What is BitCoin and What is BitCoin Mining?

foreverrising, June 15, 2011

I tried to break it down to someone yesterday. It went like this: BitCoin is a digital Internet currency. Think of it as an counterfeit-proof electronic dollar which is not manipulated by a central authority such as the Federal Reserve. It’s a basis of trade for goods, just as any other currency. Value is based on scarcity, and new BitCoins are only minted at a predictable rate once a Block is solved…

The BitCoin currency is a peer-to-peer solution for the problems which are seen in any system of currency. Every BitCoin transaction is recorded in a public ledger, which is found at Block Explorer. Each transaction is hashed into a block, the specifics of which I don’t want to get into, but are explained in the original paper Bitcoin: A Peer-to-Peer Electronic Cash System by BitCoin creator Satoshi Nakamoto. After the solution to the block is found, it is replicated throughout the peer-to-peer network, and all transactions are then verified by the BitCoin client software, which I might add is open-source. Any attempts at forging a block are rejected by the network as invalid. It is by solving a block which rewards the solver with 50 BitCoins which further propagates the BitCoin economy.

Which brings me to mining. To solve the block, a value must be solved through mathematic computation of the block. I’m not a math guy, so I couldn’t functionally explain this part, except that there are more intelligent folks which set this up. So, we use our processor power to search for the solution. As the complexity of the solution has risen to adjust the fixed rate of BitCoin dispersal, a CPU is no longer sufficient to solve a block in a reasonable amount of time. At the time of this writing, the current difficulty factor is 567385. So, if your CPU could perform at a rate of 4,000,000 hashes per second, it would take you over 19 years to solve a block, not factoring in the eventual rise of the difficulty. This, we use accelerated parallel processing, which involves harnessing the computational power of a graphics processing unit, or GPU (Why?). It’s optimal to hash on AMD cards, which is explained here. So, if I use my computer to generate BitCoins (by further supporting the BitCoin economy by verifying transactions), I am Mining BitCoins.

Take a quick look a BitCoin Part 1, a brief look and its volatile history. I ran through a couple questions that typically come up in BitCoin for the Masses, cause everyone will ask how anonymous BitCoin actually is, or how exactly do bitcoins have any value.


38 thoughts on “What is BitCoin and What is BitCoin Mining?”

  1. intp1 says:

    What is the use of solving blocks and to whom? I.e. is it just busy work in order to define the value and rate of creation or are the solutions of any use to anybody?

    1. The blocks contain the transactions, the solution verifies its validity.

      1. dave lister says:

        that isnt really any kind of answer. to give something value, it must be of use to someone else. what is the use of mining bitcoins, who is at the top of the pyramid benefitting and why?

        1. There is no head to the pyramid as you suggest. Think of it less as a measure of wealth and more as a means of trade. The mathematically established “rarity” of bitcoins enhances the strength of its value, while it cannot effectively be a store of wealth (if they are not traded they have less and less use).

  2. Shawn says:

    Thank you for this explanation.

  3. Data Transformation
    I too conceive thus, perfectly composed post! Data Transformation

  4. David says:

    I’m still totally baffled by this whole thing. Why is it so damn complicated?

    1. Bitcoin is the solution to two central problems of currency: double spending, and assuring a finite amount. Using cryptography is the best way to accomplish these solutions. Understanding the specifics of blocks is not necessary, but I would recommend learning about them in terms of how they move from one Bitcoin user to the next.

  5. So what, BitCoin mining is like finding unused BitCoins or something?

    1. The process of bitcoin mining searches for the correct solution to a block (which verifies its validity through the proof-of-work solution). The miner whom finds the solution is compensated by the bitcoin network who issues the payout + all included transaction fees. The difficulty of the solution varies depending on the rate of block generating (the speed/power of the network), as it optimally should work out to 6 blocks an hour.

  6. Tony says:

    Thanks for not explaining anything with this post. Where are the central servers that issue the so-called “blocks” that need to be mined? Who owns the servers? What are the blocks doing? Due to the fact that I have not been able to find a single straight answer on-line as to what bitcoin mining is, I feel that this is a very sketchy scheme and someone has to be the central authority. Hopefully not Mother Russia trading bit currency for nuclear weapon R&D computations.

