Bitcoin is an open network for transferring value via an internet-native money. Created by Satoshi Nakamoto White paper published in 2008 Network and asset have share the same name The Bitcoin network itself is a record of payments for the internet built to be permissionless—anyone can use it—and decentralized—no one controls it. These features were chosen so Bitcoin could support a new financial system without intermediaries or gatekeepers. A global network of thousands of computers called nodes participate in using and securing the network by running the Bitcoin software. Each node keeps a copy of the network’s transaction history, which updates in real time, to prevent fraud and verify which bitcoins belong to what user. Satoshi Nakamoto, a pseudonymous cryptography developer, created Bitcoin. A white paper with their ideas was first published in October 2008. The first Bitcoin block was mined on January 3, 2009. Although many attempts to build similar projects came before it, Bitcoin is the first successful cryptocurrency. The name Bitcoin refers to two separate parts of the system: the protocol and the asset. To differentiate the two, standard practice now uses a lowercase b and the ticker BTC for the asset. The protocol itself carries an uppercase B. All bitcoins can be split into tiny fractions. The smallest sub-unit of a bitcoin is called a “satoshi.” 1 BTC is the same as 100 million satoshis. Put differently, 1 satoshi equals 0.00000001 BTC.
Bitcoin mining is the process of recording transactions on the Bitcoin network. To do this, miners compete against each other to solve a difficult puzzle that resets every 10 minutes. Winning miners are awarded a predetermined amount of bitcoin for their success after each interval. Miners provide a service. Miners add batches of transactions to the blockchain, which is akin to making entries in an accounting ledger anyone can look at. These transactions have been verified by other network participants and sit in a holding depot of sorts called a memory pool (or “mempool”). From the mempool, miners take transactions and package them in blocks. Mining is the process of adding those blocks to the chain. For this service, miners are paid a fee for each transaction and a set reward for creating the next block in the chain. Read: How do miners make money? Mining is a hashing race. The technical details of bitcoin mining are extensive, but at its most basic elements, mining is a race to reveal encrypted data. The data hidden in the puzzle miners need to learn is a randomly generated string of numbers called a nonce. Each block’s nonce is encrypted as a hash, or an algorithmically generated string of letters and numbers that is impossible to decode. Mining is a game built around guessing what the unknown nonce is, and the rules are simple: be the first miner to guess correctly. Learn more about nonces. Because miners cannot simply “unlock” the hash to learn the nonce, they must generate random nonces of their own, hash them, and compare their hashes to the unknown nonce’s hash. Finding a matching hash to a block’s public one means the miner has also generated an identical hash. When matching hashes are generated, the new block is added to the blockchain and the winning miner claims their reward. So, to earn bitcoins, miners make new guesses at the encrypted nonce over and over as fast as possible. Bitcoin’s hashrate serves as an estimate of how much computational activity is spent on this game.
The Bitcoin network pays miners in two ways: Transaction fees Mining subsidy Combined, these two payouts comprise a block’s reward. Block Reward = Transaction Fees + Mining Subsidy The transaction that pays miners has a special name. They’re called coinbase transactions and are the first transaction included in any block. Miners use coinbase transactions to collect fees from transactions in a block and the block’s reward. What are transaction fees? Every time bitcoins are transferred from one wallet’s address to another, the sender incurs a fee. These fees are paid to miners who collect various transactions to include in new blocks. So, every time a new Bitcoin block is mined – roughly once every 10 minutes – the fees from all the transactions in any particular block are claimed by whoever mined the block. Read more: What is bitcoin mining? Users can generally decide how much they want to pay miners for a given transaction. Yet, blocks can only fit so many transactions inside them. So, the average fee tends to rise as more people wish to send transactions at the same time. Conversely, when fewer transactions are waiting to be processed, fees decline. But where do transactions go before being included in a block? Transactions sit in a waiting room called a “memory pool” (often referred to as the “mempool”) from where miners select transactions to be included in the next block. A transaction with a high fee is more likely to be picked out of the mempool during busy times. Learn more about the mempool. See a view of the mempool. Fee calculators are one helpful tool for selecting a fee that is both low and likely to be included in an upcoming block. Try using a transaction fee calculator. What is a mining subsidy? A reward is paid to the miner who first successfully adds the next block to the network. Unlike transaction fees, which are highly variable, each block has a predetermined subsidy. In May 2020, the subsidy dropped to its current rate of 6.25 BTC. When bitcoin first launched in 2009, each block carried a subsidy payout of 50 BTC. That amount drops by 50% every 210,000 blocks that are mined, or roughly every four years. These subsidy reduction intervals are commonly known as “halvings.”
