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How Bitcoin is Mined: Transactions, Miners, and Block Validators

Bitcoin is a growing force in financial markets, but how is it mined and transacted?



April 7, 2021

Bitcoin became a trend in the last few years, to the point that mainstream investors started stepping into the market. Now, according to Asset Dash, Bitcoin is among the top 10 most valuable assets in the world. But how is Bitcoin mined - or created?

When you want to transfer money to someone else, that transaction goes through a bank's servers. This means they can block, reverse, stall, or even accidentally lose your trade - this is called "centralised system".

Conversely, a bitcoin transaction was designed to not need an intermediary and engineered with three powerful features that make this cryptocurrency significantly valuable: trustless, immutable, and censorship resistant. 

  • Trustless: Bitcoin's blockchain doesn't eliminate trust. Rather, it minimises the amount of trust required from any single actor in the system. Different actors cooperate to determine the truth with the protocol's rules (public-key cryptography and machine consensus).
  • Immutable: The computational costs required to take control of the system and how unrealistic it is to hack every node in the network to threaten the blockchain ledger, makes it immutable.
  • Censorship resistant: The structure ensures that the laws that govern the network are set in advance and can't be retroactively altered to fit a specific agenda. Further, as the information is decentralised, censoring the spread of information by limiting a single source of information is unrealistic.

Just as banks are fundamental to the movement of money in centralised systems, the mining system of the Bitcoin network is fundamental to how bitcoins are created and transferred between users. The Bitcoin transaction process can be broken down into three steps:

  1. Users make a transaction and pose it to the Bitcoin network.
  2. Miners mine transaction blocks to build the blockchain.
  3. Nodes validate transaction data.

These three parts work separately and make the Bitcoin network decentralised and secure. Let’s dig deeper into all of them.

Sending a Transaction

To perform a transaction in the traditional financial system, you have to share your transaction details with a bank or credit card company and ask them to approve the deposit.

On the other hand, if you pay through blockchain technology, you broadcast the transaction to the whole Bitcoin network. Next, the transfer goes to the so-called “unconfirmed transactions” pool where it awaits processing by the nodes (miners and validators), who are the only ones with access to the pool on the network. At this moment, the status of your transaction is in standby mode.

Waiting for the Miners

The miners create “blocks” to enter the data into the blockchain. Therefore, passing the transaction from one account to another. Once approved, this record will be stored on the ledger, so everyone has access to it. When the miner finishes creating the block that verifies the transaction, it is sent to other miners to be added to the blockchain. This means that a majority vote must approve it.

Miners produce these blocks, but what does a block actually represent? 

  • Each block does not contain one transaction, but many.
  • The blocks are made up of text; that text is the transaction data (each block is about one megabyte).
  • Approximately between 2000 to 2200, transactions are added to each block.
  • The blockchain grows block by block, every ten minutes.
  • This means that we will have a maximum of 2200 transactions per block, about 3-4 transactions per second.

The miner who generates a block receives a reward. The reward was 50 bitcoins for the first block in history. At every 210,000 blocks, the reward is divided by two. Currently, the prize is approximately 12 bitcoins. Miners compete with each other to create these blocks.

But who are these miners?

Miners are individuals, groups, or companies with super-powerful computers to run a single, random, and repeated calculation. To do so, their computers use high amounts of electricity, and hence, are expensive to operate — the miner who calculates the correct number mines the block, and is therefore rewarded for their electrical input.

This computation cost is what helps secure the blockchain, and it’s known as Proof of Work.

Transaction Validation

The miner proposes the block to the nodes in the network to verify the information. Anyone can run a node, as it only requires a regular laptop program run by standard computers, although “full nodes”, or the validating nodes, comes with some minimum requirements.

The nodes hold a record of all pending and historical transactions on the chain to know if the proposed block transactions are valid. If the new proposed block is accepted, the miner will receive the reward.

Assuming the new validated block contains your transaction. Once it’s been verified by enough number of nodes, it’s considered complete.

Think Decentralised

Users make transactions, miners create blocks, and nodes verify the new block. As a result, we have a chain of transaction records called blockchain technology. All of this creates a system free from the centralised structures that previously ruled finance.

Francisco has a degree in Business and Law, and is currently working for dGen to communicate its vision for blockchain adoption to an audience of thought leaders in tech companies, corporates, and the public sector as a researcher and marketer.