 GBP, and when combined with the cost of electricity, the return on investment is only realized after almost a year's mining, when it produces around 0.3 BTC. It may still seem an OK investment, but also think about the fact that the Bitcoin network difficulty keeps going up with time, so over a year, it will become more difficult to mine and the mining hardware will expend its utility in a few months.

The race to build efficient miners is on and is only expected to grow. A recent addition to the ASIC miners' market is the DragonMint T1 miner (https://halongmining.com/shop/dragonmint-16t-miner/), which operates at 16 TH/s.