    1. It would be best not to insult Russia. Also, please remember that your feelings are not correlated to facts. Bitcoin has documentation, and this is not it. I could answer your questions, but you should continue looking somewhere else that will answer questions posed like that.

  7. dihydromonoxide says:

    lets say i have a 3.4 ghz dule core cpu and a gts450 video card that last i checked allowed me to run wow at full settings and still have 30 fps in shat or dar so how much could i make

    what gets me asking how is 19 years for a stand alone cpu so with a video card being added still like 5 years and so that is a 50 cent pay out every 5 years per user or did i miss something

    1. A CPU is a generalized computing device, in contrast with a GPU, which was designed to render video and is able to crunch numbers better. Also note that Radeon can process hashes better, as it takes four times as many machine instructions to compute a hash compared to Nvidia.

  8. It seems that the Mining of Bitcoins is a large waste of computational power. If in reality you are just exercising your GPU in some futile task and the reward is some digital currency… Would it not be much more useful to have the bitcoins be a reward for using your CPU and GPU for PRACTICAL problems such as parallel processing used at SETI@HOME and other projects like that? – I hope I am wrong in my understanding that all this computational power and the electricity used to do it is WASTED…

    1. Don’t worry, you are wrong. And whether or not SETI is a waste of computational power or time is also another viewpoint. Technically, living is a waste of time, while we know we will one day die.
      Why not do something interesting? Paint a picture, mine some bitcoin, learn a language, search for extraterrestrial intelligence, fold@home, pay it forward. The only waste is to do nothing at all.

      1. Stupid Technology Tricks says:

        “Don’t worry, you are wrong”? Hey, that’s convincing. In truth using thousands or even millions of computers running full bore to solve cryptographic algorithms that solve no real like issue is a HUGE WASTE of our limited supply of ENERGY. The fact that some fictional currency which is not tied to any physical entity makes it no better than the other inflatable and artificial, in their own way, currencies of the world. One might suggest that the energy to print paper money and stamp metal coins is also a waste of energy, since the continued printing also solves no problem and simply dilutes the value. Economics is freaking retarded. Really! Too bad it’s too late to scrap the whole system and build something based on a stable value monetary unit. Also, how is living a waste of time? Maybe for some people, but many are actually creating good with their lives. Whether or not that time spent is futile depends on your personal belief or disbelief in the afterlife. However, you cannot compare that to wasting our precious natural resources to “generate” this fictional currency who’e value derives only from wasted energy(ultimately, since no real problem is being solved). The arbitrary “value” is only based on what the trading public will allow it to be worth, and just like real world currency, there could easily come a time when people realize/decide that this vapor coin really has no intrinsic value and the whole thing will collapse in on itself like a black hole. Many people will lose in that situation as at one time or another they traded a real service or product in exchange of the currency which will diminish and become worthless. Of course, there appear to be no mechanisms in place to insure or attempt to stabilize the currency, so those people will be screwed. Alot like gambling. Money or in this case, ultimately goods, arbitrarily redistributed back and forth based on the “luck” of having your mega cluster solve an arbitrary and useless problem(However, there could easily be menacing undertones where you are unwittingly helping to crack someone’s security somewhere buried inside these trojan blocks). Read the article on the “Shovel Sellers” Who sell hardware designed for mining and the “time shares” who then distribute time on these clusters for a fee. That’s the house in the gambling scenario – and we know that the house always wins.

  9. Andrew says:

    In other words Tony he doesn’t full understand the question OR he lacks the proper knowledge to answer it. So far every answer you’ve given is nearly copy paste from every other article on the subject. How about we hear you explain bitcoins in your own words and not just hear you talk around specific questions by giving general answers.

    1. If you’ve come to this site you MUST want a general answer. If you have not read the white paper or realize that it is an open source project then you will fail to realize not only how it works, but how it will impact the world.

  10. Wally says:

    A video that explains the origin and functionality of the bit coin for the common human would be very useful.

