Why does Bitcoin require mining, while other cryptocurrencies don’t?

Bitcoin miners do not need to wear hard hats or go deep into underground mines to work hard to dig Bitcoin. Bitcoin is a virtual cryptocurrency that runs on the blockchain. Bitcoin mining is also carried out on the blockchain network using equipment that can provide computing power (computing power).

Bitcoin miners are completely different from traditional miners. Bitcoin miners don’t even need to go out. They can just assemble the mining machines and put them in an air-conditioned room to mine automatically. Apart from maintaining the equipment and paying electricity bills, the miners can almost lie down and don’t need to do any labor to mine.

How many people are mining? Where are they located?

The so-called Bitcoin mining is to participate in the operation of becoming a Bitcoin network node.

According to data provided by the Bitnodes website, there are currently more than 16,000 reachable nodes in the Bitcoin network, distributed in nearly 100 countries. The top three countries with the most reachable nodes are the United States, Germany, and France.

Including unreachable nodes, the number of global nodes exceeds 48,000, distributed in 139 countries.

Some people in Taiwan are also mining Bitcoin. The number of reachable and unreachable nodes in Taiwan is as follows:

Bitcoin reachable and unreachable nodes

According to Bitnodes, nodes that can send and receive messages with other peers are called reachable nodes, while nodes that can only send but not receive are called unreachable nodes. There are many possibilities for not being able to receive messages, such as the node being behind a network firewall, or having reached the maximum connection limit, or being in the process of synchronizing and updating information, which will also suspend receiving messages.

In comparison, reachable nodes provide more complete node functions and are an indispensable part of Bitcoin operations, but unreachable nodes are also part of the Bitcoin network and still have their importance.

Nodes can be further divided into several different types:

• The distinction is based on the degree of data storage: full nodes are responsible for storing complete information of the entire blockchain, while light nodes only store partial information.

• Differentiate by task: mining nodes are responsible for packaging new transactions into new blocks and putting them on the chain, while verification nodes are responsible for verifying whether the content of the latest packaged block is correct.

Why Bitcoin mining?

Mining is simply a way to distribute bitcoins. Before the total issuance limit is reached, new bitcoins will continue to be produced. How should these produced bitcoins be distributed? They are distributed through mining.

Two characteristics of Bitcoin:

• It is a virtual currency without entity

• Operates on a public blockchain in a decentralized manner

The Bitcoin mechanism needs to be maintained through mining. The main reason is that the Bitcoin network is a decentralized blockchain and Bitcoin is a decentralized cryptocurrency. In order to maintain the operation of the Bitcoin network in a decentralized manner, the original design method was mining.

Bitcoin core features and value: decentralization

Bitcoin is a cryptocurrency that runs on the blockchain. Let's first briefly explain how the blockchain works: the blockchain is like a shared ledger in the cloud. The special thing about it is that it packages and encrypts transactions into a block, which is then uploaded to the chain after verification. One block after another is closely connected to each other through encryption technology, so it is called a blockchain. Once a transaction is uploaded to the chain, it cannot be tampered with. The data in the block is open and transparent for inspection and verification. These blocks are stored in many nodes and kept synchronized through a program.

Bitcoin is a so-called public chain in the blockchain, a blockchain that is open to everyone to participate. One of the characteristics of a public chain is decentralization, and there is no clear owner. In plain words, if Bitcoin is a company, this company has no boss to pay salaries , but the operation of Bitcoin requires nodes to package and verify blocks. If there is no boss to pay salaries, how to attract nodes to participate in the operation of the Bitcoin network?

Blockchain operation diagram

How Bitcoin Mining Works

When Bitcoin was first designed, a total upper limit of 21 million coins was set. There was no pre-mining and it was issued from scratch through block rewards.

As mentioned before, how to attract nodes to participate without salary? In the beginning, people were attracted to join through block rewards. Every time a block is packaged, a block reward will be issued to the node responsible for packaging the block. The block reward was initially 50 bitcoins per block, and then the block reward will be halved every four years. After the third halving, the block reward has dropped to 6.25 bitcoins per block. The fourth halving will take place in late April and early May next year (2024), and the block reward will be further reduced to 3.125 bitcoins.

Bitcoin mining is the process of participating in node operations and striving for block rewards.

Bitcoin generates a new block approximately every ten minutes, which is the average time. This means that only more than a hundred new blocks are generated per day, but the number of nodes far exceeds this number. How should they be distributed? How to decide who can package a new block and receive the block reward?

The method adopted by Bitcoin is POW (Proof of Work). The program will give a math problem. The problem is difficult and takes a long time to solve. All those who want to participate in mining will quickly calculate. The first one to calculate the correct answer will get the right to package the block.

Others who did not win the right this time will be responsible for verification and prepare for the next question.

Bitcoin mining is, to some extent, a game of mathematical calculations and probabilities. Of course, all of this is done by computer, so you need to invest in better equipment and prepare higher computing power to have a chance.

Bitcoin provides block rewards through mining to attract people to participate as nodes, thereby maintaining the security and operation of the entire Bitcoin network. The more nodes participate, the higher the degree of decentralization of Bitcoin.

Bitcoin mining difficulty will be adjusted dynamically

As more people participate in mining, the computing power invested in solving problems increases. In order to maintain an average of 10 minutes to produce a block, the difficulty of the problems must be increased. If fewer people participate in mining, the computing power invested in solving problems decreases, and the difficulty of the problems must be reduced.

Bitcoin difficulty curve, source BTC.com

As more people participate in Bitcoin mining and technology advances, the equipment used becomes more and more advanced, and the difficulty of Bitcoin mining continues to soar compared to the past.

