What is Bitcoin mining?

Bitcoin mining - simply explained

This much you probably already know, it has nothing to do with mining and is very technical. Mining is the process by which new bitcoins are put into circulation. In this article, we want to explain everything that is involved in the Bitcoin mining process. From validating transactions, to creating new blocks and securing the entire Bitcoin network.
To easily get started with Bitcoin mining, there are specialized Bitcoin mining service providers, such as Munich International Mining, who take care of the hosting, maintenance and logistics of the mining equipment.

The process of Bitcoin mining is the validation of information in a blockchain block by generating a cryptographic solution that meets certain criteria.

When a miner successfully solves a hash calculation, a new block is added to the blockchain and the miner is rewarded with bitcoins for their work.
Bitcoin mining is crucial to the functioning of the decentralized network as it ensures the integrity of transactions while incentivizing participation in securing the network.

How does Bitcoin mining work?

Similar to gold miners who use power and shovels, as a Bitcoin miner you need two things: mining hardware and energy. It takes a certain amount of cost and effort to mine bitcoins, just like mining precious metals.

Bitcoin mining involves solving complex mathematical puzzles. (This is the energy required)
The first miner to find a valid hash is rewarded with newly created bitcoins and transaction fees.

The miners' computers compete to solve this complex cryptographic puzzle in order to be the first to validate the new block for the blockchain. They collect and bundle individual transactions from the last ten minutes in these blocks.

The hash

1. Was ist ein Hash: Ein Hash ist eine Art mathematische Funktion, die Daten in einen festen Zeichenfolgenwert umwandelt. Dieser Wert wird als „Hashwert“ bezeichnet. Der Zweck eines Hashwerts besteht darin, eine eindeutige, feste Länge darzustellen, unabhängig von der Größe oder Art der ursprünglichen Daten.
   Stell dir vor, du möchtest ein Buch in einer Bibliothek finden, aber du kennst nur die Größe des Buches, nicht den Titel oder den Inhalt. Der Bibliothekar könnte dir ein Etikett mit einer eindeutigen Nummer geben, die auf dieses Buch verweist. Diese Nummer ist wie ein Hashwert. Egal, wie groß oder klein das Buch ist, die Nummer bleibt gleich.
2. SHA-256 algorithm: Bitcoin uses SHA-256 (Secure Hash Algorithm 256-Bit) as a cryptographic hash function. This algorithm takes an input and generates a 256-bit (64-character) hexadecimal number as output. The SHA-256 algorithm is designed to be a one-way function. It is therefore not mathematically feasible to reverse the process and obtain the original input from the hash.
3. Rolle des Hash im Bitcoin-Mining: In der Welt der Computerwissenschaften wird Hashing oft in der Sicherheit und Datenintegrität verwendet. Das Bitcoin-Netzwerk verwendet Hashfunktionen, um Blöcke von Transaktionen zu einem einzigen Hashwert zu kombinieren. Dadurch wird die Integrität der Transaktionsdaten sichergestellt und ermöglicht es, die Daten effizient zu überprüfen. Ein kleiner Unterschied in den Daten würde zu einem völlig anderen Hashwert führen, was Manipulationen erschwert.
   Im Mining-Prozess konkurrieren die Miner darum, einen spezifischen Hash-Wert zu finden, der bestimmte Kriterien erfüllt. Dieser Wert wird „Ziel-Hash“ genannt. Miner versuchen im Wesentlichen, einen Hash für den neuen Block zu finden, der unterhalb des Ziel-Hash liegt, was die Aufgabe erschwert.
4. Block header and transaction data: The input data for the SHA-256 algorithm in Bitcoin mining comes from the block header. The block header contains information such as the hash of the previous block, a timestamp, the Merkle root of the transaction data and a nonce.
5. Nonce and Bitcoin mining process: Miners vary the nonce (a uniquely used number) in the block header and run it repeatedly through the SHA-256 algorithm until they find a hash value that is below the target. Since the hash function is deterministic, the hash changes as the nonce changes, giving miners a way to quickly try different combinations.
6. Difficulty - Difficulty adjustment of Bitcoin mining: The target hash is periodically adjusted to ensure that a new block is mined approximately every 10 minutes on average. As more miners join the network and make it easier to find a valid hash, the target is lowered. If miners leave the network, making the task more difficult, the target is increased.

Here is a simplified explanation using an example:
Let's imagine that a hash is like a unique fingerprint for a letter.

• Der Brief: Du hast einen Brief geschrieben, der eine Nachricht enthält, z. B. „Hallo, wie geht es dir?“
• Hashing: When you hash the letter, it's like putting it in a magic box that spits out a unique number that only corresponds to that particular letter. It's like giving the letter a fingerprint.
• Uniqueness: Each letter has its own unique fingerprint. Even if you change just one tiny letter in the letter, the entire fingerprint (the hash) will be completely different.
• Immutability: If you put the same letter in the magic box again and again, you will get the same fingerprint every time. It's as if the fingerprint is a kind of seal for your letter.
• Security: Showing the fingerprint to other people tells them nothing about the content of the letter. It is therefore safe to share the fingerprint without anyone having to know the original letter.

In the world of computers and cryptography, hashing works in a similar way. A hash is like a unique fingerprint for data, and it is often used to verify the integrity of information or to protect passwords.

