How Bitcoin Mining Works by Confirming Transactions

Compared to traditional fiat money systems, Bitcoin is not printed but rather, discovered. Computers “mine” for Bitcoins by competing against each other. Agam Berry explains how Bitcoin mining happens.

The Process of Mining Bitcoins

  • People send Bitcoins to each other all the time over the Bitcoin network. No one is able to keep track of who purchased what unless someone records all these transactions. According to Agam Berry, the Bitcoin network collects all the transactions made within a set period into a list called block. The miner’s job is to confirm such transactions and keep them into a general ledger.
  • The ledger consists of a long list of blocks known as the block chain. This can be used to explore all the transactions occurred between Bitcoin addresses. An updated copy of the block is disseminated to all the participants, so they know what is happening.
  • As all of the transactions are held digitally, no one is sure that the block stays intact and accurate. Thus, miners come into the process. Miners put the created block of transaction in the process by taking the information from it and applying a mathematical formula to it. It becomes shorter, consisting of random sequence of numbers and letters known as hash. The hash is kept at the end of the block chain. A hash is easy to produce and possess interesting properties as each hash is unique from the other. Changing a single character in a Bitcoin block will completely change its hash.


Authenticity of each Hash

Aside from using transactions in the block, miners also use other data to generate a hash, one of which is the hash of the last block in the block chain. Each hash is produced using the hash before it, so it becomes the digital version of the wax seal. Agam Berry knows that the seal confirms the legitimacy of every block and everyone would know if someone has tampered it. Moreover, trying to fake a transaction would change the block’s hash. One can check and compare the block’s authenticity by determining if it is still the same from the already stored block or it has changed. Because it is a chain of blocks, tampering a single block would change the whole hash of the other blocks.


The Competition for Coins

Now, Agam Berry has explained how miners seal off each block. All miners compete with each other by using software designed specifically to mine blocks. Each time they create a successful hash, they get 25 Bitcoins as a reward. The block chain also becomes updated, and all the participants on the network will know about it. It serves as their incentive in mining thus, keeps the transactions up and working.

However, miners are not allowed to meddle in the transaction data, in a block. They just need to create a different hash by using another random data known as ‘nonce’. Agam Berry believes it can take several attempts to have a working nonce and all the miners are doing it simultaneously in the network. This is how miners earn Bitcoins.