Even those who are not interested in cryptocurrencies are aware that Satoshi Nakamoto, the creator(s) of the world’s first cryptocurrency, ushered in a new era in the world of finance, heralded by Bitcoin (BTC).
According to Nakamoto’s views expressed in the Bitcoin whitepaper, online businesses have grown to depend on central authorities, governments, or banking systems serving as trustworthy third parties to handle electronic fiat currency transfers. This motivated this unknown coder (or team of computer engineers) to establish the Bitcoin cryptocurrency project, with the goal of eliminating middlemen in the transaction process.
Given that this ground-breaking project is based primarily on novel technology and highly complex algorithms, this article will go into greater detail about the math challenges of the Bitcoin mining concept, as well as attempt to answer any questions a reader may have about the Bitcoin miners’ math puzzles. But first, let’s find out how it all began.
The Idea Behind the Bitcoin Crypto Project
The Bitcoin cryptocurrency project was established with the objective of developing non-governmental, peer-to-peer digital money that would eliminate the need for a middleman in money transactions. This digital currency’s decentralized architecture stores all transactions on a distributed ledger known as a blockchain.
Bitcoins are not a physical item. They are virtual money generated by software that incorporates a set of computing processes and algorithms. Investors in the Bitcoin market can buy and sell BTC through specialized online cryptocurrency exchanges, as well as through peer-to-peer transactions on the Bitcoin network.
Moreover, the Bitcoin platform is a digital ledger that is free and open-source. Each node in the Bitcoin blockchain network uses a Proof of Work (PoW) consensus mechanism to create general agreement among all participating nodes of the network. This is accomplished with the assistance of miners, who seek to solve challenging mathematical tasks in order to compete with other nodes for precedence in blockchain transaction verification.
Also, the businesses and users of the blockchain’s public ledger can generate bitcoins through a practice named Bitcoin mining. This refers to the process through which Bitcoin miners attempt to resolve immensely complicated mathematical tasks with uniquely engineered mining computing systems in hopes of harvesting new BTC and profiting off of their value. In most cases, the calculation of these complicated algorithms requires enormous energy consumption which has a direct impact on the production and cost of Bitcoin. As a result, the Bitcoin mining operation also has a significant negative impact on the real world ecosystem.
The Blockchain Mechanism Explained
In the cryptocurrency ecosystem, blockchain technology refers to a distributed ledger system that keeps track of the cryptocurrency transactions in a distributed, peer-to-peer ledger. The blockchain, as the name indicates, represents a chain-like series of chronologically ordered units called blocks that hold encrypted transaction data.
The Importance of Consensus Protocols in Blockchain Networks
Blockchain technology used to have one caveat known as the double-spending problem. The issue of double-spending was first postulated with Bitcoin, as Bitcoin was the first of its kind. Since BTC are merely a piece of software, it was assumed that they could be easily copied and misused, which could potentially compromise its security.
Numerous consensus protocols have been incorporated into the blockchain network to avoid such fraudulent acts. With the help of these algorithms, all participants in the network are able to support and monitor the safety of its data and the stored digital assets. Also, the decentralized nature of the blockchain network allows for every user on the blockchain to be subject to continual scrutiny by the rest of the network.
One way to achieve this without the use of an intermediary is to use pre-programmed smart contracts. When the pre-programmed terms and conditions are fulfilled by all parties, the smart contract is automatically executed by a network of computers. Namely, the computer network agrees on the sequence of activities arising from the contract’s code. In this way, the smart contract eliminates the need for a third party to serve as an intermediary in the transaction process of digital assets.
Let’s go over the details on how encryption and difficult math problems worked together to make this feasible.
