Mining for Beginners

What is mining?

The process of new bitcoins is one of the most important aspects of the cryptocurrency industry. So why is it called mining?

Many people are used to the idea that “digital” and “virtual” are worthless. After all, you can just copy the files and use. It was Bitcoin that became the first technology capable of breaking this stereotype not only for ordinary people, but also for the most staunch supporters of free software and content distribution.

Bitcoin has “copy protection” built in conceptually, and circumventing it is far more difficult than cracking software protection. No matter how many times you copy your wallet or block database, you will get a copy of the same bitcoins, which can only be spent once.

Even though the Bitcoin client and protocol code is completely open, creating new coins is a complex and expensive process. You can’t generate more bitcoins than the technology’s creator intended. And to get new coins – you need a significant investment in equipment, premises, cooling and electricity. That’s why Bitcoin is called “digital gold” and is depicted as gold coins.

The word “mining” comes from the English “mining” which means “mining” and was derived precisely from the analogy with gold mining.. The more devices in the network that are mining, the better the Bitcoin network is protected against attacks. The owners or operators of such devices are called “miners”. It is also not uncommon to refer to a “miner” as the computing device itself, which is needed to calculate the Bitcoin network.

Each new block incorporates a cryptographic signature generated from the previous block.. This is how blocks are interconnected to form a “blockchain” (blockchain). The blockchain can branch off, but in the end the branch of the blockchain that most miners are working on is confirmed. This is how the network self-regulates.

Mining is the process of calculating the cryptographic signature of a block. In the Bitcoin network, a block is an array of data that holds information about the transactions that entered the network after the previous block was created (about the last 10 minutes). Bitcoin uses the SHA256 hashing algorithm, which is widespread on the Internet. The member of the network who provided the calculation of the cryptographic block signature receives a reward in Bitcoin. In doing so, he needs to shovel through tons of waste rock – hashes that don’t fit the block – to get a “gold bullion” in the form of a precious “generating transaction”.

Thanks to a mathematical theorem in cryptography called Proof-of-Work (PoW), calculating a block depends on a programmed parameter such as complexity. The computational complexity of the Bitcoin network changes every 2016 blocks (about 2 weeks at 10 minutes per block) and is set according to the average time in which all blocks were found after the previous recalculation.

But complexity is not the most important obstacle to riches. Every four years the remuneration for the block is halved. At the start of the system in 2009, miners received 50 BTC for each created block, but now the reward is 25 BTC. The next reduction in the award is expected in the first half of 2017. The exact date cannot be calculated, as it depends on the dynamics of changing mining complexity.

Why Bitcoin needs miners

Mining is fundamental to the integrity and reliability of Bitcoin or any other cryptocurrency. The work of the miners provides all the basic functions of the network:

  • Confirming transactions;
  • .

  • Protecting the network from entering false information (fake transactions and blocks);
  • Protecting the Bitcoin network from all kinds of attacks.
  • Support decentralization of the Bitcoin network.

A transaction between two Bitcoin participants must be confirmed by participation in the block. If the miner who created the block accepted it and included it in the block, the coins contained in the transaction become available for further use. An attacker who tries to feed the network a fake transaction will be discarded at the block formation stage.

Feeding an entire block to the network? To do this, you need to have a signature formed from the previous block. If there is no signature, it must be calculated, which means repeating all the calculations that were needed for the previous block, and so on, up to the very first block created on January 3, 2009. That is, in order to crudely hack the network and establish one’s own orders in it, one would have to recalculate the entire blockchain.

An absurdly large job – in fact, it’s easier for an attacker not to recalculate the entire amount of computation in the Bitcoin network all over again for just one block – but to get in with their computing power to do an honest job.

Branch out the chain of blocks? It is possible, but such a branch is doomed to be left alone, orphaned – orphaned, unless it is supported by an ever-growing computing power greater than the total power of all “honest” miners, which also requires huge expenses and makes no practical sense.

Investing just a few hundred million dollars in hardware can produce 51% or more of the processing power of the Bitcoin network. This attack is called the “51% attack”.. But in this case, too, the triumph will be more of a Pyrrhic victory. The attacker will only be able to “freeze” transactions online or arbitrarily change payments from his wallet, which will not bring much wealth.

Decentralization, that is, independence from a single control center, is one of the key advantages of Bitcoin over traditional currencies, and it is ensured by miners who are dispersed around the world. Shutting down some processing power will not stop transactions on the network, but only by shutting down every single miner.

The concentration of capacity in the hands of large pools and datacenters poses some threat of decentralization. But mining is spreading more and more widely and now there is no single pool that can get more than 50% of the network. And data centers are scattered across several continents, from Norway and Greenland to Australia.

A blitz history of mining

The first block signatures, given enough time and no competition, could even be counted by hand, with an ordinary pencil on paper. In 2009, a programmable calculator was sufficient for block calculations.

