Bitcoin is a modern enigma. Created by an anonymous programmer who called himself (or herself) Satoshi Nakamoto this virtual currency began circulating on the Internet in 2009 and has since attracted both praise and derision for either being the answer to all the evils typically associated with money or for being the world’s most elaborate Ponzi scheme. This is largely because Bitcoin is not your typical currency. There’s no carrying bitcoins around in one’s pocket, no using them in ticket machines on the Tube. Nor are they regulated by a central bank or subject to monetary policy. They exist only because people agree they do, as binary code, in cyberspace.
The Serious Business of Making Bitcoins
All conversations regarding the virtual currency known as Bitcoin inevitably come around to questions of origin. Where do they come from? How do I get them? Because there is no central bank with the power and authority to mint new bitcoins at will there has to be some other way to acquire them. Acquisition methods currently include purchasing them on bitcoin exchanges like gdax.com, trading for them or mining them. But while the first two acquisition methods are easy to understand the third, mining, is nowhere near as straightforward as it sounds.
With Bitcoin mining there is no open pit, no endless labyrinth of underground tunnels worked by hardy souls with pick axes. No, Bitcoin mining is not a physical affair. It is instead a process carried out almost entirely by computers. Bitcoins, however, do share one similarity with a precious commodity like gold: they’re a finite resource. Once 21 million bitcoins have been mined and are in circulation that’s it. There won’t be anymore. And just as it is with gold and oil the more scarce the supply of untapped bitcoins the more difficult it will be to harvest them. But just how does one go about mining bitcoins?
Mining the Digital Seam
Approximately every 10 minutes 12.5 new bitcoins are “minted” and miners compete with one another using powerful computer programs to claim these bitcoins by solving complex mathematical calculations. These calculations are based on blocks of code (the blockchain) that contain information about the latest bitcoin transactions. They are solved through the use of cryptographic hash functions, which act as a “proof of work” that incrementally validates the ever expanding blockchain.
These cryptographic hash functions ensure that there is no predictable way to resolve the complex mathematical problems generated by the Bitcoin blockchain. This means that computers are the only way to randomly generate enough potential proofs to make the endeavour worthwhile. In the simplest terms, as each batch of bitcoins joins the blockchain the ensuing problems become progressively more difficult and more computing power needs to be brought to bear on them. Because of this “mining farms” have sprung up where banks of computers are dedicated to solving these problems. “Miners” are also teaming up with each other more frequently to share computing resources and any bitcoins that result from the collaboration.
The bottom line then is that bitcoins are purposely difficult to mine due to this “proof of work” methodology. This is done in order to restrict the number of blocks found on a given day so that the number remains more or less steady and the currency is allowed to grow in a stable manner. It also provides a fool proof way of validating both the new and the old block, which helps prevent fraud.
How does it do That?
Once a proof has been established anyone attempting to tamper with the information in that block will alter that block’s hash. Also, because the hash of each block is an integral part of the next block’s hash that subsequent hash will be altered as well. Anyone who then tries to authenticate any of the affected blocks would discover that their hash was different than the one already accepted and stored with that block and the attempted fraud would be uncovered.
Miners work with and against each other to create a valid hash and once they do they are rewarded with bitcoins, the block is validated and things move on to the new block. It a process that requires increasing amounts of computational power as noted earlier but one with sufficient internal checks and balances to produce a reasonably stable cryptocurrency.
When Will Bitcoin Mining End?
As we mentioned earlier the supply of bitcoins is not infinite. There will eventually be 21 million in circulation but no more. This fact has important albeit long-term implications for bitcoin miners. It means the Bitcoin block reward system will, by mathematical necessity, come to an end in 2140. It’s likely, however, that for all practical purposes miners will move on to other pursuits well before that time because the financial incentive will no longer be sufficient to expend resources necessary to provide what will be incredibly difficult proofs.
That’s because the rewards system is set up to halve itself roughly every 4 years. Whereas 4 years ago one could glean 25 bitcoins from a proof today that reward is 12.5 bitcoins and 4 years from now it will be 6.25. By the time 2140 rolls around the reward will be a microscopic 0.00000001 bitcoins.
The Way Forward
Of those who see the currency surviving that long (and they are not exactly legion) the consensus is that by the early 22nd century (or even the late 21st century) the days of no-fee bitcoin transactions will be a thing of the past and fees are where most of the attention will focus. The irony will be lost on no one, however, since one of Bitcoin’s primary reasons for being was to eliminate both transactional fees and those imposed by middlemen like bankers.
In truth no one knows where Bitcoin will go simply because it’s little more than an enormous, unregulated experiment. It could lead to a revolution in man’s relationship with money or it could evaporate in a fog of bitterness and disinterest after a major hack wipes out years of work and billions of virtual pounds. Stay tuned.