Analysis

Brief History of Bitcoin Mining



The concept of bitcoin mining was first introduced by the pseudonym named Satoshi Nakamoto in the original Bitcoin paper published around 12 years ago back in 2008. The main purpose of the concept was two-folds: to design a competitive process to make the Bitcoin network more and more secure with time and to use game theory to get more and more users onto the network and using the cryptocurrency.

Suffice to say that the despite some road bumps along the way, the mining aspect of Bitcoin has remained an integral part of the network and has helped it become a truly global entity as envisaged by the founders. Other cryptocurrency networks like Ethereum, Litecoin, XRP and others also copied Bitcoin but deviated a lot over the years in the mining process from the original Bitcoin paper and now only Bitcoin is operating on the same principle as the original intention.

The Basic Function

The basic mathematical function behind Bitcoin mining remains the same i.e SHA-256. It is an energy intensive algorithm that basically takes bigger pieces of data and shrinks them into smaller bits, in this case 256 bits. The mining pool or group that finds the right solution gets all of the block mining reward which is basically a fixed number of Bitcoin being released into the public after every 10-12 minutes. The block reward is the only source of creation of new Bitcoin and is set to reduce to half every four years or so in a process called Bitcoin Halving. The last Bitcoin Halving occurred recently on May 12, 2020 and you can read about it here. You can also read about previous Bitcoin halvings’ coverage here. In 2009, the block reward was 50 BTC which was reduced to 25 BTC in 2012, further reduced to 12.5 BTC in 2016 and even further reduced to 6.25 BTC in the latest halving and will further reduce to 3.125 BTC in 2024.

Early History

Famously, the first 1 million Bitcoin were mined by Satoshi Nakamoto himself on his personal computer mostly likely. These Bitcoin were never transacted with and now, they have become stuff of legends as Satoshi Nakamoto is nowhere to be found. The difficulty was almost non-existent as no other entities were involved. Slowly, Bitcoin network was joined by some of the earliest adopters and they started transacting on it. Basically, it was a bunch of computer scientists and nerds who transacted with the cryptocurrency and dedicated their resources to earn some rewards. Standard double-coure processors at that time were used by the hobbyists and block reward usually went to one person at a time rather than being shared by entire mining pools. However, soon afterwards in 2010, miners began to operate in groups called mining pools. They have been around for some time within the industry. A block reward at that time fetched around 5 dollars which is now worth $320,000 at the time of writing even with the reduced 6.25 BTC block reward. So, the beginnings of this industry were extremely humble.

Interestingly enough, Bitcoin didn’t even had a steady value back then and the first known valuation was through the famous Bitcoin pizza deal as late as May 2010. In this interesting deal, Lazlo Hanyecz paid 10,000 Bitcoin for two large pizzas after posting an online offer which makes it worth around $50 and now, around $10 million. However, this story has caught on ever since and now become stuff of legends. Slowly, but steadily, users began to trade in the cryptocurrency, increasing its value and luring more miners into the network. The mining system is competitive and with increasing prices, these amateur early miners began to experiment with new equipment to increase their hash rates. This give birth to the using of computer graphics cards or GPUs for mining. In October 2010, the code to enable this was released to the public and this is when mining really began to become a race for technological/resource superiority.

Early Dedicated Bitcoin Mining Resources

Difficulty kept on rising and as a result, different techniques superior to the use of individual graphics card rose from the competition. It included the possibility of using multiple miners at the same time in makeshift arrangements called mining rigs. In June 2011 field-programmable gate arrays (FPGAs) became important within the mining community and the difficulty kept on increasing. The 2012 halving impacted the mining difficulty and future in many ways. First of all, the first halving resulted in a considerable increase in Bitcoin’s price index which fuelled the start of proper corporate-level mining wars. The multiple arrays not only became faster in mining but also reduced electricity costs which was a growing concern back then.

While rising costs and maintenance issues meant that areas with expensive power costs couldn’t compete with their older GPUs and rigs, areas with lower power costs like China continued using them for several years as increasing Bitcoin price allowed them to profit from it.

Bitcoin mining-2

Image source: pexels.com

Rise of ASIC Mining

Until 2012, Bitcoin mining had been done with hardware that wasn’t specifically designed for this purpose. It was more of an added functionality and gamers could profit by dedicating their standby computers on it. However, in late 2012, Bitcoin mining saw the arrival of the first ASICs or (Application Specific Integrated Circuits). Chipmakers acknowledged the new industry and designed specific circuits that allowed users to be ahead of the game. These circuits or ASICs ignited corporate mining wars in the true sense. The early ASIC manufacturers included Bitmain (China) and MicroBT emerged and began promoting their chips heavily, thus forever changing the dynamics oft the industry forever. The first ASIC, however was created by  Canaan Creative, a Chinese chip manufacturer.

Now the race was two-way; to buy and profit from the latest mining hardware and to find the cheapest sources of electricity available. 2013 and 2014 saw a dramatic shift in shrinking of sizes of Bitcoin miners from something like old big, old servers to small chips that could be hidden in your pocket.  Miners began to relocate to remote areas with abundant hydropower/nuclear power. These areas included Iceland, remote Russian sites, Quebec, Canada, massive Chinese hydropower projects and so on. Still other companies installed massive solar power projects just for this purpose. It was around the same time that Bitcoin mining was blamed for being too energy intensive. Ethereum, Litecoin and eventually Bitcoin Cash and other smaller networks have tried or are now trying to move away from the energy intensive nature by abandoning the Proof-of-work approach.

The Present and Future

After 2016, the mining wars multiple companies are now involved in the mining industry which is diverse and an industry within the whole Bitcoin ecosystem on its own. Bitcoin’s Proof-of-work approach has many critics but it is most likely to be continued for times to come, thus increasing its hash rate to record levels. The current hash rate is around 130,000,000,000,000,000 h/s, which in the beginning was around several thousands only. It is expected to continue to grow larger and larger with time.

Featured Image source: pixabay.com



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