Introduction To Bitcoins and mining altcoins

Travis · April 25, 2013

NOTE: This is not an introduction to bitcoin mining.

This thread was made to try and help anyone interested in understanding what they are and how they work, using the best of the knowledge and experience I have of them. I am by no means an expert. There is much about them that I do not know.

What are bitcoins?

They are no different than a dollar bill you hold in your hand. Except for the fact that it's being held in your computer's hand, so to speak. The first thing to understand about currencies is that their worth is totally arbitrary. Think of currency as replacing the word "value". I can begin paying for items in paperclips as long as me, and the people receiving them accept their value.

Bitcoins are simply a decentralized, digital currency. Decentralized means they don't have something like the Treasury here in America regulating and watching over them.

How do I get bitcoins?

By running "mining" software on your computer is the best way to produce bitcoins. The term mining in bitcoin speak means using your computer's processing power to calculate many many hashes per second. These hashes you calculate help the bitcoin network run effectively (more on that later) so you are rewarded for your help.

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.

Bitcoin transactions

Every transaction of bitcoins that happens is logged and can be publicly accessed. This, by definition, can forfeit the anonymity of the currency. You make transactions using an "address" which is randomly generated by software and is not tied to your true identity. Everyone can search any transaction that has been made but there are no identities attached so it actually makes it very difficult to trace. Bitcoin transactions can not be reversed.

Random Info

*Q: You said there are 21 million bitcoins? After they are gone, what happens? I can't get them anymore?

A: No, you just can't get "new" ones anymore. Once the pool of bitcoins is depleted mining will still be essential to the network and you will still receive a reward for your work. When transactions are made, there are small transaction fees that are taken out. These fees are the rewards given to the miners.

Q: Are they legal?

A: Yes. Nothing about them is illegal.

Q: Don't people only use them to buy drugs?

A: NO! Stop spreading that. They can be used for anything just like other currencies. The fact that drug dealers on TOR accept them, doesn't make them bad.

There is so much more about them to know but I made this relatively short.

Have questions? Post them in this thread and I will answer!