Lesson 4: Mining & Proof-of-Work - The Engine of Bitcoin #

⛏️ Intermediate • ⏱️ 90-120 min • ⚛️ 400 Quarks

The Most Misunderstood Part of Bitcoin #

Everyone's heard of Bitcoin mining. But most people think it's about "creating new coins" or "solving complex math problems." Both are wrong.

Bitcoin mining is actually about security. Miners are the guardians of the network, using massive amounts of energy to make Bitcoin virtually impossible to attack. The new coins? That's just the incentive to keep them honest.

In this lesson, you'll learn:

• What Bitcoin mining actually does (it's not what you think)
• How Proof-of-Work creates security through energy
• Why mining difficulty adjusts every 2 weeks
• The halving cycle and Bitcoin's fixed supply
• Mining pools, ASICs, and the arms race
• Environmental concerns and the truth about Bitcoin's energy use

Ready to understand the engine that powers Bitcoin? Let's dig in! ⛏️

The Big Idea: Proof-of-Work #

Bitcoin's security comes from Proof-of-Work (PoW)—a system where miners compete to solve a computational puzzle. The winner gets to add the next block and earn the reward.

What Problem Are Miners Solving? #

Miners are trying to find a nonce (number used once) that, when combined with the block data and hashed, produces a hash with a certain number of leading zeros.

Example:

Block Data: "Block #820000, Previous Hash: 0000000000..., Transactions: [...]"
Nonce: 1234567890
Hash: 7a8f3e2d1c... ❌ (no leading zeros)

Nonce: 1234567891
Hash: 9f2e8d7c3a... ❌ (no leading zeros)

Nonce: 1234567892
Hash: 0000001a2b... ✓ (4 leading zeros! Valid!)

Block Data: "Block #820000, Previous Hash: 0000000000..., Transactions: [...]"
Nonce: 1234567890
Hash: 7a8f3e2d1c... ❌ (no leading zeros)

Nonce: 1234567891
Hash: 9f2e8d7c3a... ❌ (no leading zeros)

Nonce: 1234567892
Hash: 0000001a2b... ✓ (4 leading zeros! Valid!)

The only way to find a valid nonce is brute force—trying billions of combinations until you get lucky.

Why This Creates Security #

1. It's expensive: Mining requires specialized hardware and massive electricity
2. It's competitive: Thousands of miners compete for each block
3. It's verifiable: Anyone can instantly check if a hash is valid
4. It's irreversible: To change history, you'd need to redo all that work

Analogy: Imagine a lottery where tickets cost $1,000 each, but you can verify winning tickets instantly for free. That's Proof-of-Work.

How Mining Actually Works: Step-by-Step #

Step 1: Collect Transactions #

Miners listen to the network and collect unconfirmed transactions from the mempool.

Selection criteria:

• Valid signatures (not forged)
• Sufficient funds (no double-spending)
• Highest fee rates (more profit)

Miners build a candidate block with ~2,500 transactions.

Step 2: Create the Block Header #

The block header contains:

• Version: Protocol version number
• Previous Block Hash: Links to the last block (creates the chain)
• Merkle Root: Hash of all transactions (proves they're included)
• Timestamp: When the block was created
• Difficulty Target: How many leading zeros required
• Nonce: The number miners are trying to find

Step 3: Hash the Block Header #

Miners take the block header and run it through SHA-256 twice:

SHA-256(SHA-256(Block Header)) = Block Hash

SHA-256(SHA-256(Block Header)) = Block Hash

If the hash has enough leading zeros → Valid block! If not → Change the nonce and try again.

Step 4: Broadcast the Block #

The winning miner broadcasts the block to the network.

Other nodes verify:

• ✓ All transactions are valid
• ✓ Hash meets difficulty target
• ✓ Block reward is correct
• ✓ Previous block hash is correct

If everything checks out, nodes add the block to their blockchain and start mining the next one.

