Bitcoin mining may not often be considered to the most ‚glamourous‘ part of the Bitcoin network. However miners play many vital roles in keeping the Bitcoin infrastructure up and running smoothly and safely.

Issuance of new Bitcoin

With Bitcoin, there is no central bank to issue the currency as there is with $, €, or ¥ – so just how do new Bitcoin (BTC) get created and dispersed to the network?  Enter Bitcoin miners.

Block reward

Each time a new block is ‚mined‘ and added to the blockchain – on average every 10 minutes – the miner earns the ‘block reward’, which is a pre-determined number of Bitcoin.  In this way, new Bitcoin are created, and dispersed to the network via the miners.

How is the block reward calculated?

The block reward is written in to the Bitcoin protocol, and every 210,000 blocks – approximately every 4 years – the block reward halves.

When the first block was mined in 2009, the block reward was 50 BTC. Currently, a miner earns 6.25 BTC for every successfully mined block. The next halving will be in 2024, when the block reward will drop to 3.125 BTC.  By the year 2140, the block reward will be 0 BTC.

By then, just shy of 21 million Bitcoin will have been issued, after which there will be no more new coins created.

Processing Transactions

If Alice sends Bob 1 BTC, how does this transaction get added to the Bitcoin ledger?  Enter Bitcoin miners.

Adding transactions to the block

Miners select transactions waiting to be processed to include in their block.

Miner X picks up Alice’s transaction, and adds it to his block.   He then checks that all transactions included in his block are legitimate, by following the blockchain history (in this case checking that Alice has enough funds to pay Bob).  He must avoid the block being rejected at a later stage – which it will if it contains invalid transactions – as then all his work will have been for nothing.

With his block full of valid transactions, Miner X then races to be the first to solve a cryptographic puzzle.  This requires investing significant amounts of money in computing hardware and energy. This process is what is referred to as ‚proof of work‘.

Adding blocks to the blockchain

The miner who first solves the cryptographic puzzle gets to add their block to the blockchain (the Bitcoin ledger) and receive the block reward.  He will also earn all the transaction fees of the transactions included in the block.

In this case, our Miner X was lucky, solves the puzzle first, and gets to add his block – containing Alice’s transaction – to the blockchain.

Alice’s transaction has, however, not yet been confirmed, and can still relatively easily be reversed (i.e. the block removed from the blockchain and a different block added in its place).

Confirming transactions

Every block which is subsequently added by miners on to Miner X’s block is a ‚confirmation‘ of the block holding Alice’s transaction.  The more blocks added to Miner X’s block, the harder it is for Alice’s transaction to be reversed.

For small transactions, 0 or 1 confirmations are usually considered sufficient for the transaction to be accepted as completed by the receiving party.  The higher the value of the transaction, the more confirmations the receiving party will want to see before considering the transaction to be final.

Security of the Network

The market value of all issued Bitcoin is currently $384 billion (June 2022), which puts Bitcoin at Nr. 19 for asset value (just above Exxon Mobil  and JP Morgan Chase).

51% attack

The growing value of Bitcoin makes it an attractive target for attack.  As the Bitcoin protocol is based on consensus, a successful attack would require the attacker to control over 50% of the network,  which is why an attack on Bitcoin is known as a ‚51% attack‘.

So, what stops someone (or a company or a nation state) from acquiring 51 % control to attack the block chain and manipulate transactions in the blocks?  Enter Bitcoin miners.

Mining equipment ‚arms race‘

In the early days of Bitcoin, new coins could be mined on your personal computer, meaning that a 51% attack would have been relatively affordable for larger players. At that point, the market cap of Bitcoin was low, and not many people were interested in – or had even heard of – Bitcoin.

Once Bitcoin began to grow seriously in value, miners started an ‚arms race‘, using increasingly more powerful computing equipment, requiring greater amounts of electricity, to be the one to solve the puzzle first and earn the block rewards.

New miners were attracted to the network, thanks to the high rewards to be earned.  Bitcoin mining has therefore become an increasingly expensive process, making an attack on the network more expensive, too.

Cost of attacking Bitcoin network

As we know the hashrate of the entire Bitcoin network, we can calculate the hourly cost associated with an attempt to control 51% of the network.

Indeed, there is a website dedicated to the calculation of the cost of an attack on proof-of-work cryptocurrencies, Crypto51.app.    According to their calculations, it would currently cost over $880,000 an hour to sustain an attack on the Bitcoin network.  Even for a nation state, this figure would be prohibitive.

The high cost of the proof-of-work process, together with the high rewards to be earned by following the Bitcoin protocol, incentivise miners to remain honest by following the protocol and preventing an attack on the network.

It is more profitable for miners to mine BTC and earn the block reward and transaction fees by following the rules, than it is for them to attack the network and risk failing, and thereby losing everything.

With each day that passes since the launch of Bitcoin in 2009, a successful 51% attack becomes increasingly unlikely, if not impossible.