Common Problems with Bitcoin Mining

Can I mine on my phone or laptop?

There was a time when this was possible, but with the increasing competition in the industry, there are now many institutional users mining in the market, and the mining market is becoming more and more professional and large-scale. According to the latest research by Coinmetrics, the three mining machines produced by Bitmain alone account for 76% of the total computing power of the Bitcoin network. The number one Antminer S19j Pro accounts for 34.3% of the computing power, and the second-ranked S19 accounts for 28.1%. Most of the computing power is provided by professional mining machines.

Most miners will also cooperate to form mining pools to mine together. According to BTC.com data, the top five mining pools currently account for more than 85% of the computing power of the entire Bitcoin network.

In comparison, the computing power of ordinary mobile phones or computers is too low. Now, you must set up a professional mining machine to have a chance of mining. It is almost impossible to mine with a mobile phone or an ordinary computer.

But if you are a super lucky chosen one, it is not certain. Occasionally, there will be super lucky nanominers who can mine with relatively small computing power, just like winning the Bitcoin mining lottery.

Latest Bitcoin Mining News: A single miner gets 6.25 BTC reward using only 1PH of computing power

Bitcoin mining seems to be very environmentally unfriendly?

Due to continuous high-frequency calculations, the mining machines involved in Bitcoin mining are indeed very power-consuming and very hot. In order to keep the equipment cool and maintain good operation, very strong air conditioning is usually required. Overall, Bitcoin mining is very power-consuming.
Power consumption is a fact, but whether it is environmentally friendly or not is not necessarily the case. We must look at the source of the energy used. According to foreign analysis, more than half of the energy currently used in Bitcoin mining comes from green energy.

Can Bitcoin mining make money?

If you solve the problem, you will win the opportunity to package a block and be allocated a block reward, which is referred to as mining. However, because Bitcoin mining is so competitive and difficult, the cost of setting up a mining machine + the cost of maintaining the mining machine + electricity costs. If Bitcoin continues to rise sharply, it will be fine. When the price of the currency is not good, you may even lose money.

If mining is too profitable, more people will invest, the price of graphics cards will skyrocket (mining machines will use a large number of graphics cards), and the cost of assembling mining machines will increase again.

In summary, unless you can get a relatively cheap graphics card or relatively low electricity bills, Bitcoin mining is not very profitable at this stage, and it is increasingly developing on a large scale, such as mining farms and mining pools. Scaling helps reduce costs.

What to do after all the Bitcoin mining is done?

The total amount of Bitcoin is capped at 21 million, and it is expected to be mined out by 2140, after which there will be no more Bitcoin block rewards.

However, the node’s income is not limited to block rewards. All transactions on the Bitcoin network need to be processed and packaged by nodes, and transaction fees are charged. When the block rewards are issued, there are still transaction fees that can be returned to the nodes as a reward for participation.

As long as Bitcoin is adopted widely enough and there is sufficient transaction volume on the Bitcoin network, the transaction fees collected will be sufficient to maintain enough nodes participating.

Why don’t other cryptocurrencies have mining?

Blockchains that use POW (Proof of Work) like Bitcoin can also be mined, such as Bitcoin Cash BCH and Litecoin LTC. Mainly due to environmental protection, energy consumption and transaction speed considerations, more and more blockchains are now adopting POS (Proof of Stake) mechanisms, or some new blockchains have newer consensus mechanisms. Due to different consensus mechanisms, other cryptocurrencies do not necessarily use mining to determine block reward distribution.

The second oldest coin, Ethereum, also used to be a POW mechanism and required mining, but it completed its transformation last year and has been converted to a POS mechanism, distributing block rewards through staking. Ethereum mining has become history.

Staking can also be understood as a form of alternative mining, which is still an act of trying to win block rewards. The difference from Bitcoin mining is that it no longer requires computing power, but instead locks up cryptocurrencies.

Is Bitcoin hashrate related to price?

The more computing power is invested, the more difficult Bitcoin mining will be, and the cost of mining will increase. In theory, when the price of Bitcoin is higher, it is more profitable for miners, and they are more willing to invest resources, buy more mining machines and open more mines, and the computing power continues to rise.

When the price of Bitcoin falls, in theory some miners will start to lose money. After losing money, they should shut down the mining machines, reduce the computing power, adjust the mining difficulty, and find a new balance.

But if we compare the trends of the two, although the computing power may occasionally decline, the overall trend continues to be upward, and there is no obvious connection with the price trend.

The above considerations are only theoretical. In reality, there is the issue of fixed and variable costs. Although mining loses money after taking into account the overall investment costs, the mining machines have been bought after all, and they may not be sold. As long as the income from continuous mining is higher than the electricity cost, it will continue, or start looking for a cheaper source of electricity. Some people who can't bear it and decide to exit the market sell their mining machines at a low price, but for those who bought the mining machines at a low price, it may be profitable again.

Perhaps coupled with a mentality that the price of Bitcoin will recover sooner or later, if mining is not cost-effective at the moment, it will be regarded as hoarding coins. As long as the variable cost of mining is lower than the direct market price, buying coins is a good investment.

Due to a combination of factors, although the price of Bitcoin fluctuates, the fluctuations in computing power are relatively small, and the continuous upward trend is more obvious.

Summary: A simpler way to participate than mining: buy Bitcoin directly

In the past when mining was not so competitive, it was a way to obtain a large amount of Bitcoin at a lower cost. However, nowadays, it has become a practice with high upfront and maintenance costs. The capital requirements for becoming a Bitcoin miner are getting higher and higher, and it is difficult for the middle class to participate.