Mining Explained In Simple Terms

Bitcoin Mining is the process solving complex mathematical problems (referred to as Hashing). These mathematical problems are very difficult to solve, but very easy to prove they have been solve correctly. As these complex problems are solved (and confirmed by the network), awards of Bitcoins granted (by the network). The network wants to grant these awards every 10 minutes. If there is much deviation from this award rate, the difficulty of the mathematical problems increases or decrease to maintain an overall average of distribution over a very long period of time. Here is a graph that shows the predefined distribution rate of Bitcoins:

The process of Mining is a bit hard to explain, but a fun, short game was developed to help newcommers understand what is happening during Mining and it might be a good place for you to start. Check out Bitcoin Bingo to see how it works.

In the beginning, there was relatively little computing power being focused on these problems and regular CPUs could be used. As Bitcoin became more popular, people started using high speed graphics cards to solve these problems. The network compensated every step of the way by adjust the difficulty of the problems to average the award to once every 10 minutes. Once all 21 million Bitcoins have been awarded through Mining, the incentive to solve these mathematical problems shifts from free Bitcoin awards to transaction fees.

Which brings us to the question: What exactly are these problems being solved? The problems being solve involve rolling up transactions into bundles, hashing them into a value less than the current difficulty level.

When any value is hashed, it is compressed into a fixed length string of characters that is very unique to the original value. As an example, the string “Hello World” will always hash to the string “d2a84f4b…”. Changing one character in the original value makes drastic and unpredictable changes to the hash value. When these Bitcoin transactions are combined and hashed, a very unique value is computed. But in order for the solution to win, it must be less than the current difficulty level.

Mining Pools

If you’re going to be mining with a CPU (hopefully a very fast one with multiple cores), it will be best to join a Mining Pool. By doing this, you’re contributing your CPU power to a pool of other miners to share in the profits if your pool solves the round. You’re more likely to get a small distribution of Bitcoins more frequency compared to a very long time (years) between keeping the whole award for yourself.

Mining On Your Own

To be profitable, you’re going to have to invest some money in graphics cards and expect an increase in your electricity bill. Please see the Resources page for a list of popular graphics cards, mining clients, and pools you can join.