Bitcoin Mining System

Bitcoin Mining

To understand the consensus mechanism of the Bitcoin system, we first have to discuss the role of a miner. A miner collects pending Bitcoin transactions, verifies their legitimacy, and assembles them into what is known as a “block candidate.”

The goal is to earn newly created Bitcoin units through this activity. The miner can succeed in doing this if he or she can convince all other network participants to add his or her block candidate to their copies of the Bitcoin Blockchain (Bitcoin Mining).

Bitcoin mining is permissionless. Anyone can become a miner by downloading the respective software and the most recent copy of the Bitcoin Blockchain. In practice, however, there are a few large miners that produce most of the new generally accepted blocks.

The reason is that competition has become fierce and only large Bitcoin mining farms with highly specialized hardware and access to cheap electricity can still make a profit from mining.

For a block candidate to be generally accepted, it must fulfill a specific set of predefined criteria. For instance, all included transactions must be legitimate. Another important criterion is the so-called “fingerprint” of the block candidate. A miner obtains this fingerprint by computing the block candidate’s hash value using the hash function dSHA256.

For example, we will look at the hash value for the text, “Federal Reserve Bank of Saint Louis.” The fingerprint of this text, which was calculated using the hash function dSHA256, is


Now notice the small change in the original text to “federal Reserve Bank of Saint Louis.” It will cause an unpredictable change of the fingerprint, which can be seen from the corresponding new hash value:


As suggested by this example, a data file’s hash value cannot be prognosticated. This characteristic is employed in the mining process as follows. For a block candidate to be accepted by all miners, its fingerprint must possess an extremely rare feature:

The hash value must be below a certain threshold value—that is, it must display several zeroes at the beginning of the fingerprint. An example of a fingerprint of a block that was added to the Bitcoin Blockchain in 2010 is given in the following example:

Block #69785 (July 23rd, 2010, 12:09:36 CET)

0000000000 14243 293b78a2833b45d78e97625 f 6484ddd1accbe0067c2b8 f 98b57995

Miners are continuously trying to find block candidates that have a hash value satisfying the above mentioned criterion. For this purpose, a block includes a data field (called the nonce) that contains arbitrary data. Miners modify this arbitrary data in order to gain a new fingerprint.

These modifications do not affect the set of included transactions. Just as with our example, every modification results in a new hash value. Most of the time, the hash value lies above the threshold value, and the miner discards the block candidate.

If, however, a miner succeeds in creating a block candidate with a hash value below the current threshold value, he or she broadcasts the block candidate as quickly as possible to the network. All the other network participants can then easily verify that the fingerprint satisfies the threshold criterion by computing it themselves.