Bitcoinomics, Chapter 12: Bitcoin Mining

“I am pretty confident we are the new wealthy elite, gentlemen.” – Atlas

Adding blocks to the block chain is a difficult task indeed. Required thereof is time and processing power. The individual or group who puts forth this time and energy, and manages to produce a block, gets rewarded.

This reward is two-fold. First, the block producers get a bounty of some number of bitcoins, agreed-upon by the network. (Currently this bounty is 25 bitcoins; this value will halve every 210, 000 blocks.) Second, any transaction fees that may be present in the transactions included in the block are claimed by the block producer.

In short, Bitcoin mining is the use of processing power to try to produce a valid block, and as a result ‘mine’ some bitcoins. The network rules are such that the difficulty is adjusted to keep block production to approximately 1 block per 10 minutes.

Thus, the more miners engage in the mining activity, the more difficult it becomes for each individual miner to produce a block. The higher the total difficulty, the harder it is for an attacker to overwrite the tip of the block chain with his own blocks (which enables him to double-spend his coins).

Mining is not only important for maintenance of the transaction database, but is also the mechanism by which bitcoins get created and distributed among the people on the Bitcoin network. There are within the Bitcoin protocol parameters which stipulate that over the next hundred years, give or take a few decades, 21 million bitcoins will have been created, the maximum number ever to be allowed by the protocol. This is a mathematically controlled currency supply. For context, each month the Federal Reserve buys $85 billion in bonds.

A company that stirred the attention of the Bitcoin mining community is Avalon, who in the Spring of 2013 began shipping their first Asic-based bitcoin miners, custom-built rigs with specially-designed chips for efficient mining.

Recently someone on eBay paid $20, 000 for a $1, 500 miner from “batch two” of three. At the time of this writing, another auction has a batch two Avalon miner going for over $19, 000.)

In the middle of 2012, the race to create the next generation of mining hardware had begun. In June or July of 2012, Butterfly Labs released their ASIC lineup. With a promise to ship in October, the company took in over a million dollars in just a few days.

Source: www.goldsilverbitcoin.com