Bitcoin’s Consensus Algorithm
A consensus algorithm is a process in computer engineering used to create mutual agreement on the integrity and transparency of sensitive information exchanged across distributed processes or network structures. The underlying consensus algorithms of the Bitcoin blockchain technology include the following protocols and accompanying mechanisms:
- The SHA-256 Protocol;
- The Proof of Work Algorithm;
- The Proof of Stake Algorithm;
The SHA-256 Protocol
Cryptocurrency mining is the process in which people attempt to solve the cryptographic SHA-256 hash algorithm in order to create a new Bitcoin or other altcoins. The SHA-256 hashing protocol (also: Secure Hashing Algorithm) refers to a mechanism employed by cryptography that transforms all input data of the blockchain network to a 256-bit hash value.
This protocol is used to protect sensitive transaction and user information by encrypting them into a hash. By employing digital signatures, the SHA-256 protocol is able to authenticate transaction data in a secure and confidential manner.
Furthermore, this approach is used to regulate the generation of user addresses and to make them more private, as well as to validate the transactions that take place on the Bitcoin network. It is also necessary to use the SHA-256 technique to generate the Merkle root, which is included in the block header.
The Proof of Work Algorithm
The Proof of Work algorithm eliminates the necessity for cooperation with financial institutions or authorities or the necessity for an intermediary to execute cryptocurrency transactions. Its goal is to form a consensus among the computer units that make up a decentralized database system.
This algorithm is built upon the methods of a sophisticated branch of mathematics known as cryptography. To be more specific, Bitcoin miners are obliged to utilize their hashing power to solve a cryptographic task in order for the Bitcoin network to maintain its decentralized character.
The mathematical equations created by the PoW algorithm are always unique and so complicated that they can only be solved by specialized hardware with exceptional processing capacity. Bitcoin miners provide proof of their work on the Bitcoin blockchain network in the form of a solution to a highly complex mathematical problem assigned by the PoW algorithm.
The Proof of Stake Algorithm
Due to the high energy consumption of the Proof of Work (PoW) consensus mechanism, the Proof of Stake (PoS) consensus method was created as its alternative. Because nodes do not compete with one another to add a new transaction data block to the blockchain network, there’s less power usage.
Let’s consider the mechanism that underpins this algorithm. To begin with, the user must store, i.e. invest a certain amount of their digital assets in a dedicated wallet as a stake in order to gain the chance of validating a blockchain transaction.
The PoW algorithm increases the chances of mining a new block if the Bitcoin miner has more processing power. The PoS distributed algorithm, on the other hand, chooses the node with the highest cryptocurrency stake and the shortest time to solve the math problem set by the algorithms as the next one to validate a blockchain transaction and earn the block reward.
The nonce or “number only used once” is a random number that is used just once during the cryptographic process of hashing, which involves the encryption of transaction data in a block. To be more precise, the transaction information from the previous block is encrypted using methods of cryptography into a sequence of alphanumeric symbols with a predetermined length in order to ensure the security of the blockchain. The resulting data output is labelled as a hash of the transaction block.
After it’s rehashed, the nonce satisfies the level of difficulty imposed by the blockchain technology’s consensus mechanisms. When it comes to blockchain mining, this random integer is the most important mathematical problem that miners must resolve in order to validate a transaction and create new coins.
How Does Bitcoin Mining Work?
Each Bitcoin block is protected by a series of complex math computations that must be completed in order for the block to be valid. When these difficult tasks are completed (typically with the assistance of sophisticated computing hardware and specialized software), a block of bitcoins is unlocked. Each block has a dedicated equation that releases the block. However, that code is totally random, and it is up to the miner to discover it and release the block in circulation. This may take a long time, which is why a fast commuting unit is required.
Bitcoin mining is the process of allocating Bitcoin transactions to cryptocurrency miners for subsequent processing. In most cases, the transactions that contain the highest transaction fees are prioritized in the next block.
The miners then process the transactions by using the SHA-256 algorithm in order to obtain a computational solution for the complex mathematical puzzle, create a valid Bitcoin block, and mine bitcoins (BTC). Next, the remainder of the blockchain network must approve this outcome of the miner’s work so that the miners can validate the transactions. There’s a block reward with every block that’s been mined – a new Bitcoin.
