Source:sofi.com

Incentives and Proof of Work of Bitcoin Mining

Bitcoin mining is a crucial component of the blockchain network through which new BTC is produced and at the same time, this process controls the number of BTC in circulation. But, also, most Bitcoin supporters were drawn to Bitcoin mining, because they wanted to earn BTC, especially in the early years, before the network became competitive.

Today mining is still as valuable, but in order for miners to gain their rewards, they have joined mining pools and farms. If you also want to learn about mining and its incentives, we cover everything you need to know here.

Cryptocurrency should be understood as the type of digital currency that will function on the basis of cryptographic algorithms. It is independent, which means that there is no main authority or something the institution that controls it and manages or approves its transactions. It’s based hence on the idea of a blockchain and is completely decentralized.

Bitcoin Mining Process

Source:corporatefinanceinstitute.com

By working as miners new BTC enters the network. The process of validating blocks of transactions is also known as proof of work and it’s extremely important because it prevents double-spending, which is a problem associated with cryptocurrencies from happening in the payment system. The double-spending problem is essentially the option to use the same cryptocurrency more than once.

So, the miners are basically running the blockchain network and they do a very important job. The compensation is a block reward, along with transaction fees, but the main incentive for the miners is the block reward.

In order to work on the blockchain network, they need a computer system that has a great GPU or they also need to invest in a special computer system for mining. In addition, miners need to be aware that this is a time-consuming process, and even though they can easily validate 1MB worth blocks of the transaction, then they need to be the first to solve a complex numeric problem in order to get the reward. Today because the competition is increasing in the network it is fairly impossible to get a reward for your work as a solo miner.

PoW, also the first consensus-building algorithm, was devised by Satoshi Nakamoto. It is a process in which computers we call miners to solve complicated mathematical problems after which they are rewarded with some share of the cryptocurrency. What happens after the calculation is complete is that a new block and the transactions that belong to it are added to the blockchain. Proof-of-work rests on the “longest chain wins” system.

Increased Demand for BTC

Source:blog.fox.exchange

The demand for Bitcoin is rising due to the bull market phase of BTC where it achieved numerous records including a price of over $60,000. Mining has also remained extremely popular, but online trading sites are more accessible for anyone that can’t get into mining or finds it too expensive. One example is bitcoinstorm, which is an excellent automated exchange platform that is based on Artificial Intelligence technology.

So, in other words, the trading process is automated for the members on this site, and you can easily sign up on the site without having prior experience in this field.

Because the demand for BTC is growing, the blockchain network is getting more saturated, which results in increased collective computing power, and the network is designed to also increase the difficulty of the mining process based on the collective computing power in the blockchain network.

This adjustment happens every two weeks or after 2,016 blocks are mined. So, this is also another reason why as we said earlier, it is very difficult for solo miners to get compensated.

The Block Reward

Satoshi Nakamoto which is the inventor of the blockchain on the blockchain network and Bitcoin has set the block reward at 50 BTC. But, he also created a protocol called Bitcoin halving which halves the block reward after 210,000 blocks are added to the network. This event is important because it regulates the inflation rate and the rate at which new Bitcoins are produced.

However, it reduces the block rewards. The reward was decreasing in this order every four years. It was reduced from 50 BTC to 25 BTC in 2012, it decreased to 12.5 BTC in 2016 and in 2020 it is 6.25 BTC. The mining pools and farms that are developed as a response to these conditions are essentially a collective way of mining on the blockchain network and sharing the block rewards and the transaction fees among the members of the group.

Cloud mining

Source:cripto-valuta.net

Mining requires adequate space, with good electrical installations, good ventilation/cooling system, and sound insulation. Some give up mining just because of this complication. “Cloud Mining” was created as a solution to these problems. There is an idea that a man instead of buying mining equipment practically pays the rent of someone’s existing mining equipment. In this way he participates in mining, although he does not physically have the hardware, so he does not have to worry about electricity, cooling, noise, security, and similar things that give miners headaches.

Although PoW and PoS are the most popular mining algorithms, there are some more. It’s Proof-of-Burn, an algorithm in which coins are “burned”, that is, sent to an address that is not available to anyone and, thus by no means can I spend further. This usually works by burning units of one cryptocurrency in order to another was obtained.

Final thoughts

When we talk about investing in cryptocurrencies in general, we can say their era is yet to come. Digital gold is gaining strength in the market day by day. Here we are not only talking about bitcoin, which is the most famous and valuable currency since its founding in 2008, but also about other cryptocurrencies worth mentioning – Ethereum, Ripple, Litecoin, and many others. For any way of investing to decide, follow the situation on the market, because it can change several times during the day.

However, you should be aware that any investment, including this one, carries with it a certain amount of risk, so it is advised that you do not enter more than you dare to lose.


Ricardo is a freelance writer specialized in politics. He is with foreignpolicyi.org from the beginning and helps it grow. Email: richardorland4[at]gmai.com

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