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Mining the Blockchain

The process of mining the bitcoin blockchain uses the SHA256 hash function, a cryptographic standard developed by the NSA in 2001. In the most simple terms, mining bitcoin involves hashing the header of the most recent block repeatedly in order to find a specific mathematical sequence which will allow the chain to be extended. This economic measure of requiring processing time through computation is known as a proof-of-work scheme and it is the staple of the bitcoin mining process. This process is largely a practice in brute hash force, as proof-of-work requires modifying the input data randomly until a solution is found.

Coinbase Transaction

In the mining process of bitcoin, a special input called the coinbase occurs where the input must be between 2 and 100 bytes. Because newly mined bitcoin have no inputs, and every transaction displays its inputs as its parent’s transaction output, a coinbase transaction describes the inputs of a newly minted block with no prior history.

Any arbitrary data can then be used as the coinbase input of a newly minted block of bitcoin. For example, the very first block of bitcoin mined, the genesis block, has its coinbase input as:

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51% Attack

A 51% attack becomes possible when a mining pool holds 51% or more of the total network hashing power. In performing this type of attack, a mining pool will be able to outpace the bitcoin network in the confirmation of new blocks, thereby granting themselves the ability to double spend money and cause denial-of-service to others.

However, it could be argued that a disincentive to perform a 51% attack exists, as occurrences where a single mining pool has amassed a majority market share of hashing power causes a sudden loss in confidence in the network thereby decreasing the value of bitcoin and subsequently their own profits.

**In this example, mining Pool B holds a 55% market share of total network hash power. Such a large sector of the bitcoin network under the control of a single pool poses a threat to the decentralization and confirmation of payments.

It is worthwhile to note that a mining pool does not necessarily need a 51% majority of hashing power to conduct this type of attack. Statistical modelling has demonstrated that this type of attack is possible with as little as 30% of total network power. Only after a single mining pool has accumulated 51% or more does the probability of success tip in their favor.

Forking the Blockchain

In the event of a 51% attack, a mining pool effectively creates a fork whereby previous, unconfirmed transactions are invalidated. A successful fork can cause transactions with even 6 confirmations to be invalidated.

Block Difficulty

The difficulty parameter of solving the proof-of-work function increases alongside the total hashing power of the network. Therefore it becomes more difficult to compete in the bitcoin mining industry as hash power increases. One of the main factors incentivizing new entrants into the bitcoin mining industry is an increasing market price of bitcoin as the total value of the block reward will also have increased.

The difficulty of finding a solution to the proof-of-work scheme in bitcoin mining is retargeted every 2,016 blocks. This ensures that, on average, a new block is confirmed every 10 minutes.

Because bitcoin mining is so energy intensive, the price of electricity can be an important factor when planning a successful bitcoin mining operation. One statistical figure to consider is the average amount of bitcoin generated from one kilowatt hour of energy consumed – a labour index for the bitcoin mining industry.

Block Size

The current size of each block added to the bitcoin blockchain is 1MB. This limit on the size of each block imposes an arbitrary bottleneck of 7 transactions per second.

Currently, bitcoin core developers are discussing proposals which will scale up the capacity of the network in order to increase in the flow of transactions.

Unit Summary

  • The blockchain is a ledger of transaction information that forms an immutable record.
  • Each new block of transactions adds to the chain of this record.
  • Miners who compete to find a proof-of-work solution to the next block are compensated directly in new bitcoin.
  • Adding new blocks to the chain is the only way new bitcoin enter circulation.
  • The difficulty of finding a new block is automatically retargeted every 2,016 blocks.
  • The difficulty parameter is always targetted to coinsider with a 10 minute average block time.