News
15 Jun 2021

The Difficulty in Mining Bitcoin

All currencies need a mode of regulation so that new money comes into existence. The way it happens with fiat currencies like the Dollar or the Pound is that their respective regulatory body is in charge of dispersing it, but that only accounts for roughly 3% of the money in circulation. The rest is controlled by the modern credit and debit relationship of commercial banks. Bitcoin, however, chooses to take an alternate route in a process called mining. It’s essential to the Bitcoin ecosystem considering the fact that it’s deregulated – not controlled by any governing institution.

How does Bitcoin Work?

The notion of money is more to do with having a social contract between a buyer and seller or a borrower and a lender. Physical cash exists to uphold that contract, but technological advances enable tracking it in the digital realm in modern banking systems.  You can start bitcoin trading easily today with cryptosoft.

This process of accounting is also a theme in Bitcoin, which uses an online ledger to track the movement of Bitcoin from one place to another. Every transaction is recorded in it since Bitcoin’s inception in 2009, making it another system of money, in other words, a currency.

Why is Mining Needed?

Since Bitcoin doesn’t rely on banks or any other institution for recording transactions, this task needs to be done by someone else. Bitcoin relies on a peer-to-peer network, delegating this task to computers called nodes or miners.

Every time a Bitcoin transaction occurs, it is sent off to the network for all miners to see. They gather said transaction and others, verify that it’s credible, and package it into chunks called transaction blocks. Each block is then sent back to the network for all miners to verify again, making sure that no double-spending occurs. Once verified, it is made a permanent part of the ledger, linking to it via cryptography so that it remains immutable. This series of connected blocks are referred to as the blockchain.

Miners receive a reward for facilitating Bitcoin transactions. Plus, they also receive a reward when cracking Bitcoin’s security by finding keys that solve its cryptographic functions. That’s how new Bitcoins come into circulation, making it is an important process without which Bitcoin won’t work.

What is Mining Difficulty?

Bitcoin isn’t in infinite supply. In fact, the digital currency plans to halt the production of new coins as soon as 21 million Bitcoins come into circulation. Currently, Bitcoins in circulation are steadily approaching 19 million.

The network doesn’t just hand out Bitcoins; instead, it supplies them at a steady rate to incentivize transaction block formation and prevent a sudden influx of Bitcoin that has the potential to inflate its value.

Since miners are competing with each other for this task and the process itself is pretty random, the more computational power they have access to, the higher their chance of securing this reward. Hence, the reward for mining Bitcoin is governed by the network by controlling the complexity of mining Bitcoin. The network aims to ensure that a transaction block links to the blockchain every 10 minutes. So, if the combined computational power of the network is too high, the Bitcoin ecosystem will adjust the complexity for solving cryptographic functions such that it gets more difficult to attain the reward. Conversely, if too low, the network makes it easier to mine Bitcoins.

Additionally, the reward is halved with time. When Bitcoin came into being, the reward was fixed at 50 Bitcoins, set to be halved every 4 years. Now, after 3 halving cycles, the reward amounts to 6.25 Bitcoins, roughly equivalent to $224,000 in today’s exchange rate.

 

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