  11. church'schiken says:

    I thought it was explained just fine. If you actually read the article (which I’m kind of guessing a lot of you just skimmed over it) you would realize that mining bitcoins isn’t something you just “do”, it takes work and the fact that only 21 million can ever exist, EVER, is what gives the bitcoin its value. As of August 2012, each bitcoin was worth approximately 10 USD. To answer the first question, the value to someone else is that they themselves don’t have to mine the bitcoin. They can offer a service or good, which one would accept, and then get paid in bitcoins (which as we know, is approximately 10 USD). For the most part, it’s really useful to people who trade in “shady” or “sketchy” things, such as users on the Silk Road (i.e. drugs and illegal weapons). However, you CAN trade bitcoins for actual money, so, all your hard work pays off in the end. Since, solo mining is so difficult however, your best bet is to join a “mining pool” and work with others towards solving the algorithm, or “block”, which is worth 50 bitcoins. Once the collective has solved the block, the block is divided amongst them. So, to simplify things, the bitcoin has value because it’s actually worth money and because it isn’t just handed to you on a silver platter. To add icing on the cake, you can BUY material goods or services with them. Really, if that doesn’t answer your questions, you need to be doing something else, like reading a book, walking the dog, or something physical, because that’s the most simplified answer you will ever get and you’ll never understand bitcoins. Also, for those of you wondering, “how do I get use my bitcoins on the Silk Road?” you need a special program (not sure what it is) and then you have to go through some long and ridiculous process to even find it, then more work to actually get in. It’s part of an unregulated part of the internet known as the Deep Web and it isn’t fun for anyone but the people that hack into your computers and clean out your bank account. Its also full of viruses and other crazy shit you don’t want anything to do with. IT ISN’T WORTH IT. Buy your drugs on the street corner and buy your weapons the legal way. If you get caught with an unregistered firearm, you’d better be ready to be fucked by the long dick of the law, and sending drugs through the mail is NEVER a good idea.

  12. Gorgerak says:

    I love your level-headed, smooth put downs on these sceptics. Personally, I mine bitcoins, using a AMD7850, run at 350Mh/s making roughly $1.30 /day or 82 pence in a decent currency. Its not huge, would cost thousands of pounds to try and make a living off it, but it means i get a free pint and a free packet of crisps at my local pub every week so who am I to complain? I don’t fully understand bitcoin mining – and never do I think I will – but I dont want to, my brain would explode, I know enough to grasp how it works, how I can make a little bit of money on the side and that probably puts me on the same level as most others.

    1. pstyle says:

      82 pence per day would be loss making if you ran the machine for 24 hours per day.
      15p per KwH for electricity, assuming a conservative 250W machine would cost you 86 pence per day in electricity charges.

      If bitcoin mining was profit making, it would be massively commercial. But it relies on users who have not calculated their overheads (usually in the form of marginal costs).

  13. pstyle says:

    OK can I try to put this into laymans terms, and then you tell me if I’m right?

    A whole lot of transactions go on in the marketplace, with “bitcoins” as the monetary unit.
    None of the parties to these transactions get paid at the moment of the transaction. Rather the details (receipts etc) of that transaction get sent to a storehouse called a “block”,

    As the “block” starts to fill up with the receipts of many transactions, a large amount of processing power is required to review each transaction and verify that is was legitimate. Only when this verification is complete can the parties be paid.

    Now, in order to ensure that there is enough processing power made available, the “block” uses the computers (CPUs and GPUs) that are sitting in various peoples homes and offices to carry out the verification. Once verified, the parties to the transactions receive their payments and the person (CPU/ GPU) who provided the solution to the verification process is rewarded with a small amount of coins as a “thank you”.

    The process of donating your GPU/CPU time tot he blocks so they can use your processing power is called “mining”, because you are hoping that you get lucky and strike the solution, and thus earn the reward.

    Is that it?

  14. sherrkan says:

    Can you leave some information on the terminology you are using and break it down into layman’s terms? For example I have no idea what you mean by the term “block” and “solution”. I watched a few videos online and still did not understand. So from my understanding my computer will mine bitcoins by essentially crunching data. Based on the rate it does this at I will be able to earn bitcoins. Ok, so…what data are we talking about? Why is it crunching it? What is my computer actually doing? It’s finding a solution to a block…I dont understand what solution and why that is of value. If I go lift boxes off a truck for 8 hours or sit at a desk and analyze trends writing reports then I am being paid for my labor. I do not grasp how I am able to make money with no labor or skill involved. Thank you in advance.

