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How is a Bitcoin made?

So far in this series, we’ve already talked about what Bitcoin is, about how you can buy it, and how you can spend it, but how is it actually made?

Bitcoin vs. Gold

The short answer is that new Bitcoins are mined. However, since that is just giving a label, rather than a definition, you’re probably going to want to know a bit more than that.

It’s perhaps easiest to compare Bitcoin to its nearest physical equivalent: gold. Just as existent banking systems are (or at least were) based on the quantity and value of gold in a given country’s banks, the security and validity of Bitcoin based on the quantity of Bitcoins currently available in the network.

Likewise, the production of new amounts of both gold and Bitcoin meet the same paradox. As mining equipment becomes more and more powerful, so the amount of material to be mined becomes less and less, meaning that more effort is being pumped in to get the same net returns. However, this leads to a predictable and sustainable growth of the amount of either resource in the real world.

Of course, in the case of gold, this is just how it worked out. Gold is an element, and therefore cannot be produced or created out of something else, no matter what any budding alchemist might tell you. Recent estimates hold the total amount of mined gold in the world to be somewhere in the region of 187,000 tonnes, with a further 3,000 to 4,000 tonnes being produced as a result of mining every year. As it becomes ever more scarce, new mining techniques and equipment must be discovered and invented in order to maintain that level of production.

Bitcoin follows the same pattern, and deliberately so. Being a cryptocurrency, creating new Bitcoins could have been as easy as pressing the hash key on your laptop, but that would have been pointless: a free, abundant, and infinite supply of any commodity leads to devaluation and hyperinflation, and your billions and billions of Bitcoins would be worth less than the laptop that allowed you to make them. As with gold, scarcity and reliability are the cornerstones of Bitcoin. In a white paper that he published in 2008, Bitcoin’s creator Satoshi Nakamoto stated that the availability of Bitcoins would be capped at 21 million. By best estimates, almost 17 million of those Bitcoins have been created (or mined) as of 2017.

But what of the mining itself? We can picture the notion of mining for gold – massive drills and diggers clawing out a mountainside to release the gold ore within, and so on – but what are we actually mining for when it comes to a pseudo-currency?

To understand that, we need to talk about transactions, blocks, and blockchains.

Transactions

A transaction is any activity involving Bitcoins. If you buy a Bitcoin from a vendor, then that is a transaction. If you sell a Bitcoin to a buyer, then that is a transaction. If you purchase goods or services with a Bitcoin, then that is also a transaction. Think of each of them as being a line in a physical ledger, denoting money in and money out.

Blocks

If a transaction is a line in a ledger book, then a block is a page in the same book, essentially a collection of transactions. In real terms, a block is 1 megabyte (Mb) worth of transactions on the Bitcoin network. As each block (or page) is completed, the next transaction to be undertaken will fall into the next available block. A block is a permanent record of transactions on the Bitcoin network, and one that cannot be erased, removed or amended.

Blockchain

Again, if a transaction is a line in the ledger and if a block is a page in a ledger, then the blockchain is the ledger itself. Every ‘page’ filled in is a new block, or a new link on the chain. This blockchain stretches all the way back to the beginning of the Bitcoin revolution and the Genesis block that Satoshi Nakamoto released in 2008. If you purchase a Bitcoin from a vendor, then it is entirely possible, given enough time and patience, to trace the life of that Bitcoin all the way back along the blockchain, working your way through blocks (or pages, to return to our ledger analogy), all the way to the point where your Bitcoin was first created, or mined.

Which leads us back to our original question: how is a Bitcoin made, and what is Bitcoin mining?

Mining

First of all, it’s important to realise that mining is just a piece of Bitcoin terminology. What Bitcoin miners are actually doing is auditing and verifying transactions on the network, specifically preventing a thing called double-spending, whereby someone could create an electronic copy of a Bitcoin, and spend it twice. Because every single Bitcoin transaction is held somewhere along the blockchain, the blockchain itself becomes the verification of legitimacy. If a transaction has made it into a block, and that block has made it on to the chain, then the sale or purchase in question was, by definition, a legitimate one.

So, in order to maintain that legitimacy, every single transaction must be checked, in detail and in depth, to confirm the provenance of the bitcoins being used in the transaction, which is where the miners come in.

The miners perform two tasks – the first is for the good of the network, and it is the verification of Bitcoin transactions. Once they have verified enough transactions to fill up a block (that is, 1Mb of transactions, you’ll remember, which could potentially equate to hundreds or even thousands of lines in our virtual ledger), they will be eligible to win a crop of newly-generated bitcoins.

