BITCOIN MINING EXPLAINED: EVERYTHING YOU NEED TO KNOWDate: 2017-12-22
All eyes on Bitcoin The cryptocurrency has staged a meteoric rise in 2017 that has attracted new investors, but, for many, question marks still surround bitcoin and the technology behind it.
Recent reports are pointing to the high energy cost associated with mining; the process used to create bitcoin, is there any way to fix it? Here are some of the questions asked, answered.
What is bitcoin mining?
Just like gold miners produce the world's supply of gold, so do bitcoin miners. They produce all the digital currency available to the market, but naturally, it is a bit more complicated than that. Mining is the process of adding transaction records to Bitcoin's public ledger, or the blockchain.
How does mining physically work?
The blockchain is simply a chain of blocks. Miners use a special software to solve mathematical problems that both confirm legitimate transactions or blocks and then create new bitcoins, adding new transactions to the blockchain every 10 minutes or so. The hash rate is the number of calculations a piece of hardware can make every second as it works to solve the math problem, and the higher the hash rate, the more likely a miner is to solve a transaction and thus be rewarded with a set amount of bitcoin.
Why is it so difficult?
The difficulty of mining bitcoin is the design of it. The ideal mining time is 10 minutes per block, and if that falls, the process becomes more difficult with the aim of keeping the block creation rate stable. There are a total of 21m bitcoin that can be mined, at which point the miners will close shop unless bitcoin's protocol – the rule that secures the system – is changed to allow for a large supply.
Is it profitable?
Mining with bitcoin can be profitable, as miners are rewarded with a fixed amount of coins and transaction fees for their hard work, but the computers and hardware necessary for powering through blocks can use a lot of electricity and end up costing huge amounts of money.
How much energy does it use and what does it cost?
The massive computer network behind bitcoin uses quite a bit of energy, as much as Serbia, to give you an idea.
A recent report by Accounts & Legal said the aggregate computing power of bitcoin network is nearly 100,000 times larger than the world's 500 fastest supercomputers combined, and miners are constantly installing upgrades to make their computers faster.
Digiconomist is a company that created a bitcoin energy consumption index in order to understand how much electricity is consumed by the cryptocurrency. As of 5 December, bitcoin's estimated annual electricity consumption was 31.96 terawatt hours (TWh), or 0.14 percent of the world's total electricity consumption.
That’s more than Morocco, Oman and the Slovak Republic. Annualized estimated global mining costs were $1.6bn (£1.2bn), while annualised global mining revenues were $10.2bn. The index says 250-kilowatt hours (KWh) of electricity are consumed per transaction.
So what will the solution be?
"The current bitcoin mining system is no doubt inefficient. This is one of the flaws in the original blockchain and represents a potential scaling issue. We're not at the point that anybody should really be worried and we have every confidence that upgrades to the network will come in the near future that will tackle this issue," said Mati Greenspan, the senior market analyst at eToro.
"There are many solutions. For example, the Ethereum blockchain is working on a solution called proof of stake, which will significantly reduce energy consumption in ether mining."
Next big challenge for bitcoin?
Greenspan said working out how to scale the network is next on the agenda. "Energy consumption is only a small part of that. If bitcoin is to replace cash, in the long run, it will need to be fitted to process more than 100,000 transactions per second. At the moment it can do about 10. Many proposals are on the table but as the currency is decentralized it's difficult to get everybody to agree on one," he added.