Bitcoin is a growing force in financial markets, but how is it mined and transacted?
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.
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:
These three parts work separately and make the Bitcoin network decentralised and secure. Let’s dig deeper into all of them.
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.
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?
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.
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.
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.
