What is Bitcoin?
Bitcoin is a revolutionary digital currency born in 2009, after the 2007-2008 subprime mortgage crisis, and created by Satoshi Nakamoto, a pseudonym used by an individual or group of people who released the Bitcoin white paper.
As a cryptography-based digital currency, bitcoin is peer-to-peer and decentralized. In other words, it provides an alternative method of payment that is accessible by anyone around the world, who have access to a smartphone or computer. Due to the use of cryptography and a host of other technical means, bitcoin is also a very secure digital currency that is not subject to inflation or political factors like traditional currencies.
Also, as a decentralized digital currency, bitcoin operates without the control of any central bank or government. Any computer that runs the Bitcoin open source code is referred to as a node on the blockchain network without any application, regardless of its owner or location, and then can issue and trade bitcoins.
Over the years, bitcoin has become one of the most valuable currencies in the world and has gained international recognition. Bitcoin has a rich historical development at one point reaching over $68,000 in 2021 and has reached a total market capitalization of over $1.2 trillion.
What is the Blockchain?
Blockchain is the underlying technology of bitcoin operation. In short, it is a distributed ledger - all transactions on the blockchain will be recorded in this ledger. Every 10 minutes, the transaction data from the previous 10 minutes will be updated. These transactions will be packaged into blocks and need to be verified by the entire network, so each node has complete ledger data.
Although any node can freely access these transaction data, these data are almost difficult to tamper with. Of all, the primary purpose of blockchain is as a safe way to store information and guarantee data security, therefore several processes were implemented to avoid malicious tampering of data.
Blockchain technology has many uses beyond cryptocurrencies and can be integrated into countless industries.
What is a Node?
As people always say, the blockchain is a peer-to-peer transaction system, and the peer, in this case, is the node. Nodes are essentially computers and servers that are used to verify and store new information in the blockchain.
Bitcoin has 4 types of nodes:
- Full nodes – Nodes that hold and distribute copies of the entire blockchain network
- Super nodes – Nodes that connect other full nodes across the entire blockchain network
- Light nodes – Nodes that are similar to full nodes but hold a portion of the entire blockchain network
- Mining nodes – Nodes that produce new blocks for the blockchain
What is Mining?
Mining is the only way to issue Bitcoin which is an ongoing process by miners across the network to form the blockchain. To explain in vernacular, mining is to record the transactions generated on the blockchain in the ledger. This process will generate certain rewards to stimulate all miners to continue mining and jointly operate the entire bitcoin network which will be explained in detail later.
The rule of bitcoin is to generate a new block every 10 minutes, and the new block records the transactions generated by each node in the past 10 minutes. The accounting rights are fairly distributed to each node which the nodes need to compete for, through a certain mechanism to obtain mining rewards.
When a new block is being added to the blockchain, the node which created it broadcasts it to the entire network, and other nodes verify the block to see if there are any illegal transactions, so as to ensure the validity. Once a majority of nodes validate the new block, it will be added to the blockchain successfully.
What are ASIC Miners?
Bitcoin mining is a process of computational power competition. Therefore, as bitcoin is more and more widely accepted, so do the mining hardware—CPU, GPU, FPGA, and ASIC—which have undergone constant iterations and enhancements.
The full name of ASIC is Application-Specific Integrated Circuit, which refers to an integrated circuit specially designed to complete specific computational tasks. ASIC mining machine is a special device used for efficient mining of cryptocurrencies, and the mining efficiency can reach several times that of general-purpose hardware.
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What is a Mining Pool?
With the rising of computational power across the network, it has become progressively more difficult for individual miners to mine coins, and mining pools have emerged as a way to accumulate the computational power of a group of miners together.
Miners simply connect their machines to a pool's online servers to pool their computational power with other miners, thereby increasing their probability of finding new blocks. Once the mining is successful, each miner in the pool gets his share of the reward, depending on the miner's contribution and the pool's rules.
What is Mining Reward?
Miners use ASIC mining machines to mine, paying not only the cost of hardware facilities, but also the electricity. So why are there so many miners all over the world keen on mining? The answer is that mining is rewarded by bitcoin and transaction fees.
Let's start by discussing bitcoin. According to Satoshi Nakamoto's rules, 50 bitcoins can initially be mined every 10 minutes, but in order to maintain the scarcity, the amount of bitcoins reward will be cut in half every four years. Right now, the payout of mining is 6.25 bitcoins each time, with the next halving event expected in 2024. Usually, the price of bitcoin will increase after a halving event.
The transaction fee is an incentive for the user of the transfer to the miner. In the underlying system of bitcoin, there is no mandatory regulation on handling fees. However, with the continuous development and growth of bitcoin, the number of transactions generated per unit time is increasing. It is vital to charge miners some processing fees in order to encourage them to record their own transactions in the ledger first. The amount of the specific handling fee has nothing to do with the size of the transfer amount, and is usually determined by whether the transaction network is congested. Therefore, the transaction fee in a bear market will be lower than that in a bull market.
What is Proof of Work (PoW)?
The Proof of Work (PoW) algorithm is a consensus mechanism that requires a party of a network to prove a computational cryptographic problem to verify a new block in the blockchain. This form of verification secures the network from malicious acts such as double-spending acts from occurring.
PoW verfication are executed by miners that offer a high level of security, providing a decentralized method of verifying transactions.
Several cryptocurrencies utilize a PoW algorithm, such as Bitcoin, Bitcoin Cash, Bitcoin SV, Ethereum, Litecoin, Dogecoin, Zcash, Dash, Decred, and other cryptocurrencies.
Data centers are large-scale computational facilities that mine cryptocurrencies. The advantage of data centers is the access to cheap electricity, this provides a great cost advantage for mining compared to smaller-scaled mining that consumes power of the grid.
Data centers on a macro level provide a more professional ability for mining operations, and there will be an increased speed of maintenance and management. Scalability for operations is also greatly improved.
Current data centers incorporate renewable energy into mining operations. This integration has brought a positive outlook on cryptocurrency mining.