Step 5: Collect the Reward #

The winning miner receives:

1. Block subsidy: Currently 6.25 BTC (halves every 4 years)
2. Transaction fees: All fees from included transactions

Total reward: ~6.25 BTC + 0.1-0.5 BTC in fees = ~$250,000 USD 💰

Mining Difficulty: The Self-Adjusting System #

Bitcoin has a target block time of 10 minutes. But as more miners join (or leave), blocks would be found faster (or slower). So Bitcoin automatically adjusts difficulty.

How Difficulty Adjustment Works #

Every 2,016 blocks (~2 weeks), Bitcoin recalculates difficulty:

New Difficulty = Old Difficulty × (2 weeks / Actual Time)

New Difficulty = Old Difficulty × (2 weeks / Actual Time)

Examples:

• Blocks took 1 week → Difficulty doubles (too fast)
• Blocks took 2 weeks → Difficulty stays same (perfect)
• Blocks took 4 weeks → Difficulty halves (too slow)

Why This Matters #

Without difficulty adjustment:

• More miners join → Blocks found in 1 second → All 21M Bitcoin mined in a day → Game over

With difficulty adjustment:

• More miners join → Difficulty increases → Blocks still take ~10 min → Bitcoin supply stays predictable

This is genius. No matter how much computing power joins the network, Bitcoin maintains its 10-minute block time and 4-year halving schedule.

Current Difficulty Stats #

• Current Difficulty: ~60 trillion (60,000,000,000,000)
• Network Hash Rate: ~500 EH/s (500 quintillion hashes per second)
• Next Adjustment: Every 2,016 blocks

To put this in perspective: If you tried to mine Bitcoin on your laptop (1 MH/s), you'd find a block once every 10 million years on average. 😅

The Halving: Bitcoin's Deflationary Schedule #

Every 210,000 blocks (~4 years), the block reward halves. This is hardcoded into Bitcoin's protocol.

Halving History #

Why Halving Matters #

1. Fixed Supply: Only 21 million Bitcoin will ever exist
2. Predictable Issuance: No central bank can "print more"
3. Deflationary: Supply decreases over time (opposite of fiat)
4. Price Impact: Historically, halvings precede bull markets

Supply Schedule:

• 93% of all Bitcoin already mined (19.6M / 21M)
• Last Bitcoin mined around year 2140
• After 2140: Miners earn only transaction fees (no block subsidy)

Mining Hardware: The Arms Race #

Bitcoin mining has evolved from hobbyist CPUs to industrial-scale operations.

Evolution of Mining Hardware #

2009-2010: CPU Mining

• Regular computer processors
• Hash rate: ~1-10 MH/s
• Anyone could mine from home
• Satoshi mined on a laptop

2010-2011: GPU Mining

• Graphics cards (gaming GPUs)
• Hash rate: ~100-500 MH/s
• 50-100x faster than CPUs
• First "mining rigs" built

2011-2013: FPGA Mining

• Field-Programmable Gate Arrays
• Hash rate: ~1-25 GH/s
• More efficient than GPUs
• Expensive and complex

2013-Present: ASIC Mining

• Application-Specific Integrated Circuits
• Hash rate: 100+ TH/s (100 trillion hashes/sec)
• Built only for Bitcoin mining
• Industrial-scale operations

Modern ASIC Miners #

Top miners (2024):

• Antminer S19 XP: 140 TH/s, 3,010W
• Whatsminer M50S: 130 TH/s, 3,276W
• Antminer S21: 200 TH/s, 3,500W

Cost: $2,000-$10,000 per unit Profitability: Depends on electricity cost and Bitcoin price

Mining Profitability #

Break-even electricity cost: ~$0.05-0.07 per kWh

Example calculation:

• Miner: Antminer S19 (110 TH/s, 3,250W)
• Electricity: $0.05/kWh
• Daily cost: 3.25 kW × 24 hrs × $0.05 = $3.90/day
• Daily revenue: ~$8-12 (varies with difficulty/price)
• Profit: $4-8/day (~$120-240/month)

But this changes constantly based on:

• Bitcoin price
• Network difficulty
• Electricity costs
• Hardware efficiency

Mining Pools: Cooperation in Competition #

Solo mining is like playing the lottery—you might never win. Mining pools let miners combine their hash power and share rewards.