This, then, is the second task. The Bitcoins are generated by the networks own protocols, and are essentially up for grabs. At the moment, each new block allows the miner the opportunity to go for those bitcoins (currently 12.5 bitcoins are being generated, or mined, for each new block), and this is where the competition steps up. You see, verifying a block’s worth of transactions is pretty easy stuff. The next stage, to win the bitcoins themselves, only happens if you’re the first miner who happens to arrive at the correct answer to a specific numerical problem. In the Bitcoin network, this principle is referred to as proof of work.

Proof of work

You’ll be glad to know that there is no need to have experience with advanced computation skills or mathematics in order to provide your proof of work, as it is all done by your mining software. What that software is attempting to do is to generate what is known as a hash. A hash is a hexadecimal number that is 64-digits long, with each digit being one of sixteen designations (hence the word hexadecimal, from the Greek hexa meaning six, and “deca”, meaning ten: six plus ten). For Bitcoin purposes, the sixteen possible designations are 0, 1, 2, 3, 4, 5, 6, 7, 8, 0, a, b , c, d, e, and f.

Now, the Bitcoin network produces a target hash, completely at random, with no formula for calculation, and no way of predicting it based on previous hashes – rather like a National Lottery Draw, for instance. Every hash is unique, and prior hashes have no bearing on the future. When a miner manages to complete a box of transaction audits, then they are allowed to have a guess at the value of the target hash, by producing their own hash. If the miner’s hash is equal to or lower than the target hash, and that miner is the first one to do so, then 12.5 Bitcoins will be generated (or minted if you want to think in terms of regular currency) and added to the existing pool of Bitcoins available for all. More specifically, those 12.5 Bitcoins are awarded to the miner who guessed the hash correctly.

Now, if that all sounds a bit too easy, it almost certainly is. The odds of a lone miner making any serious cash out of mining for Bitcoins are stratospheric. Indeed, the odds of anyone hash producing a result that is under the target hash is less than 1 in a trillion.

What allows Bitcoins to continue to be generated, and at such a rate (the average clearance time for a block is 10 minutes, with 12.5 Bitcoins being generated each time to account for same) is that there are loads of Bitcoin miners out there, using very sophisticated equipment and, perhaps more importantly, thousands of linked computers to do the computational work for them. There is dedicated mining hardware and software out there, capable of producing billions of hashes per second, spread over thousands of computers and, even then, there is no guarantee of success.

Your newly-generated hash, even if it does meet the criteria, simply might not get there in time. Some other miner, or mining syndicate might have snagged that same hash mere seconds before you but, in the world of Bitcoin mining, the winners get the spoils.

Lottery

As mentioned above, the odds of a single user just happening to come across the right hexadecimal code in time to cash in are pretty unlikely and yet, with all those Bitcoins being spawned at the rate of 75 bitcoins per hour, and up for grabs, someone has to win it, and it could be a solo user.

Think of bitcoin mining as a lottery because, quite literally, that’s what it is. While Bitcoin as a currency is one of the strongest and the most stable, getting your hands on those newly-minted bitcoins is going to take more than a little luck.

First, there is your work for the network – that is, your verification of previous transactions, or lines in the ledger, to return to a previous analogy. 1Mb of transactions means that you’ve filled a block and that is essentially your lottery ticket, your eligibility to partake in a spot of hashing. Each hash attempt is a line of numbers on your ticket, and each line has a chance of winning the jackpot, so long as the numbers fit into a certain hexadecimal pattern.

The good news is that you can submit your hashes as many times as you like, thousands and millions, and billions of times per second, which sounds great, except you probably still won’t hit the magic number, as every single newly generated hash retains the same odds of over a trillion to one.

Again, just like the lottery, many people think of joining a syndicate. The rationale here is the same. One person, even one person with a decent mining set-up stands an infinitesimal chance of matching a hash. Two people combining hashes stand a slightly better chance, a couple of dozen even better, and a few thousand? Well, you get the idea. More people combining their blocks results in more hash attempts made over a given period of time, and a greater chance of getting the desired result.

Of course, whenever you do win, you’ll make less, having to share your Bitcoins, or the value thereof with all of your fellow syndicate makers. You may also owe an additional fee to the syndicate organiser, who will normally take a percentage or two of any earnings, on the grounds that he is ensuring the legality of the exchange, and corralling all of the mining efforts of any given syndicate.

However, it is a path worth pursuing. With Bitcoin currently valued at around $5,000 per bitcoin, and 12.5 of them available (or $62,500) every 10 minutes a sufficiently large and well-equipped mining syndicate can see decent profits as more people jump on board, prompting more transactions, blocks filled up quicker, and a swifter generation of more Bitcoins into the cybereconomy.

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