Proof-of-Work

Der Mining-Prozess ist Arbeitsaufwand, was als Proof-of-Work (PoW) bezeichnet wird – es erfordert viel Energie und Rechenleistung, um einem Zielhash zu erreichen. Die geleistete Arbeit wird als der erforderliche Validierungsnachweis angesehen.
Das Finden eines Hash unterhalb des Ziels ist der Proof-of-Work im Bitcoin-Mining. Es erfordert erheblichen Rechenaufwand und Energieaufwand. Sobald ein Miner einen gültigen Hash entdeckt, senden sie ihn an das Netzwerk, und andere Knoten überprüfen seine Gültigkeit. Der erste Miner, der einen gültigen Hash findet, wird mit neu geschaffenen Bitcoins (reward) und Transaktionsgebühren (fees) belohnt.
Wenn man alleine im Netzwerk Mining betreibt (Solo Mining), ist diese Art der Ausschüttung weniger häufig, aber man bekommt, denn vollen Blockreward und die Transaktionsgebühren.
Wenn man sich einem Mining Pool anschließt, wird die Rechenleistung aller Teilnehmer gebündelt und im Team öfter ein Block gefunden, und anteilig an der beigesteuerten Rechenleistung, die Gewinne aufgeteilt. Bei dieser Methode lässt sich ein konstantes Einkommen durch Bitcoin Mining generieren.

Blockreward - Rewards for blocks

Die Belohnung für das erfolgreiche Validieren eines Blocks sind Bitcoins. Im Jahr 2009 hat man 50 Bitcoin für das Mining eines Blocks erhalten. Aber die Blockbelohnung halbiert sich alle 210.000 Blöcke (ungefähr alle vier Jahre), und so sank die Belohnung im Jahr 2013 auf 25, dann auf 12,5 und schließlich auf 6,25.
Beim der nächsten „Halving“ von Bitcoin wird die Belohnung auf 3,125 geändert.

Another incentive for Bitcoin miners to participate in the process is the transaction fees. Miners receive fees for the transactions collected in this block in addition to their rewards.
When Bitcoin reaches its planned cap of 21 million (we won't live to see it: expected around the year 2140), miners will only be rewarded with fees for processing transactions that network users pay. These fees ensure that miners still have the incentive to mine and keep the network running. The idea is that competition for these fees will keep them low after the halving events (halvings) are completed.

Wie funktioniert Bitcoin Mining Sicherheit

The puzzle-solving mechanism is necessary to protect the Bitcoin network from attacks. We have learned that it takes hardware and energy to mine bitcoins and generate new blocks. It is not worthwhile for a miner, for example, to generate a false block that contains more bitcoins for an address or misdirects a transaction, as this block would be rejected by the nodes in the network. The work already done (energy) would have been for nothing. It would take over 50% of the total hashing power to mine a wrong block as correct, which would cause too much cost and would be difficult to organize due to the decentralized nature of the network. This makes it extremely difficult and expensive to compromise the network.

How many Bitcoins can be mined?

Das Bitcoin-Protokoll sieht vor, dass maximal 21.000.000 Bitcoins existieren werden. Dies bedeutet, dass das Angebot an Bitcoins endlich ist und die Gesamtmenge festgelegt ist. Bis heute (Januar 2024) wurden fast 19,6 Millionen Bitcoins gemined, und es wird geschätzt, dass der letzte Bitcoin etwa im Jahr 2140 gemined wird.
Funfact: Es gibt kein vergleichbares Gut auf der Welt was eine fest definierte „Endlichkeit“ hat, was mittlerweile auch Ökonomen und Wissenschaftler beschäftigt.

What are mining pools?

To increase their chances of receiving a block reward, some crypto miners could join together in so-called mining pools and combine their resources to mine for Bitcoin or other mined cryptocurrencies. Rewards are paid out according to the computing power contributed, which means that higher computing power increases the chances of rewards.

Bitcoin mining facts & figures:

• On average, a new block is created approximately every 10 minutes
• The mining difficulty changes every 2,016 blocks
• To date (January 2024), almost 19.6 million of the 21 million possible Bitcoins have already been mined; it is estimated that the last Bitcoin will be mined in 2140 .
• The upper limit will be 21 million Bitcoins
• In the beginning, in 2009 , you received 50 Bitcoinsfor mining a block
• 2012: The first Bitcoin Halving took place on November 28 and reduced the reward from 50 to 25 Bitcoins per block.
• 2016: The second Bitcoin halving took place on July 9 and reduced the reward from 25 to 12.5 Bitcoins per block.
• 2020: The third Bitcoin Halving took place on May 11 and reduced the reward from 12.5 to 6.25 Bitcoins per block.
• 2024 (predicted): The next expected Bitcoin halving is expected to take place in April 2024 and will reduce the reward from 6.25 to 3.125 Bitcoins per block.
• Gesamtanteil erneuerbarer Energien im Bitcoin Mining: 54,5 %

Mining bitcoins yourself

Is Bitcoin mining in Germany even worthwhile? If you want to mine Bitcoin profitably from home, it depends on your individual factors. Although there are increasingly efficient Asicminers, such as the Antminer S19 XP, the current energy prices in Germany are still too high for profitable Bitcoin mining. However, if you have a solar system on your roof, the calculation can look completely different.

It is possible to mine professionally on a small or large scale. Bitcoin mining companies such as MIM.farm offer complete packages where the miners are securely hosted and maintained and managed by experts. You benefit from lower electricity costs, e.g. in Paraguay, reliability and logistical challenges.