How Mining Pools Work #

1. Join a pool: Connect your miner to pool's server
2. Receive work: Pool assigns you block header variations to hash
3. Submit shares: Send "near-valid" hashes as proof of work
4. Pool finds block: Reward distributed based on shares contributed
5. Get paid: Proportional to your hash rate contribution

Pool Reward Methods #

PPS (Pay-Per-Share):

• Fixed payment per share submitted
• Guaranteed income
• Pool takes risk

PPLNS (Pay-Per-Last-N-Shares):

• Payment based on shares in last N shares before block found
• Higher variance
• Lower pool fees

FPPS (Full Pay-Per-Share):

• PPS + transaction fees
• Most predictable
• Slightly higher fees

Top Mining Pools (2024) #

1. Foundry USA: ~30% of network hash rate
2. AntPool: ~20%
3. F2Pool: ~15%
4. Binance Pool: ~10%
5. ViaBTC: ~8%

Centralization concern: Top 5 pools control ~80% of hash rate. If they colluded, they could attack Bitcoin. But they'd destroy their own business, so it's unlikely.

Bitcoin's Energy Use: The Controversy #

Fact: Bitcoin uses a lot of energy—about 150 TWh/year (similar to Argentina).

But context matters:

Energy Use Comparisons #

• Bitcoin: 150 TWh/year
• Gold mining: 240 TWh/year
• Banking system: 260 TWh/year
• Christmas lights (USA): 6.6 TWh/year
• Always-on devices (USA): 1,375 TWh/year
• Global energy use: 176,000 TWh/year (Bitcoin = 0.08%)

The Renewable Energy Angle #

Miners seek cheap electricity, which often means:

• Hydroelectric: 40%+ of Bitcoin mining
• Stranded energy: Gas flares, excess renewable energy
• Off-peak hours: Using otherwise wasted electricity

Bitcoin Mining Council estimates:

• 59% of Bitcoin mining uses sustainable energy
• Higher than most industries

The Security Argument #

Bitcoin's energy use isn't waste—it's security:

• Energy → Hash rate → Attack cost → Network security
• More energy = more secure network
• This is the entire point of Proof-of-Work

Analogy: Is the energy used to secure Fort Knox "wasteful"? No—it's the cost of security.

The Innovation Angle #

Bitcoin mining drives:

• Renewable energy development: Miners fund new solar/hydro projects
• Grid stabilization: Miners can turn off instantly during peak demand
• Methane reduction: Miners capture and burn waste gas from landfills/oil fields

Why Mining Matters for Bitcoin #

Mining isn't just about creating new coins. It's the security mechanism that makes Bitcoin trustworthy:

1. Prevents double-spending: Expensive to rewrite history
2. Decentralizes control: No single entity controls the network
3. Incentivizes honesty: Miners earn more by following rules
4. Proves scarcity: Can't fake the work required
5. Distributes coins: Fair launch, no pre-mine

Without mining, Bitcoin would just be a database anyone could edit. Mining makes it immutable.

The Future of Mining #

After 2140 (when block subsidy ends):

• Miners earn only transaction fees
• Fees must be high enough to secure network
• Lightning Network may reduce on-chain fees
• Layer 2 solutions may change fee dynamics

Possible scenarios:

1. High fees: On-chain transactions become expensive (like international wire transfers)
2. Layer 2 dominance: Most transactions happen off-chain (Lightning, sidechains)
3. Fee market evolution: New fee mechanisms emerge

The bet: By 2140, Bitcoin will be valuable enough that transaction fees alone provide sufficient security.

Key Takeaways #

• Mining = Security, not just coin creation
• Proof-of-Work makes attacking Bitcoin prohibitively expensive
• Difficulty adjusts every 2 weeks to maintain 10-min blocks
• Halving every 4 years creates fixed 21M supply
• ASICs dominate modern mining (100+ TH/s)
• Mining pools let small miners earn consistent rewards
• Energy use is the cost of security, increasingly renewable
• 51% attack is theoretically possible but economically irrational

🎯 Test Your Knowledge #

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