Hey y’all, Jordan here.
Welcome back for another edition of Crypto Tonight’s Explainer Series. Last week, we talked about the blockchain and what the f**k it is. This week, I want to piggyback on that conversation and dig into (no pun intended) the practice of mining Bitcoin or what is going on under the hood of a transaction on the Bitcoin blockchain and how more Bitcoins are made. Understanding the mechanisms of mining can help us understand the role and consequences that it will play in the future of the crypto ecosystem.
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Let’s Take a Step Back to Take Two Forward
Let’s start by rehashing last week. A blockchain is effectively a super secure and transparent system for recording transactions. These can include the movement of information, the tracking of goods, and the exchange of currency (crypto). Blockchains represent the foundation of what many people now refer to as Web3, or the future of the internet. In this ecosystem, people around the world now fill the role of legacy institutions, such as banks. Historically, societies have relied upon these centralized authorities to make sure that transactions are valid and secure. However, with the advent of this new technology, this onus is actually placed upon a decentralized network of individuals and computers scattered across the planet, who are rewarded for ensuring that all data being recorded is valid and secure.
Mining Ain’t What It Used to Be
Okay okay, this meme is a little ways off. Though, when I think about mining historically, I typically think about those vast underground labyrinths, run by corporations who don’t give a shit about the physical or financial well being of their employees. Over the past few years, however, when I hear the word mining I’ve come to replace this dark imagery with that of computers humming along, working overtime for the sweet reward of a Bitcoin.
What feels like a lifetime ago (~10 years), mining Bitcoin was something that could be done using your grandmother’s Dell. Over these past few years, with the rise in Bitcoin’s popularity, mining is something that now requires specialized computer systems (I’ll call them rigs), which are typically run by specialized companies or groups of people. These rigs look similar to a data center - stacks upon stacks of computers grouped together row upon row.
Walk Me Through It
Here are the steps involved in mining Bitcoin:
- I want to send my pal Ian a BTC for introducing me to Drake (I really like him now).
- This transaction and a group of others are sent to a network of computers (nodes) scattered around the globe.
- These nodes fight to be the first to solve difficult computational mathematical equations. In solving the equation, nodes also verify the legitimacy of the transactions conducted. This process is called hashing.
- As a reward for solving the equation first, the winner updates the blockchain with a newly minted block containing the verified transactions, and is granted a predetermined amount of Bitcoin as a reward.
- Currently, this reward is 6.25BTC. As a rule, after every 210,000 blocks are minted (or about 4 years), the reward is cut in half.
Is a Crisis Brewing?
As I mentioned above, the process of mining is twofold. In removing institutions like banks from transactions, the blockchain depends upon nodes to act as verifiers and settlers of these respective transactions. For doing so, they’re rewarded with a specified amount of Bitcoin. As Bitcoin has soared in popularity, so too has the desire to mine more of it, increasing the competition and the computational power needed to eke out a reward.
As Spiderman’s Uncle Ben once said, “with great power comes great responsibility.” This too is true of Bitcoin miners. As the requirement for more computational power to hash has grown, so too has the need for more computers and equipment, all of which consume great deals of energy. It is the responsibility of those mining to provide the electricity for running and cooling the rigs, which has basically made it impossible for amateurs to be involved in this process, though, every now and then, individual miners do hit the jackpot.
To paint a not so pretty picture, it has been reported that Bitcoin mining consumes more energy than the country of Finland, home to roughly 5.5M people. When you take into account that significant percentages of worldwide Bitcoin mining is done in countries that still rely on fossil fuel for energy production, it seems like we haven’t learned anything about climate change and the potential for ensuing chaos. Though many miners have started to relocate to geographies that have renewable forms of energy, I’m still left with a moral dilemma when considering this practice.
Where Do We Go From Here?
I’m not a Bitcoin maximalist, but it’s clear to me that Bitcoin is not going anywhere and neither will the desire to mine more (until there are no more to be mined - there can only ever be 21M Bitcoin). While I believe this technology is important, I definitely find myself questioning where we go from here. We cannot continue on a path of self destruction like we have done in the past. Fortunately, companies like Block led by Jack Dorsey have started to think long and hard about this problem. In fact, it just announced that it has enabled transactions on the Lightning Network, which will not only make payments instant, but will also lower energy usage by allowing these transactions to be made off-chain. Block is not alone in addressing these issues, and I’m sure that whoever can develop solutions will reap many rewards.
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