Hashrate is one of the most commonly referenced metrics in bitcoin mining. But what is it? As the term suggests, the Bitcoin network’s hashrate is simply the estimated rate of total hashes generated by all active mining machines. Called hashing, the process of generating hashes is the primary job of miners. What’s a hash? Hashes are strings of numbers and letters used to encrypt data. Any sort of raw information—like passwords, poems, or single letters—can be turned into a hash by using specific hashing algorithms. The Bitcoin protocol uses the SHA-256 hashing algorithm. Learn more about SHA-256. All hashes are unique, like fingerprints. No two pieces of data generate the same hash. And there is no way to “unlock” a hash to know what data it contains. Only by re-entering the exact same information into the hashing algorithm and generating an identical replicated hash can the data behind the first hash be verified. Measuring hashrate Hashrate (sometimes called hash power) is an estimate of the total amount of computational activity that bitcoin miners spend working to add new blocks to the network. This task requires miners to encrypt data into hashes and match it with a piece of encrypted data in the new block, called a nonce. Finding an encrypted match solves the block. Hashrate is measured using the base unit of hashes per second (h/s). The metric itself is extrapolated from the speed at which new blocks are added to the blockchain, which can lead to variance in the hashrate number reported by different data providers.
Bitcoin mining facilities – or farms – are large data centers constructed to power thousands of mining machines. These facilities emerged as mining hardware became more specialized and power requirements increased with the shift from CPU bitcoin mining to ASIC mining. Large warehouses typically house mining farms, and it’s not uncommon to repurpose old factories for bitcoin mining farms. But size and scale are irrelevant for an operation’s designation as a mining farm. Mining farms are equipped with large cooling and ventilation systems, rack or rig structures to hold machines, and adequate power supplies. ASIC miners generate an abundance of noise and heat and large-scale operations require extensive and reliable amounts of electricity. The advent of portable mining operations allows miniature mining farms to relocate based on the availability of cheap energy. As an alternative to building large mining farms in a single location, mobile mining units can travel to power stations with excess power or natural gas sites to harness would-be flared gas.
For any miner, the lifetime of an ASIC mining machine is one of the most important considerations. Mining demands a lot of ASIC machines, but high-quality models are built to withstand relentless hashing. Still, many miners opt to push their machines to the limit for maximum output, which can cut short a machine’s lifespan. Learn more about this practice, called overclocking. Good machines operating in well-managed facilities can last for many years. Three to five years is typically a machine’s average lifespan, although even longer periods aren’t unheard of. Newer models are expected to have at least five-year lifespans. For example, it’s not uncommon for mining farms to still have Antminer S9 models online, which originally launched in 2016. Other quality machines like the Antminer S19, Whatsminer M20, and Whatsminer M30 are expected to easily last several years if operated in a good facility, although some of these models are only a few years old. If an ASIC is consistently overclocked, poorly maintained, or housed in unfavorable conditions, however, its lifespan can be as short as a few months. Some examples of facility features that can harm machines: Poor ventilation or cooling Humidity Extreme temperatures Irregular monitoring or maintenance A machine’s raw hashing power isn’t the only consideration. Some ASIC models are taken offline depending on their profitability, which can vary with Bitcoin’s difficulty and price. Higher price levels will often prompt less-efficient, typically older ASIC models to be brought back online, while lower price levels or significant increases in mining difficulty can have the opposite effect.