  15. So who put up the original $210,000,000 ? I believe $210M was never put up. Also, if you can trade bitcoins for cash then the original $210M has to shrink every day until there are no more bitcoins. Why would the originators give away $210M? Bitcoins make no sense whatsoever. If value is placed on things like bitcoins because of their limited quantity then I am willing to sell a small stone in my front yard because there are no others in the world just like it!

    1. admin says:

      What original $210 million? No such thing.

  16. fgart says:

    I don’t get it. so let me go over it.

    you make a bitcoin transaction, the details of which (how much, from who, to who) are recorded to keep track of who has what. I suppose to avoid digital forgery and preserve the use of none but genuine bitcoins.

    the details are hashed into a “block”, that means hashes are continually added to the “block”, and the “block” is shared over a peer-to-peer network.

    that is done so anybody on the p2p network can look at the block to check validity of bitcoins and their proper owners, to avoid bogus transactions?

    if I got it right and that’s how it works, then why does anybody need to crunch a solution to the block? everybody can access the block, so what is a solution needed for? isn’t a “solution to the block” really reverse-engineering the hashes to reveal the details?

    1. admin says:

      You can’t reverse a hash.

  17. Micela says:

    I completely agree with everything except what you said about Silk Road. First of all, you need an onion browser such as Tor to even visit the website. Using an onion browser assures anonymity for the users by defining no real ip address. Once you’re all set up to browse the SilkRoad site you’ll notice that all its transactions are done in BitCoin and all sellers have user feedback. Like they say, it’s the Amazon of Drug Trafficking. For more information http://silkroaddrugs.org/silkroad-drugs-complete-step-by-step-guide/

    1. admin says:

      Tor guarantees no anonymity.

  18. LinkoVitch says:

    If I get this right, hopefully this will make sense to some people.

    Currency is an abstraction of materials, skills etc.. before currency someone may have traded a loaf they had personally baked in exchange for someone repairing their roof. In this day and age such an exchange isn’t likely to be of much use, a roofer isn’t going to have much use for loaves of bread beyond his own limited needs and this doesn’t scale for such a large population of diverse and often intellectual skill sets. So we have currency, which itself in isolation is of no use or value (try and spend a Greek Drachma today). These IIRC are essentially backed by the issuing countries government, and are a promised value usually backed by the countries gold reserves.

    A bitcoin has no government to issue, it itself and the network is mathematically designed to ensure a distribution of ‘currency’. The currency is 100% digital and as such has no physical backing, but this isn’t necessarily of concern as $1000 of gold bullion isn’t of any real use to a person other than it can be traded for currency which in turn can be traded for services and items. Much the same with bitcoins I imagine, they have no intrinsic value, but as their acceptance grows they will most likely be able to be exchanged for goods and services.

    The mining process I guess is just a way to produce them in a unique and distributed manner, removing the control of a central ‘mint’

    well, from thinking about it that seems to be how it sounds to myself, I could be wrong, hopefully I am not too far from it :)

  19. david H says:

    when something is so complicated that it can never be explained, fully or simply, by and to most people, then history tells us we are simply looking at a scam, and the only questions really that should be considered are if we are a part of it and when is the bottom going to fall out and under whom ? funny how ‘derivatives’ come to mind.

  20. SEF says:

    So the point is to create all 21M solutions and then trade those solutions? Just as there is some limit to the economically feasible amount of gold that can be melted into coins, gold has a “store of value”. Chemical properties (and tests of those) can prove gold is gold. Gold is exchanged for other commodities and services because it is widely recognized as rare and effectively impossible to forge. Its rarity relative to effort to collect dollar bills to buy it gives gold a widely agreed upon value in dollars. If dollars were easy to create/earn, then the price for a fixed quantity of gold would increase (in dollar terms). So bit coin is a limited set of numbers/solutions owned by someone. When a market exists that accepts bitcoins as currency, the bitcoins take on value. Even paper money follows this line of thinking. The person asking about Russian servers etc. has a point — there has to be a central bank somewhere keeping track of who owns the solutions/numbers. The solutions/numbers cannot be duplicated, but the record of ownership? Can that be gamed?

