This article is a brief background of the history and systems behind Bitcoin Mining. If you want to learn how to mine Bitcoin, you should visit our other article instead.
Bitcoin was designed from the ground up to use a system called Proof of Work (PoW) to verify transaction on its blockchain ledger. Proof of Work is done by miners on the Bitcoin network using their processing power to find solutions to cryptographic puzzles.
The process of mining bitcoin is simply a race to solve a particular cryptographic problem using processor power. The first miner who find a valid answer to the cryptographic puzzle is rewarded with bitcoins and records the answer that they found to the blockchain as the next block.
The power available to a miner to solve this cryptographic puzzle is measured in hashes. Since the chances of anyone finding the answer to a puzzle is random, more hash power (also known as “hash rate”) means that a miner stands a higher chance of finding the answer and getting the bitcoins. The Bitcoin code is designed to adjust the difficulty of the mining puzzle according to the hash power available on the network.
Mining has evolved from CPU mining, to GPU mining, and then to the era of ASIC mining.
From CPU to ASIC
At the earliest stage of Bitcoin’s development, the total hash power of the Bitcoin mining network was low, and so was the difficulty of mining Bitcoins. It was feasible and efficient to use CPUs to mine Bitcoin during this period using the basic Bitcoin Core program.
As the value of Bitcoin increased, more miners started showing up on the network to add their hash power to the pool, increasing the difficulty. This meant that the equilibrium of hash power and cost had shifted because the value of a bitcoin had increased dramatically. Eventually, CPUs were not able to perform adequately in an environment of higher mining difficulty.
The release of puddinpop’s CUDA Miner in 2010 allowed Bitcoin miners to process the hash algorithm with their GPU instead of their CPU. GPUs have more cores but lower speeds than CPUs, but their specialized set of instructions meant that when configured properly, they could produce about a hundred times the hash power of a CPU.
As the value of Bitcoin continued to rise, hardware developers had more of an incentive to develop specialized hardware for mining. One such attempt was field programmable gate arrays, but this hardware was quickly followed by application-specific integrated circuits, or ASICs, in 2012.
ASIC technology was about 200 times faster than GPU bitcoin mining and launched an entire sub-industry of ASIC chip manufacturing and mining farms. Among the most notable mining hardware companies to emerge were Avalon Creative and Bitmain.
Miners began pooling their hash power in 2010 in order to smoothen out their return on computing power. The random nature of bitcoin reward distribution meant that a single miner could toil for years (depending on your luck and hash power) without seeing a single Bitcoin. On the other hand, a new miner could theoretically get lucky and get a handful of Bitcoins within the first few days.
Mining pools used the combined hash power of their members to work on Bitcoin’s mining algorithm and paid out for every block mined proportionately to each member’s hash power after deducting a small fee. This meant that members of a mining pool would get paid more frequently but in smaller quantities.
The growth of mining farms and mining pools has been astounding, but it also means that it has become mathematically unlikely that any individual small miner could hope to make any money without joining a mining pool.
Bitcoin mining today and tomorrow
These days it is almost impossible to mine Bitcoin independently. Large crypto mining companies and pools dominate the landscape, with massive mining farms built near sources of low-cost electricity. Setting up an independent, viable mining operation costs hundreds of thousands of dollars and technical knowhow, not to mention the cost of operating power-hungry ASICs.
Cloud mining, the practice of renting computing power from cloud computing platforms for mining, was a common retail solution. Many smaller players in this industry found it difficult to gain users’ trust and many people fled to larger brand names for security. Cloud mining remains a long-term game: profits may not be high all the time, but miners plan to hold their Bitcoin over a long term to make up for the initial cost.
Owned-and-managed services are one of the more popular solutions for miners who don’t want the hassle of dealing with technical issues, or with the difficulty of procuring ASICs in a market where demand far outstrips supply. Miners buy and own an ASIC (or many ASICs) from a large company like Huobi, and the company manages the entire setup for a fee.
Major concerns have been raised by governments and environmental groups about the power consumption of Bitcoin mining. Bitcoin mining consumes large amounts of power, and miners have been under pressure to use carbon neutral sources of energy. It is estimated that between 40% and 70% of the Bitcoin mining network is run on green energy, and that this number will probably increase over time.
For the foreseeable future, Bitcoin mining is generally considered to be a profitable activity, as long as the overall value of Bitcoin continues to rise, more miners will be attracted to the ecosystem in search of profitable returns.