So what is bitcoin mining? A simple explanation

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While bitcoin mining doesn’t involve helmets, soot or non-metaphorical canaries, the noise inside the modernized shipping container that Edward Weniger owns in Omaha, Nebraska sounds a bit like heavy machinery piercing the center of the earth.

Part of that noise comes from the dozens of “rigs” — hot rod computers, essentially — mining bitcoin inside.

The highest decibels are produced by what keeps the rigs from melting: “Just a bunch of industrial fans kicking on and on and noisy,” said Weniger, who rents the space to other miners and does part of its own mining.

Even in Nebraska, where electricity is relatively cheap compared to other parts of the country, Weniger has a hefty utility bill, “about $8,000 a month.”

So what exactly do these platforms do? And why are they consuming so much energy that Congress is now concerned about the impact of crypto on energy grids and carbon emissions?

To understand this, let’s review a simplified version of how a bitcoin transaction works.

Step 1: Don’t trust. To verify.

Robert Farrokhnia, a professor at Columbia Schools of Business and Engineering, agreed to tutor me for the price of a hypothetical bitcoin, currently worth around $40,000.

If I wrote Farrokhnia an old-fashioned paper check, a financial institution somewhere would have to make sure I actually had $40,000 in my account before the transaction could be processed. But bitcoin doesn’t make the banks; the whole thing is to avoid a centralized financial authority.

“That begs a question, and it’s: if there’s no central authority that we can trust to ensure the integrity of transactions, how can we ensure the integrity of this decentralized system? ” said Farrokhnia.

To make sure I don’t write bad bitcoin verification, miners and other computers on the bitcoin network (these are called “nodes”) verify that a pending transaction is legitimate. Like a bank, they do this by checking a financial ledger.

But unlike the Wells Fargo ledgers, the bitcoin ledger is public – anyone can see it, and it can live on your computer, mine, or anyone else’s. It is the bitcoin blockchain. Imagine around 700,000 tablets of stone – the blocks – all lined up together, with every transaction in bitcoin’s history engraved on them.

“In a way, they’re looking at all your past transactions from the first day you joined the bitcoin network to make sure you have at least one bitcoin that you can use to pay for my services,” Farrokhnia said.

Miners walk through the blockchain ledger (or in some cases a subsection of the ledger) and if they say, “Yeah, he has the bitcoin he says he has”, the transaction goes into what we calls the “mempool”.

Step 2: Enter the mempool

Even after this verification, Farrokhnia still cannot spend the bitcoin sent to her – there is still work to be done.

Our transaction enters the mempool, which is basically a holding area. Imagine this as bitcoin DMV. Thousands of pending transactions, three to five per second, from all over the world, waiting for a number to be called.

All bitcoin transactions in bitcoin purgatory are waiting for a miner to call their number. It’s at least a 10 minute wait. Bitcoin payers will sometimes include a “transaction fee,” which you can think of as advice to miners to avoid longer waits.

Let’s say, hypothetically, that Edward Weniger of Nebraska selects our transaction along with about 2,000 others. It starts chiseling our transaction details into its own block to add to the blockchain. But he is not the only one.

“It’s entirely possible that multiple miners will select your transaction, among other things, and put it in a block,” Farrokhnia said.

Miners all over the world, from Kazakhstan to Florida, want to add their block to the blockchain. But there can only be one.

Step 3: The Mathematical Bitcoin Lottery

So which miner wins?

“In the bitcoin protocol, miners are required to solve a mathematical puzzle which, in essence, is finding a [random] number,” Farrokhnia said.

The puzzle is really more like a lottery. Perhaps the easiest way to figure it out is to go to a casino. “Imagine a slot machine,” Farrokhnia said. “But instead of having three bars, it actually has 64 bars, so you can already imagine how low the probability of success is.”

For any guess – a pull on the slot machine arm – a miner has an infinitesimal chance of hitting the jackpot. The odds are literally better that you will be struck by lightning.

The jackpot, and the incentives miners have for doing all of this, is currently 6.25 bitcoins, currently around $250,000. Jackpots are awarded every 10 minutes or so, and this is how miners get most of their money.

The winning miner’s tablet is added to the blockchain, and Professor Farrokhnia can finally spend his hypothetical bitcoin (although, to be on the safe side, he must wait for a few more blocks to be added).

Proof of work and power consumption

Why the hell is this process so elaborate? “Proof of work,” Farrokhnia explained. “I have to make sure you’ve done the job, the verification correctly, giving yourself a task difficult enough to require electricity and resources and time and so on.”

The theory behind all bitcoin mining is that Edward Weniger in Nebraska wouldn’t go through all that hassle if he tried to outsmart the system somehow. The correct answer to the mathematical puzzle is easily verified by other miners, and a block containing bad transactions should eventually be detected when new blocks are added.

But the original idea was that the miners would really be nerds with a personal computer and free time, a slot machine per miner.

“But it turned out that people realized that ‘Hey, you’ve got two, I’ve got another five at home – if we combine our resources, we have a better chance of winning,'” Farrokhnia said.

As the price of bitcoin has skyrocketed in recent years, the value of the mining jackpot has skyrocketed with it. Multinational mining companies have started developing more powerful rigs and aggregating thousands of them.

This concerns Erik Franklin, a professor who studies climate change at the University of Hawaii.

“If you have a high-end rig, you can basically have the same level of power demand in a single day that I would have running my three-bedroom house in Hawaii,” Franklin said.

Bitcoin evangelists claim that you can easily run rigs from renewable or orphan energy sources. Moreover, it is not as if the traditional banking sector is carbon neutral.

But even now, Franklin said, cryptocurrencies use more energy than some entire countries.

“Don’t look at where it is today, but look at the trend. Ten years ago that impact was zero, and now suddenly we’ve added another country at the scale of Poland,” Franklin said.

Ethereum and other platforms are experimenting with less energy-intensive mining methods. But so far, the bitcoin model is the dominant model.

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