What is BitCoin Mining?
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What is mining?This is the most misunderstood part of bitcoins so this section will have a lot to explain.To understand why we mine, you need to understand at least the basics of how the bitcoin network operates. Mining is done to protect the bitcoin currency and the transactions of bitcoins that people send. When a transaction is made, the data is sent to the bitcoin network. Transactions are stored in chunks called "blocks". When you mine, the bitcoin network sends you a block to "solve". Your computer takes it and randomly shuffles the information inside of it, then calculates a new hash for it. What the miners are mining for is a hash that is smaller than a certain predefined amount. (starts with a certain number of zeros. Since the hashes are randomly generated, you can imagine how unlikely that many zeros in a row are) This amount is the "difficulty" which is calculated automatically by bitcoin software based on how quickly the blocks are being finished by the miners. This corrects for increasing hardware performance and mining speeds.Once a block is finished by a miner, the new block and new hash are sent back to the bitcoin network. If it is confirmed to be correct, the miner is rewarded with bitcoins. The current reward is 25 bitcoins per block. The reward for a block is constantly diminishing until eventually, there are no more bitcoins to give out and all roughly 21 million bitcoins are in the market*. Due to the popularity of bitcoins and the large amounts of money that people spend on mining rigs, the difficulty is high enough that a very expensive equipment would have to run for months just to solve one block. This would certainly be inconvenient for anyone wanting to mine. We fix this by creating "pools". A pool takes place of an individual miner in a sense. They take the blocks from the network and instead of one person calculating hashes, the pool sends the job out to all of the miners that are in the pool. For example, I mine for the BTC Guild pool. When the pool finishes a block, it divides the reward (as evenly as possible) to the miners depending on how much work they did. This gives people a nearly constant flow of income and allows cheaper hardware to mine.Blocks sent to the network are calculated in a special way so that they can certify validity of the previous block. This confirmation process creates a "block chain" which is what makes the currency so great.
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