While initially, the block reward was 50 bitcoins, the mining incentive is automatically reduced by half with each successive transaction block, ensuring that only 21 million bitcoins are created in total.
How Do Bitcoin Mining Pools Function?
Given the global interest in Bitcoin, as well as the high cost of mining software for creating new bitcoins, the Bitcoin mining pools (or mining farms) are an excellent option for Bitcoin enthusiasts with limited hashing power.
These mining pools are, in fact, a network of miners that pool their computing power and distribute the bitcoins they collect as a reward to all of the mining pool participants. There is a pool operator that generates the block header and distributes it to all miners that participate in the Bitcoin mining pool. The Bitcoin miners that take part in the mining pool should return headers as proof of their work on the blockchain as well, albeit these are far easier to compute than the current rate of math challenge difficulty.
Following that, each miner is assigned a unique Bitcoin address. After their hashing power is evaluated, this is the place where the miners receive their corresponding share of block rewards and transaction fees from the mining pool initiative.
If a pool member’s labour is significantly helping the discovery of new cryptocurrencies, the PoW by the miner is accepted for the distribution of the total mining pool shares. If, on the other hand, a miner does not contribute significantly to the discovery of new coins or submits the PoW after the block has been verified, the miner’s request for a part of the mining pool’s earned bitcoins is denied.
How Do CPUs and ASICs Compare in Bitcoin Mining?
The first Bitcoin mining used to be performed with the help of the CPUs (Central Processing Units) of a common computer. These mining computers were utilized by Bitcoin miners for solving tasks assigned by the consensus algorithms of the blockchain platform, to validate the blockchain transactions.
While it is almost impossible to use CPUs for Bitcoin mining nowadays, this is not necessarily the case for the mining of other cryptocurrencies. Since central processing units need a lot of processing time and hence slow down the entire mining process, such mining computers are not as efficient as ASICs. As a consequence, miners won’t have any guarantee that they will succeed in mining a new coin.
This is why if a CPU is your only option for Bitcoin mining, perhaps it’s better to join a Bitcoin mining pool for faster mining results. These crypto mining pools can be exploited for mining Monero (XMR), Zcoin (XZC), Bytecoin (BCN), AEON (AEON), etc.
On the other hand, there are ASICs (Application-Specific Integrated Circuits). These dedicated cryptocurrency miners are specifically designed to offer much more computing power than CPUs, which translates into a greater chance of you obtaining the block reward. ASICs are not only quicker and more efficient, but they also use considerably less electricity and offer higher hash rates, which is quite beneficial for a miner looking to profit from a crypto mining venture.
However, these mining computers come with a hefty price tag and only a few cryptocurrency miners are able to afford them. In addition, these highly specialized devices are typically suited for solving a particular algorithm, which means they can only be used for the mining of a single cryptocurrency, so you would have a Bitcoin (BTC) specific miner, a Bitcoin Cash (BCH) miner, Litecoin (LTC) miner, etc.
A Few Words Before You Go…
The Bitcoin protocol is a piece of mathematical computing software that runs on the blockchain network rather than a regular computer network. Its major role is to analyze and organize encrypted transaction data while also establishing broad consensus among the nodes participating in the network, a process known as consensus building.
This process is supported by Bitcoin miners, whose task is to solve the math problems set by the consensus algorithms and validate the incoming transactions by placing them into a blockchain block. This effort is rewarded with a small amount of BTC. By joining a Bitcoin mining pool, a crypto miner has even better prospects of increasing their personal hashing power and gaining higher block-rewards, i.e. more bitcoins.
The blockchain’s consensus algorithms also protect the network from malicious nodes trying to complete unauthorized claims. By coordinating the transaction information throughout the entire blockchain network, the consensus algorithms are able to compare and verify the copy of the previously authenticated transactions to avoid double-spending.
As a result, the consensus algorithms, together with the miners who solve the math problems, protect sensitive data from unwanted access and increase users’ trust in blockchain technology.