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Bitcoin ended 2020 on the rise and, apparently, is not going to stop there. Cryptocurrency Gains Popularity on Social Media and Institutional Investors
Bitcoin is increasingly being used as a store of value. Its appeal is reflected in the image and reputation of blockchain networks and cryptocurrencies in general.
Bitcoin network and mining
During the financial crisis on Wall Street in 2008, an anonymous developer known by the pseudonym Satoshi Nakamoto published a whitepaper proposing a decentralized currency model independent of governments and central banks. Digital currency transactions will be carried out in a peer-to-peer (P2P) network and confirmed by solving cryptographic problems. This process is called mining.
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Mining is a complex process, as a result of which new blocks with confirmed transactions are added to the chain. To create a decentralized P2P technology and ensure that no one can change the information recorded on the network, Satoshi decided that every new transaction on the network would be confirmed by miners using the solution of cryptographic problems. In general, for a transaction to be confirmed, all the nodes – the so-called nodes – in the network must come to a consensus.
Mining and consensus types
There are two main consensus mechanisms in modern blockchain networks: proof of work (PoW) and proof of stake (PoS). Bitcoin developers have built a network based on the PoW consensus algorithm.
This means that miners are rewarded for adding a new block to the network (one block includes 1 MB of confirmed transactions). To get or “mine” a block in the PoW model, a miner must find a “hash” that is less than or equal to the target hash.
The PoS consensus mechanism uses validators. They are rewarded for contributing a portion of their capital to support the operation of the network. Essentially, validators lock their currency in the system and place a bet on the next block to be added. If they guess right, they get a reward. In general, the validator can only work with a network share equal to the volume of locked coins.
The PoW consensus algorithm was designed to protect the bitcoin network and prevent double-spending. But it also has drawbacks.
To verify transactions and add a new block, miners use a lot of computing power and consume a lot of electricity. A report published by the International Energy Association in 2019 showed that mining bitcoin consumes more energy than some countries such as Switzerland and Ireland.
To solve the problem of energy consumption, the PoS algorithm restricts users to checking only their share in the network. In December 2020, the Ethereum (ETH) project announced the first phase of the Ethereum 2.0 launch, which will move the ecosystem to PoS consensus. Thus, the developers plan to reduce gas commissions and reduce energy consumption.
21 million coins and bitcoin halving
In decentralized systems, all elements of the source code should run like clockwork. The limited supply of bitcoins and the phasing out are unique conditions designed to support the decentralized model.
Ultimately, as new blocks are added to the chain, only 21 million coins will be issued. At the time of writing, about 18.6 million bitcoins have been mined.
Every four years or every 210,000 blocks, the amount of the reward is halved. In 2009, miners received 50 bitcoins for each block. After three halvings, this amount dropped to 6.25 BTC.
Consequently, each contraction creates an artificial shortage of bitcoins and has historically led to a bullish trend.
How long does it take to mine one bitcoin
Now to the million dollar question – how long does it take to mine one bitcoin. As mentioned earlier, the Bitcoin network was based on the PoW consensus mechanism. In this model, miners are rewarded in bitcoins for each new block of transactions added to the network.
Regardless of the number of miners, a new block is added to the network every ten minutes. Hundreds of thousands of miners are now working on the network, and they are all competing for the opportunity to solve the hash and add a new block.
It may take years for one miner to extract a block, and it is not a fact that he will win this competitive struggle. To overcome this barrier, many miners combine computing power and then, accordingly, share the reward. Over the past few years, mining has evolved: developers are thinking about how to save time, electricity and computing power without compromising the basic principles.
ASIC and the evolution of mining
When bitcoin mining began, miners used their home computers with conventional graphics processing units (GPUs), minimal power consumption, and minimal technical skills.
However, in October 2010, the developers posted the bitcoin code on the network. Mining has become a competitive business requiring powerful computers and high performance.
Over the years, the network of miners has grown, along with the required computing power. In 2013, the Chinese manufacturer Canaan creative developed special integration schemes (ASICs) for bitcoin mining.
ASICs were incredibly advanced: they were faster, more efficient, and more powerful than GPUs. Today, bitcoin miners continue to compete for the right to mine a block, and hardware manufacturers strive to offer economical and powerful devices.
What happens when 21 million coins are mined
The supply of bitcoins is limited and sooner or later the mining process will end. This point raises many questions in the context of the profitability of mining in the future.
However, miners will keep earning even after the last coin has been mined. They will receive transaction fees.
The debate over the profitability and efficiency of mining will grow with the popularity of Bitcoin.