Of course, in practice no one did, and mining was done by enthusiasts on CPUs – the processors of ordinary home computers. The era of processor-based calculations was quite long – almost two years. When miners ran a program that used a CPU to calculate the block signature, Bitcoin was worth no more than a few cents, and no one thought about super profits back then.

In 2011, a program was developed to mine on GPU (graphics processing unit of a video card). It handles these calculations much better, since top graphics cards have dozens to hundreds of small shaders at their disposal, each of which can calculate hashes separately. Thus, it became possible to “parallelize” the calculations and speed them up by several orders of magnitude.

Computers with multiple graphics cards called “rig” appeared, and then entire farms with dozens or hundreds of cards that dealt exclusively with computing for the Bitcoin network. That’s when the so-called “pools” – sites for collective mining – appeared, and single, or “solo-mining”, useful for decentralizing the network, became risky and impractical. This era continued for two more years. The next step was the use of FPGA modules, and then the development of specialized ASIC chips, which can only engage in mining, but much faster and more economical than any video card.

With the advent of ASIC mining changed irreversibly and a “hashrate race” began, which continues to this day. Since the beginning of 2013, mining equipment manufacturers have been on the fast track of microelectronics development, from 130nm Avalon I to 16nm chips from Bitmain and Bitfury, and even more high-end chips are in development.

What and how to mine
Easy money

Profitability of Bitcoin mining falls in the same progression as the complexity of computing grows. Therefore, the income from mining now can only be obtained by having very cheap electricity plus a huge number of computing devices equipped with the most advanced chips and cooling systems. On the forum, amateur miners offer a variety of industrial and home-built devices for those who want to mine at home, and several manufacturers offer their latest developments. It is difficult to talk about the profitability of this occupation, because it has long been balanced around zero and depends on the slightest movements of the course and complexity.

Even more doubtful is the so-called “cloud mining”, which implies the lease of computing power for calculations in the “cloud”, and more precisely – in the data center of the service operator. In most cases you pay for electricity and depreciation of the equipment, plus you bear all the other risks. Cloud mining services that do not charge for electricity often turn out to be pyramid schemes.

Nevertheless, with a good study of the market, it is possible to find quite profitable offers for home mining, which can bring income comparable to the salary of an average office employee.

If you want to mine Bitcoin on an industrial scale, you need a former military base or a tunnel in the Arctic with meter-thick metal doors and smart condensation cooling systems that support hundreds of thousands of boards with millions of chips.. This is how one of the leading miner manufacturers and owner of a large cloud service, KnCMiner, describes its data centers. That way you can at least keep up with the competition.

Making money mining Bitcoin without a big investment? That time is gone years ago. Now it is possible to make a profit on mining using processors and video cards only on alternative cryptocurrencies, that is, forks or altcoins.


After the advent of ASIC miners, numerous forks started using devices that Bitcoin no longer needs. One of the most common alternative hashing algorithms, Scrypt, has long been a refuge for video card farm owners. But in 2014 there were ASIC chips for it as well. By this time a whole “zoo” of new algorithms had arrived – Scrypt-N, Scrypt-Jane, X11, X13, X15, Cryptonote, Groestl, Quark and others. Many altcoins are now quite profitable to mine on PC processors or video cards.

There are digital currencies that use a different theorem, called Proof-of-Stake (PoS). Unlike Proof-of-Work, which the Bitcoin network uses, PoS-based currencies do not require ever-growing computing power. For blockchain to function, they only need wallet programs running constantly on users’ computers, and mining occurs due to the duration of coin storage. Some forks are different hybrids of PoW and PoS.

There are also more exotic variants. For example, a new type of mining is gaining popularity, in which cryptocurrency (Burst and similar) is charged for the use of space on a hard drive or other media. This technology is called Proof-of-Capacity (PoC). Data carriers are booming and this business also has prospects. These decentralized repositories can be useful, for example, for low-cost distributed hosting of sites or large sets of data that are not very valuable, such as collections of images, photos, music or videos.

The future of mining


Technologies such as optronics, photonics, superconductivity and quantum computing will be used to create new, faster chips. Economically, bitcoin mining is most justified in Iceland, where you can get energy from geothermal sources, and the cooling near the Arctic Circle provides nature itself. Maybe there will be mining farms in the Sahara and Tibet, where solar energy will be used for computing and cooling. In the distant future, the Arctic Ocean coast and Antarctica will be a good region for mining. The energy for the calculations there can be obtained by tidal power plants, cooling the chips with outside air.

And perhaps in a few years more cost-effective types of mining, such as Proof-of-stake and Proof-of-Capacity, will take over, or new. Then huge farms devouring megawatts of electricity will be a thing of the past. But the idea of decentralized financial systems has already gained credibility and will evolve regardless of how their reliability will be ensured.<br