Welcome to Brave New Coin’s Bitcoin 101. First-timers, we’d like to introduce you to the wonderful world of cryptocurrency; where payment is frictionless, free and instantaneous, and pizza could cost you $5 million dollars (more on that later). Sections 1-6 will cover the essential things you need to know about Bitcoin.
To our experienced readers, welcome back. Sections 7-10 contain some more advanced ideas and fun trivia. Read up, get to know Bitcoin better, and discover how cryptocurrency could change the world. Let’s get started.
So by now you know a bit more about Bitcoin’s history, how its made, and why it is interesting. Let’s get back to that mining thing, and introduce another bitcoin quirk, the hardware arms race to build better miners.
The Evolution of Miners
As Bitcoin’s value rose, the reward for solving a block increased with it. Miners are now rewarded thousands of dollars worth of bitcoin for solving a block, and so people were willing to pay more to increase their chances of getting these rewards. Bitcoin mining hardware has evolved through 3 distinct phases:
ASICs. 2013 onwards: Finally, as bitcoin’s value soared to over $1000 USD in 2013, purpose built mining hardware was created to mine bitcoin. ASIC computers were much more powerful and efficient at mining than GPUs, and are now what keep the Bitcoin network running. They are however, very expensive, and have been criticised because most people cannot afford them.
This arms race has resulted in Bitcoin becoming the world’s most powerful supercomputer, with total hardware investment in the millions of dollars. This makes it extremely expensive to perform a 51% attack on the network.
The mining arms race and Bitcoin’s increasing popularity made the network hash rate skyrocket. With so many miners competing to solve a block, individual miners could mine for days, weeks, months, even years, without ever being rewarded (when they were rewarded though, it would be a big pay day).
To deal with this problem, miners agreed to combine their computing power to increase the likelihood of solving a block, and then redistribute the reward out to those contributing their mining power. This meant miners received smaller, more consistent payment, allowing them to better cover their day to day costs of electricity, rent, and other needs.
Certain mining pools have grown huge, causing concern amongst the Bitcoin community. If a single pool controlled more than 50% of the networks power, they could theoretically create fraudulent transactions. This however doesn't seem to be an issue, as mining pools have it in their best interest to maintain bitcoin’s price and network security.
See how the pools compare:
“Cloud mining”, also known as cloud hashing, is another new way for anyone to mine cryptocurrency. Cloud mining is the renting out of mining hardware to anyone willing to pay online, for a pre-specified period of time. These agreements are called “mining contracts”.