As the Decentralized currency, Bitcoin is now receiving a heavy demand from the investors and traders. Comparing price of Bitcoin 2 years ago was extremely low than that of today’s price.
According to july report 2017, Bitcoin prices surges heavily, it is $2505.63 for one BTC. This growth coerces me to explain our reader How bitcoin initiated, how it works and how mining happens.
What is Bitcoin: It’s a medium of exchange (like US dollar) but not printed at all. It is a decentralized currency which is free from regulation and bank authority.
How Bitcoin Works and How does it mine?
As I said, Money is not printed rather it is discovered.
How does Mining Take Place?
Bitcoin Networks are sent to ensure people send money all the time. But without any specific record of these transactions, it would be analyzed to decide who had paid what. Thereby a list is created to collect all these transactions which has been made during a set of periods- this list is referred as Block. Then a Miner must confirm those transactions and write them into a ledger.
What is a general ledger in Bitcoin Mining?
A general ledger is nothing but a long list of blocks referred as Blockchain. This Blockchain enable users explore all the transactions happen among bitcoin address. This is not subjected to any specific times, means it can be explore any point of time. Every new bitcoin transaction (i.e Block) it is added to the blockchain. It is then becoming a lengthy list of transactions. As and when a new transaction is added to blockchain, then an undated copy of this block is given to every participant of Bitcoin. This update enables them identify what’ happening.
Miners & the process: The ledger has to be updated, accurate and trusted – This is where the Miners comes into picture.
Hash Functions: It is a mathematical Process that takes up input data irrespective of any size, performs an operation on it and then return with output data of a fixed size. To be specific, this hash function used to store password.
Making a Hash of it:
When a Block is created, a process initiates by the miner. They gather the information in a block and proceed with mathematical formula to it. This turns into a hash and stored in a block. Though, with the collection of data like Bitcoin block, it is easy to produce hash but in a practical view, it is impossible to work by just looking at the hash. However, it is easy to produce has through a larger amount of data. It is where each has is just unique and if you change a little (say one character in a Bitcoin Block), its hash will change entirely.
There is not only a transaction used by miners to generate hash, rather other data are also used. For instance, hash of the last block that was stored in the blockchain.
Each block’s hash is initiated with the earlier hash of the block – this becomes a digital vesion of a wax seal. It is to confirm that this block alongwith every block after this is legitimate. It is because if you interfered with it, everyone would know.
If anyone tries faking the transaction just by changing the stored block in blockchain then block’s hash would change. AT the time, if someone checks the authenticity of block (which is done by running the hashing function on it), they would then identify has was different from the has already store with the block in blockchain. This instantly spots the block as a fake.
The previous hash is followed to create the hash in the next block in the blockchain, alleviating with a block results making subsequent block’s hash wrong else. This is how Miners “seal of the block”.
Competing for Coins:
Once creating hash successfully, Miners will obtain a reward of 25 bitcoins. With this, Blockchain will be updates and status of the same will be received by Miners on the network. This award is an incentive to keep mining and transactions active.
The key problem lies here is, creating hash is easy, since this can be done through collection of data. However, computers are very good at this. This coerces a strict system thus Bitcoin protocol introduces the “Proof of work”. Otherwise users would be hashing transaction blocks irrespective of the limit in each second. This would results in mining of Bitcoins in each minute.
This protocol does not simply accept any old hash. It demands to look over with certain conditions and specifications. For instance, at the start, it should have certain number of zeroes. There can be no certainty of analyzing the hash before it produces and when you merge a new data in it, the hash will have different look.
Miners are supposed to change the data they use to create a hash. Creating this can be possible with something called “Nonce”. In order to create the hash, Nonce is used with transaction data. In case, if the hash does not get in the format, the Nonce will then change. To find the working and proper Nonce, miners has to go through many attempts and all the miners tries it at same time. It is where Bitcoin Miners earn Bitcoin.