3. Bitcoin Minning

History of Bitcoin Mining

Two developments have contributed to the evolution and composition of bitcoin mining as it is today. The first is the manufacture of custom mining machines for bitcoin. Because bitcoin mining is essentially guesswork, arriving at the right answer before another miner has almost everything to do with how fast your computer can produce hashes. In the early days of Bitcoin, desktop computers with ordinary CPUs dominated bitcoin mining. But they began taking a long time to discover transactions on the cryptocurrency’s network as the algorithm’s difficulty level increased with time. According to some estimates, it would have taken “several thousand years on average” using CPUs to find a valid block at the early 2015 difficulty level.

Over time, miners realized that graphics cards, also known as graphics processing units (GPUs), were more effective and faster at mining. But they consumed a lot of power for individual systems that were used for hardware not really required for mining the cryptocurrency. Field Programmable Gate Arrays (FPGAs), a type of GPU, were an improvement, but they suffered from the same drawbacks as GPUs. 

Nowadays, miners use custom mining machines, called ASIC miners, that are equipped with specialized chips for faster and more efficient bitcoin mining. They cost anywhere from several hundred to tens of thousands of dollars. Today, bitcoin mining is so competitive that it can only be done profitably with the most up-to-date ASICs. When using desktop computers, GPUs, or older models of ASICs, the cost of energy consumption actually exceeds the revenue generated. Even with the newest unit at your disposal, one computer is rarely enough to compete with mining pools—groups of miners who combine their computing power and split the mined bitcoin among participants.

The second development of Bitcoin forks also influenced the makeup of bitcoin miner networks. Among 1-in-16-trillion odds, scaling difficulty levels, and the massive network of users verifying transactions, one block of transactions is verified roughly every 10 minutes.8 But it’s important to remember that 10 minutes are a goal, not a rule.

The Bitcoin network processed just under four transactions per second as of August 2020, with transactions logged in the blockchain every 10 minutes.9 By comparison, Visa can process somewhere around 65,000 transactions per second.10 However, as the network of Bitcoin users continues to grow, the number of transactions made in 10 minutes will eventually exceed the number of transactions that can be processed in 10 minutes. At that point, waiting times for transactions will begin to get longer and continue to do so, unless a change is made to the Bitcoin protocol.

This issue at the heart of the Bitcoin protocol is known as scaling. Though bitcoin miners generally agree that something must be done to address scaling, there is less consensus about how to do it. There have been two major solutions proposed to address the scaling problem. Developers have suggested either creating a secondary “off-chain” layer of Bitcoin that would allow for faster transactions that can be verified by the blockchain later, or increasing the number of transactions that each block can store. With less data to verify per block, the first proposed solution would make transactions faster and cheaper for miners. The second proposed solution would deal with scaling by allowing for more information to be processed every 10 minutes by increasing block size.

In July 2017, bitcoin miners and mining companies representing roughly 80% to 90% of the network’s computing power voted to incorporate a program that would decrease the amount of data needed to verify each block.11

The program that miners voted to add to the Bitcoin protocol is called a Segregated Witness (SegWit). This term is an amalgamation of segregated, meaning separate, and witness, which refers to signatures on a Bitcoin transaction. Segregated Witness, then, means to separate transaction signatures from a block and attach them as an extended block. Though adding a single program to the Bitcoin protocol may not seem like much in the way of a solution, signature data has been estimated to account for up to 65% of the data processed in each block of transactions.

Less than a month later, in August 2017, a group of miners and developers initiated a hard fork, leaving the Bitcoin network to create a new currency using the same codebase as Bitcoin. Although this group agreed with the need for a solution to scaling, they worried that adopting SegWit technology would not fully address the scaling problem.

Instead, they went with the second solution of increasing the number of transactions that each block can store. The resulting currency, called Bitcoin Cash, increased the block size to 8 MBs to accelerate the verification process, to allow a performance of around 2 million transactions per day. On Nov. 10, 2021, Bitcoin Cash was valued at about $712 to Bitcoin’s roughly $66,500.

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