Bitcoin mining explaned : How bitcoins are generated?

December 12, 2016 by
bitcoin mining

Bitcoin mining serves a 2-way purpose: of adding verified transactions into the blockchain; and of releasing new Bitcoins.  Yet, bitcoin mining is primarily done to let Bitcoin nodes to reach a secure, alteration-free consensus.

If we talk of bitcoin mining in a simplified way, we may say that the process involves collate the recent transactions of the blocks and trying to crack a computationally difficult puzzle.  The participant who wins ‘solving the puzzle contest’ gets rewards (which incentivize mining) and place the next block of the ledger.

bitcoin mining

Basically, Bitcoin nodes are used to authorize transactions in the blockchain and eliminate chances of re-spending of Bitcoins that have already been used in some other transactions. Bitcoin mining is purposefully created so as to be resource-intensive and cumbersome in nature. This is done so that the miners find a steady number of notes in a particular time span, usually one day.

Individual blocks are considered valid, if they contain a proof of work. This proof of work is, further, verified by other Bitcoin nodes each time for every block. Bitcoin uses the hashcash proof-of-work function.

What is ‘Proof-of-Work’?

In bitcoin mining a proof of work is a piece of data which is fabricated in order to satiate certain requirements.It is a task in itself to scrutinize if the given set of data is in accordance with the stipulated requirements.

Producing a proof of work is a hit-and- trial and error-producing deed. Bitcoin uses the Hashcash proof of work.

Hashcash is a proof-of-work algorithm, which has been used as a denial-of-service counter measure technique in a number of systems.

A hashcash stamp constitutes a proof-of-work which takes a parameterizable amount of work to compute for the sender. The recipient (and indeed anyone as it is publicly auditable) can verify received hashcash stamps efficiently. Hashcash was invented by Adam Back in 1997

At this point it is most widely used as the bitcoin mining function.

The email anti-spam tool, like the proof-of-work algorithm, is also called hashcash and is used to create stamps to attach to mail to add a micro-cost to sending mail to deter spamming. The main use of the hashcash stamp is as a white-listing hint to help hashcash users avoid losing email due to content based and blacklist based anti-spam systems.

Hashcash source code includes a library form, and also the algorithm is extremely simple to code from scratch with the availability of a hash library.

(Explained by


What is ‘ Bitcoin-mining Difficulty ’?

It is a measure of how difficult it is to find a hash below a target value (256-bit number) during the proof-of-work.

During the bitcoin mining process, the cryptographic hash runs on the blockchain header. Each time a new hash is used, a new random element is generated on the header, called a ‘nonce’. Depending on the header element and the nonce, a new hash will be fabricated, resembling this hexadecimal thing-


To create a valid block the miner has to find a hash that is below the difficulty target, to make sure that blocks are discovered in definite time intervals.  So if for example the difficulty target is


Any number that starts with a zero would be below the target, e.g.:


If we lower the target to


We now need two zeros in the beginning to be under it:


Since, these numbers are visibly complex, we assigning a simpler number, the mining difficulty. This relatively measures the number with respect to the previous block.

Hardware involved

ASIC or Application Specific Integrated Circuit is solely designed for Bitcoin mining. It has brought about 100X increment in hashing power and 7X reduction in power consumption when compared to the previously implemented technologies.  Though exchange rate also determines the profit, under all circumstances, the greater efficiency of the device, the higher is the profitability.

Software involved

Bitcoin Mining has 2 ways- Pool mining and Cloud mining

Cloud mining is more prone to scams, hence avoided.

Requirements of pool mining:

  • Having a Bitcoin wallet
  • Connect to mining pool.

The amount generated by bitcoin mining is divided among the members of the pool as per their contribution to the pool, in terms of hashes.

Mining incentives

  1. The miner is rewarded with Bitcoins, agreed upon by consensus. Currently this bounty is 25 Bitcoins; this value will halve every 210,000 blocks.
  2. A fee or an incentive that miners include in their block. Further, as the rate of incoming of new bitcoins miners in each block dwindles, the fees will make up asubstatial percentage of mining income.

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