REUTERS / Colm Fulton
- Bitcoin mining is the process that allows new currencies to enter circulation, adding to the cryptographic ecosystem.
- Miners receive bitcoins as a reward for checking transaction “blocks” on the blockchain.
- Last month, they earned more than $ 1 billion in combined earnings. See how they do it.
- Visit the Insider Business section for more stories.
Bitcoin is created on a decentralized network called blockchain, where a vast network of digital “miners” works to verify transactions at any time.
These miners earned $ 1.1 billion in January, 62% more than in December, when the price of bitcoin rose to $ 42,000. The way to earn that amount of money is no easy task.
What do bitcoin miners do?
Miners have a responsibility to audit transactions on the blockchain to ensure the legitimacy of the network. They also work to avoid the “double spend” scenario, in which a bitcoin owner could sneak the same coin twice through duplication or forgery.
Miners do not necessarily work as a team. They work to compete with each other in order to add the next “block”, or a record of all bitcoin transactions, to the chain. A block contains a partial record of the most recent transactions and carries 1 MB (megabyte) of data.
The miner who received a reward would be the first of a pack to go through hordes of number combinations to solve a numerical problem, known as proof of work, to arrive at an acceptable 64-character code. The code for this winning block helps keep the blockchain safe. It would normally look like the bottom line of this image:
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For being the first to solve the equation and successfully add the next block to the chain, the miner is rewarded with a certain amount of bitcoin. Only one of these blocks can be added at a time, and each one takes about 10 minutes to verify and attach.
Over the next 20 years, a total of 21 million coins will be launched.
What is the value of the rewards?
In 2009, the first time that bitcoin was created, miners were rewarded with 50 bitcoin per block. But, according to a mandate from Satoshi Nakamoto, the rewards for mining are halved every four years. The rewards were reduced to 25 bitcoin in 2012 and to 12.5 bitcoin in 2016.
In February 2021, miners earned 6.25 bitcoin for each new block extracted – the equivalent of about $ 330,475 based on the current value. They can also keep the transaction fees for each transaction made in that block, which is worth $ 20 per transaction.
It is estimated that 1 million bitcoin miners are currently in operation.