Proof of Work (PoW) is a process that requires miners to expend energy solving a sort of puzzle for each block added to the blockchain. After it’s complete, the “work” of solving new blocks can be easily verified by other miners. PoW also serves as a protection mechanism against bad actors who might try to alter the blockchain’s transaction record or spam the network with meaningless transactions. What’s the work? Mining work comes from a process called hashing, wherein miners guess at a random encrypted number included in every block called a nonce. The nonce is needed for miners to win the lottery to make the next block. Miners make guesses as fast as possible to be the first to discover the number and claim the reward for their work. Read: What is bitcoin mining? PoW effectively creates a form of artificial cost in a usually costless digital world. Anyone wishing to amend or alter the blockchain’s transaction record must complete expensive work that is cheap to prove and confirm. Read: How do miners make money? After a miner wins the guessing race, the answer (nonce) is broadcasted to other miners across the network to share that the work has been completed and the block is added to the network. In this way, the work is proven and easily confirmable by other miners. With the cost of PoW comes the benefit of security. Bitcoin users can trust that the network’s transaction record is valid because only values that miners have expended energy on can make it onto the ledger. Re-writing these transactions, moreover, requires overpowering a majority of the network, which is about the energy equivalent of a small country.
Difficulty is a relative value that represents the amount of effort that miners need to generate to solve new blocks and claim their block rewards. It’s conceptually similar to Google’s search engine score that adjusts search rankings on a 0-100 scale overtime on internal metrics. Mining difficulty adjusts periodically to regulate how quickly miners are adding new blocks. Higher difficulty levels mean more effort is required. Lower difficulty means adding blocks is relatively easier. How is difficulty calculated? Difficulty adjusts every 2016 blocks, or roughly every two weeks. Each adjustment’s target is based on a comparison of the amount of time required to solve the prior 2015 blocks with the two-week target time. Difficulty drops if solving the latest set of 2015 blocks took longer than two weeks. The opposite happens if the process took less than two weeks. The time spent mining new blocks varies based on changes in Bitcoin’s hashrate, an estimate of how many miners are competing to get paid for adding new blocks to the network’s record of transactions. When more miners are mining, bitcoin’s hashrate increases, which causes blocks to be solved more quickly and a subsequent increase in difficulty. When fewer miners are mining, the hashrate drops, new blocks are added at a slower pace, and difficulty often drops. Learn more about how difficulty is calculated. Bitcoin’s difficulty started at 1. Although it fluctuates upward and downward regularly, it can never drop below its initial level of 1. Because the difficulty is so high, miners have long since abandoned mining bitcoin with CPUs and GPUs, instead building mining farms for ASICs designed for mining.
A mining pool is an organization of miners who combine their individual hashing power. Pooling hash power to increase the probability of solving each new block and claiming its reward. Software coordinates the working miners and prevents duplicate hashing work as they try to solve new blocks. Regular payments from pools allow miners to forecast and calculate future profits. Mining pools originated as a way for miners to cooperate and remain competitive as Bitcoin mining industrialized alongside an increase in difficulty. Running only a few mining machines represented an increasingly smaller percentage of the Bitcoin network’s total hashrate, which steadily reduced the probability that smaller miners would solve any given block. Learn more about how to win a block’s reward. Each member of the pool receives a portion of the payout when their group of miners solves a block. Payouts are dependent on the amount of “work” each miner contributes to the pool’s efforts. When a pool solves a block, members who contributed a larger share of the pool’s total hashrate receive a larger portion of the reward. Read: What is bitcoin mining? By being paid based on their contribution to a pool’s overall hashrate, a miner can be paid fractions of multiple block rewards at a more regular interval instead of waiting months or years to solve a block and claim an entire reward on their own. But exactly how shares of the reward are calculated and paid can vary. Read: How are pool miners paid? Compass does not manage a mining pool, but all Compass miners can elect to join a mining pool of their choice.
