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How Does Bitcoin Mining Work?

Bitcoin mining is a process where new bitcoins are made and entered into circulation. However, the term is also used to describe the validation of cryptocurrency transactions on the blockchain network and their addition to a distributed ledger. On the blockchain network, groups of approved transactions form a block which is then joined together to create a chain. To add each new block to the chain, Bitcoin miners compete to solve complex mathematical equations using computer hardware known as application-specific integrated circuits (ASICs). 

The Bitcoin mining process

The most expensive of these circuits can cost up to $10,000, so it is important for miners to recoup their costs. To that end, a miner who is successful in adding a new block will receive 6.25 bitcoins as a reward – equivalent to around $300,000 using December 2021 prices. Note that the reward reduces by 50% every four years or so during events referred to as “halvings”.

To get started, the miner needs access to a digital wallet and mining software that is connected to ASIC hardware.

Why is Bitcoin mining bad for the environment?

Solving complex mathematical problems requires enormous amounts of computational power. The more computational power a miner possesses, the more likely they are to solve the calculation and earn the reward. 

This results in a metaphorical arms race where each miner endeavors to purchase the computer with the best hash rate, which is a metric used to measure how fast a computer can work on Bitcoin mining. These devices require more electricity to run, with a collective network of them consuming vast amounts of energy.

Though estimates vary, The New York Times claims the process of mining Bitcoin consumes around 91 terawatt-hours every year. This is more electricity than the 5.5 million citizens of Finland use over the same period. 

Digital trend platform Digiconomist suggests the carbon footprint of a single Bitcoin transaction is around 978.25kg, equivalent to 2,168,135 Visa transactions or more than 163,000 hours watching YouTube. What’s more, each transaction produces 309 grams of electronic waste, comparable to the waste produced by almost two iPhone 12s.

In the United States, some energy providers are only meeting increased demand by burning fossil fuels such as coal. In fact, states with ailing coal industries such as Montana, Kentucky, and New York are seeking to profit from the crypto trend by encouraging Bitcoin mining companies to invest in operations there.

Is Bitcoin mining profitable?

While the figures touted earlier suggest Bitcoin mining to be a profitable endeavor, this only tells part of the story. The process is profitable under certain circumstances, but this is impacted by the cost of electricity and mining equipment. 

Miners in countries where electricity is expensive may find mining unsustainable. Conversely, miners with access to cheaper electricity often reside in third-world countries where the cost of mining equipment is prohibitive. 

Profit potential is also impacted by:

  • Competition from other miners, which is only set to increase.
  • Volatility in the Bitcoin price.
  • The halving process, which reduces miner rewards by 50% every four years.

Key takeaways:

  • Bitcoin mining is a process where new bitcoins are made and entered into circulation. The process also describes the validation of cryptocurrency transactions on the blockchain network and their addition to a distributed ledger.
  • To get started, a Bitcoin miner needs a digital wallet and mining software that is connected to sophisticated computer hardware that can solve mathematical problems. The device with superior computational power has the best chance of mining Bitcoin.
  • Bitcoin mining is bad for the environment because it has a large carbon footprint. Annual electricity consumption is comparable to countries with populations in the tens of millions and electronic waste is also a concern. Bitcoin mining has also caused renewed interest in fossil fuel burning as suppliers seek to meet the increased demand for energy.

Learn More From The Book Blockchain Business Models

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Read Next: EthereumBlockchain Business Models Framework Decentralized FinanceBlockchain EconomicsBitcoin.

Read Also: Proof-of-stakeProof-of-workBlockchainERC-20DAONFT.

Other Commercial Applications On Top Of The Blockchain

DeFi

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Decentralized finance (DeFi) refers to an ecosystem of financial products that do not rely on traditional financial intermediaries such as banks and exchanges. Central to the success of decentralized finance is smart contracts, which are deployed on Ethereum (contracts that two parties can deploy without an intermediary). DeFi also gave rise to dApps (decentralized apps), giving developers the ability to build applications on top of the Ethereum blockchain.

Tokenization

erc-20-token
An ERC-20 Token stands for “Ethereum Request for Comments,” which is a standard built on top of Ethereum to enable other tokens to be issued. Based on a smart contract that determines its rules, the ERC-20 enables anyone to issue tokens on top of Ethereum. As they are using a standard, those are interoperable. ERC-20 Tokens are critical to understanding the development of Ethereum as a business platform.

Decentralized Autonomous Organizations

decentralized-autonomous-organization
A decentralized autonomous organization (DAO) operates autonomously on blockchain protocol under rules governed by smart contracts. DAO is among the most important innovations that Blockchain has brought to the business world, which can create “super entities” or large entities that do not have a central authority but are instead managed in a decentralized manner.

NFTs

non-fungible-tokens
Non-fungible tokens (NFTs) are cryptographic tokens that represent something unique. Non-fungible assets are those that are not mutually interchangeable. Non-fungible tokens contain identifying information that makes them unique. Unlike Bitcoin – which has a supply of 21 million identical coins – they cannot be exchanged like for like.

Sharding

sharding
Blockchain companies use sharding to partition databases and increase scalability, allowing them to process more transactions per second. Sharding is a key mechanism underneath the Ethereum Blockchain and one of its critical components. Indeed, sharding enables Blockchain protocols to overcome the Scalability Trilemma (as a Blockchain grows, it stays scalable, secure, and decentralized).

Staking

proof-of-stake
A Proof of Stake (PoS) is a form of consensus algorithm used to achieve agreement across a distributed network. As such it is, together with Proof of Work, among the key consensus algorithms for Blockchain protocols (like Ethereum’s Casper protocol). Proof of Stake has the advantage of the security, reduced risk of centralization, and energy efficiency.

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