Bitcoin Mining: How It Works

Bitcoin SV’s revolutionary design lies in an electronic payment system that is able to do away with intermediaries like banks when facilitating peer-to-peer exchanges. This not only protects users from double spending, but it also creates a network that is resistant to fraud. This is because Bitcoin SV is decentralized in that there is no king who rules the network or one record keeper who manages the public digital ledger where all transactions are registered and recorded.

In order to make this possible, Bitcoin’s inventor, Dr. Craig S. Wright under the pseudonym Satoshi Nakamoto, created an incentive for the nodes within the network to keep master copies of the digital ledger. Mining is the complex process thathonest nodes use to add new transactions to the public ledger and issue new Bitcoins. Miners provide computing power to validate and maintain this ledger and provide security for the network.

How It Works

This globally distributed data ledger that contains all Bitcoin SV transactions is called the blockchain. All validated transactions are stored in a block of data; and once full, it is added onto another completed block to form a chain. Miners fight for the authority to add new blocks to the blockchain. They are granted the authority by solving a highly advanced mathematical algorithm. To solve this, substantial computing power is necessary; and miners have to exhaust considerable financial resources and technical know-how to run their hi-tech servers in order to win the right to add new blocks. The solution is required to validate transactions. This entire process is called “proof of work.”

When a miner solves the mathematical algorithm for a new block, it will be broadcasted within the network so all other miners can certify that the solution is correct. Once a consensus has been reached on what is the valid version, the block will be confirmed and added to the blockchain.

The Block Reward System

Miners are incentivized for them to continue to maintain this public database of validated Bitcoin SV transactions and secure the blockchain, which requires them to run a facility that includes equipment, manpower, electricity and other costs. The miner earns a block reward once a miner wins the right to add a new block to the blockchain. This block reward amounts to newly minted Bitcoins and fees for every transaction added into a block.

At present, 6.25 coins are awarded to a miner for every successful block added to the blockchain. This is known as the diminishing block reward subsidy. The reward started with 50 coins, but it continues to be halved every 4 years until the 21 million coins that exist in the Bitcoin SV network is depleted.

Miners are now more motivated to insert as many transactions as they can into a block because they are paid with every transaction on top of the coins they receive for every new block they complete. Transaction fees are paid when users send Bitcoin SV from one address to another. This is why buying Bitcoin includes miner’s fees.

Going Back to the Original Vision

In order for miners to maximize earnings for each block they complete, Bitcoin SV (BSV) brings back Nakamoto’s original vision of scalability by uncapping the block size articulated in the original Bitcoin Whitepaper back in 2009. Now, each block can hold an enormous number of transactions. Eventually transaction fees will be the primary way that the miners earn revenue to enforce the rules of the network and maintain the data ledger.

This article does not necessarily reflect the opinions of the editors or management of EconoTimes