On average, 900 new bitcoins are issued per day. To estimate how often an individual miner will solve a new block and claim its reward, the Bitcoin network’s total hashrate can be compared to an individual miner’s hash rate. New bitcoins per day On a daily basis, an average of 144 blocks are added to the Bitcoin blockchain. Only 6.25 BTC are made per day after the network’s last halving event in May 2020. 144 blocks per day * 6.25 BTC per block = 900 BTC issued daily Winning a block reward An individual miner’s likelihood of winning a block reward is the total network hashrate divided by the individual’s hashrate. The result is the number of blocks that will be mined on average before the individual miner solves a block. Read: How do miners make money? For example, if the Bitcoin network has a current hashrate of 150 exahashes per second (EH/s) and an individual miner’s capacity is 1 EH/s, the miner controls 1/150th of the total hashing capacity. This amount of hash power implies that the miner will on average solve one block after 150 others have been solved. 150 EH/s total / 1 EH/s individual = (1/150 share of hashrate) In short, the more hashing power an individual miner controls, the better odds they have of solving each block and claiming its reward.
Merged mining is the process of mining for more than one blockchain network at the same time. The same mining activity used to solve blocks and add transactions to one blockchain can be simultaneously used to complete the same task for another blockchain. Mining for more than one blockchain does not affect the performance of mining equipment. Merged mining instead offers a sort of “two-for-one” arrangement where they can compete to claim block rewards from more than one network without having to divide their total mining capacity between the two networks. Successful merged mining requires the same hashing algorithm for both networks: If two networks have different hashing algorithms, they cannot be mined together. Learn more about hashing. Litecoin and Dogecoin are increasingly popular merged mining pairs, and both of these networks are Scrypt-based blockchains. Bitcoin uses the SHA-256 hashing algorithm, which means that, in theory, any other blockchain-based asset that also uses SHA-256 can be mined along with Bitcoin.
A mempool – shorthand for memory pool – is a holding room for all unconfirmed transactions a node can see on the Bitcoin network. How does it work? Bitcoin transactions are sent through a network of peered connections, called nodes. Each node has its own pool of unconfirmed transactions sent to it by other attached peers. Nodes validate or invalidate transactions on a few criteria including a correct cryptographic signatures, if funds are double spent or if the amount if inputs is greater than the amount of outputs. Valid and invalid transactions are then broadcast to other nodes nearby. Valid transactions are picked up by mining nodes to be packaged in a block after a sufficient number of nodes have propagated the valid transaction throughout the network. Nodes drop invalid transactions from their mempools when told to do so by their peers. The mempool can be measured in a number of ways, but is typically done by fee-per-byte or satoshis per byte (sats/byte). As an on-chain market, the mempool ebbs and flows with demand for blockspace. Look at a live snapshot of the mempool How do miners use it? Miners maintain many peer connections than a typical node. In other words, miners have larger mempools than a typical node. Transactions with higher fees are typically picked out of the mempool by miners and packaged into blocks faster than those with lower fees. Read: What is a mining node? Finding a new block happens roughly every 10 minutes. Historically, that has proven a low enough threshold for nodes to propagate transactions around the network and update their mempools before a valid transaction is packaged in a block.
Cloud mining is a method for individuals to participate in mining without owning or maintaining mining hardware or facilities. Cloud mining companies will offer purchase agreements for part of their total hashrate to customers. Customers don’t own mining machines, they simply own a portion of the company’s hashrate for as long as the mining contract lasts. In exchange for purchasing some of the hashrate, the cloud mining contract will include an agreed-upon payout. Learn more about hashing and hashrate. The goal of cloud mining is to remove all upfront costs associated with mining from individuals who want to participate in mining, albeit in a very limited way. But in exchange for removing this hardware, maintenance, electricity, and other costs, ownership and control of the actual mining hardware stay with the company and not the clients. Several legitimate companies offer cloud mining contracts, but this type of mining service has historically suffered as a target for fraudulent businesses who sell more hashrate than they have or simply disappear with customer funds. Cloud Mining versus Compass Compass is not a cloud mining company. Compass offers full ownership of mining hardware to its clients, optionality to move mining machines between different facilities, join and swap mining pools, or sell mining machines to other miners. With Compass, miners are not simply signing a contract to buy a portion of someone else’s mining operation. Compass miners buy their own machines, direct the Compass team to place them in a facility of their choice, and have full control over the hardware.
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