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Bitcoin mining facilities at a mining pool company (9).
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In 2009, under the nom de plume Satoshi Nakamoto, an anonymous figure changed the course of currency forever. They released the digital currency dubbed Bitcoin. While most traditional currencies--like the dollar--are paper currencies backed by a central government, Bitcoin is completely electronic and open source, with no authority backing it and no one owning the network (1). This opens the door to innumerable uses, such as online purchases, international transactions, and speculation. But, with no governing body, where does Bitcoin come from?
With a website like google.com, the site is owned by the company and its shareholders and the company is in charge of handling and processing all activity on its site. With Bitcoin, there is no owner and therefore no central person in charge of processing each transaction. The Bitcoin network is composed of the people (2). Independent individuals use their computing power to process Bitcoin transactions, a process known as mining. Any person can use their computer to have a mining software compute difficult calculations, which is the process of handling Bitcoin’s computational needs (3). In order to facilitate the constant computing, there is a reward for mining. Bitcoin transactions come in sets every 10 minutes, known as blocks, and the individual whose software successfully computes the transactions receives a block reward, which is, of course, Bitcoin currency. Are people getting free Bitcoin by just sitting back and watching their computer software process data?
The first Bitcoin block was known as the Genesis Block and was solved on January 3, 2009 (4). The reward was 50 BTC (Bitcoin) and went to an anonymous recipient. For that first block, solving it on a personal computer and watching the proceeds come in may have been feasible. However, as Bitcoin became more popular, so did mining. Because of the immense competition in mining as well as the exponential increase in the number of transactions, mining on an individual laptop is out of the question. Bitcoin mining has become its own industry. There are close to 100,000 miners currently (5). It is estimated that “bitcoin's computing network is more powerful than 525 googles and 10,000 banks” (6) and that “global bitcoin computing power now 256 times faster than top 500 supercomputers, combined” (7). We are far past the days of one person on their individual computer.
Individuals can purchase mining machines that increase their mining computational power for hundreds or thousands of dollars. But now, there are major Bitcoin companies worth millions that are using supercomputers for their mining. Individuals can purchase a stake in these companies’ mining capacity, known as cloud mining. But this mining comes at quite the cost; one estimate puts the annual electricity cost of major mining at $400 million (8). While Bitcoin is just sitting around ready to be collected, that concept of free money is far from reality.
References:
(1) https://www.theguardian.com/technology/2017/sep/13/from-silk-road-to-atms-the-history-of-bitcoin
I have always heard of Bitcoin but never actually understood how it all works. It seems to be becoming a very popular currency and makes me wonder if paper transactions will begin to fade out as Bitcoin popularity grows. Then again, without authority surrounding the Bitcoin world, it seems as though this currency could be dangerous to work with. Without physical securities, like banks, how do you ensure that your Bitcoin is secure?
ReplyDeleteYour blog gave me two ideas that I found interesting. I'm curious what the average person has to invest in Bitcoin mining in energy, equipment, and time to become profitable. I feel like more people would do it if it were easy these days. Also - I wonder what it takes as far as knowledge and ability to mine Bitcoin. Especially I'd like to know where the bitcoin being mined is on the internet. Maybe a future blog post topic?
ReplyDeleteI've actually never thought of bitcoin as a mining process. I always thought people paid real money for it to be converted into an online currency, but the fact that people basically engineer it is interesting to me. I was personally a bit confused about the purpose of bitcoin mining, but it seems that the Bitcoin company needs outside people to do it to keep their cost down right? If they don't have to pay that $400 million mining themselves, why would they if they can give out Bitcoin as payment?
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