One way to earn good money is by mining bitcoins. So how does bitcoin mining works?
Conventional money is produced and generated by the central banks and people earn it in so many ways. If the government needs more money they just print more money. This system is different than the bitcoin network. Bitcoins are discovered using computer software that contains mathematical formulas. Users who participate in this network ‘mine’ for bitcoins by contending each other.
Every transaction within the bitcoin network is recorded. When people send bitcoins to each other, the general ledger will trace it and record it to keep track of every transaction. These transactions are collected within a given period of time and compiled a list called the ‘block’. The confirmation of each transaction will go to the ‘miners’ and they will document them in the GL.
The long list of blocks composes the blockchain or the general ledger. Here, all transactions are transparent so everyone can see the activities that take place in every bitcoin addresses. New blocks created are added to the blockchain and updates will be given to everyone who participates in the network to maintain transparency of transactions.
The ‘miners’ ensure that the blockchain remains uncorrupted and intact. This is the reason why the GL or the blockchain is trusted by everyone inside the network.
As each block is produced or collected, the ‘miners’ take all the information and they turn it into something else by applying mathematical formulas to it. The processed product is known as the ‘hash’ and it is composed of random letters and numbers. The ‘hash’ is stored at the end of the blockchain along with the block. It is important to note that each ‘hash’ is unique from each other. It may be easy to produce out of collected blocks but without knowledge of the mathematical formulas, it is not possible to know what the data is all about. Changing just one character in a bitcoin block will definitely change its ‘hash’ totally.
The ‘hash’ that miners add to the block functions like a wax seal. Each ‘hash’ is produced using the ‘hash’ of the former block. This way, the chain of blocks are ensured to be legitimate and once it’s tampered, the hash of the succeeding blocks will all be changed completely creating a chaotic domino effect. All the blocks with changed ‘hash’ will then be tagged as fake so tampering is very noticeable.
To avoid tampering of blocks, ‘miners’ seal off each block using mathematical formulas. ‘Miners’ will get a reward of 25 bitcoins for every successful ‘hash’ created and then the blockchain will be updated for everyone to know. Old ‘hash’ will not be accepted so each ‘miner’ has to abide by the Bitcoin protocol known as ‘proof of work’. In order for them to create a different ‘hash’ every time, ‘miners’ need to use ‘nonce’ which is a random piece of data. Oftentimes, ‘nonce’ does not work and so ‘miners’ have to try many times to find out a ‘nonce’ that work. Once they are able to discover a ‘nonce’ that work then they are able to create a successful hash and they earn 25 bitcoins as a reward.
How are bitcoins sent?
Each participant within the bitcoin network needs a private key and a bitcoin address. A private key refers to the sequence of numbers and letters which is kept personal and highly confidential. This is like a passcode or a PIN to your bank account. The bitcoin address, on the other hand, is available to the public and is quite similar to your conventional bank account. The only difference is that bitcoin address can be set-up without any hassles and requirements, unlike the bank account.
Here’s a typical scenario: Person A wants to send Person B some bitcoins. Person A then uses his private key to compose a message including the source of transaction, amount and the recipient’s bitcoin address and signs it. Person A sends the bitcoins from his bitcoin wallet to a larger bitcoin network and the miners will then verify if the transaction is legitimate or not. Once verified the miners will place the transaction into a block and solves it eventually. The transaction usually lasts up to 10 minutes as the ‘miners’ process the data. For low-value transactions, merchants process requests right away but for more important online transactions, for example, it is expected to take a few minutes before one can take advantage of the services paid for or download the digital goods.
If in case the amount of input and output does not match, bitcoin network will create two separate transactions. For example: If person A wants to send 2.5 bitcoins to Person B, and there is no exact amount inside person A’s bitcoin address, then Person A uses the 3 bitcoin transaction and sends it to person B with the specific amount of 2.5. The network will then create a separate bitcoin address to hold person A’s change of 0.5.