  21. solomon says:

    Bitcoin is a digital currency that is not controlled by any central bank of any nation but mostly used on the internet to purchase goods and services. It is just like Liberty Reserve/Perfect Money /Ego money but what gives it value is that it is generated by computer hardwares and the amout that can be produced per 24 hours is dependent on the power of the CPU of the computer in use to mine it. Well you would have to do lots of research first and understand Bitcoin first before you invest. That is almost impossible to predict but read this http://www.groupbitcoin.com/blogs/news/11063945-so-how-much-money-will-i-make-how-many-bitcoins-will-i-get-from-mining-with-you

  22. Nick says:

    Why is it that no one can actually explain what mining is? I keep reading that you link your computer up to a group, and then, whala! you start mining. What the hell is it. What do I have to do. When I mine for gold, the process is digging or panning, collecting, melting, and on and on. Why can’t anyone say what I have to do to mine? I keep hearing we have to solve algorithms. I am a graduate student in pure math, and I still do not understand what that actually means. What algorithms? For what? For who? Is my math background not enough because I don’t know anything about computer programming. Please, someone stop keeping this damn secret and just tell us what the hell bitcoin mining is. So ridiculous.

  23. Nick says:

    Who pays out the 50 bitcoins for a solved “block”? Is there a bunch of kings and queens out there somewhere saying, “hey, I need a computer system to do this or that, lets send it down to the miners to solve this.”? Why is there only 21 million that can ever exist? Sounds arbitrary. Sounds like one day, the kings and queens can just say, “well, now there can be 25 million bitcoins.” How is a finite number of bitcoins sustainable when there is an ever increasing amount of people trying to obtain them?

  24. The part I don’t understand is where a bitcoin’s intrinsic value is…

    One of the oldest substances money has been based on is Gold. Gold is essentially eternal. There are few substances -and all of them man made at cost- That can destroy Gold. That is because Gold is 99.8% chemically inert. It’s density, ductility, tensity, conductivity and beauty have made it always important, to every one, no matter when, no matter where. Even if you reply to this claiming to place no value on gold yourself. You would be placing a value on gold by even replying. Because, your ability to reply is based on a machine that uses gold in it’s makeup / as part of the process for your devices creation. The exact value we place on gold at a given place and point in time is subject to change. But, it always has, and always will have value.

    Gold is not valuable on basis of being finite and rare alone. While these are factors are part of gold’s value. it’s most important factor is that it is the singular most useful material in existence. If we had more of it… we would use a lot more of it. But we don’t so it’s use is executed in either the most purposefully wasteful ways – or more politely exorbitant – such as jewelery, in order to visibly display having wealth; Or it is put to it’s highest possible uses.

    At one time the US Dollar (which is also the world reserve…for the moment) was based on gold. We have since moved away from the gold standard. And, moved away from the real estate standard after that. We have moved to a standard of pure belief in fact. But, other countries have done this in the past as well. But none of that could have been done without a booming influx of gold to begin with.

    And even if countries who are loosing faith in the US Dollar elect a new standard. That standard will likely be based on gold. Countries like saudi arabia and germany have been buying massive amounts of gold with US dollars (essentially cashing in their chips), which has directly raised the price of gold to never before seen levels (this is all probably in preparation to elect a new world reserve. But no government mandated monetary system is eternal and even if this doesn’t happen any time soon. The pattern of how money works dictates that it will happen).

    Even if the US Dollar becomes worthless…It’s mostly cotton. And the Cotton can be reprocessed into other goods. Lets get ridiculous and say the you know what hit the you know where and the whole world collapsed. The US Dollar under such circumstances could -in a post-apocalyptic world- even be useful as an extremely re-usable toilet paper, or given how much of it there is, readily accepted kindling for fire. It could be used as filters for helping to make clean water. That is because it is made of useful and adaptable material.

    Gold and even something as fallible as paper money has intrinsic value. Value for being just what it is. I just don’t see that with a virtual currency that isn’t insured by something precious in the real world. Basically bitcoin, in my mind. seems to be trying to skip the step of being based on something and go strait to a faith based system of value. Which doesn’t work. You can’t just cut in line. And, even when you force your way up in line…well like I said you can always wipe with paper money… can’t do that with a digital currency.

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