Bitcoin Mining

Key Takeaways

  1. Bitcoin mining's purpose is to secure the network & group transactions.
  2. Miners are essentially playing a lottery where each computation they make is akin to buying a ticket.
  3. As an incentive to participate in the validation process, miners who create a new block (which requires winning the lottery) receive the block reward of 6.25 new bitcoins plus the associated transaction fees.
  4. Mining difficulty is adjusted approximately every two weeks to keep new bitcoin issuance on schedule and allow for ten minutes between every new block.
  5. Mining is a numbers game. Because of this, individuals and small mining companies band together in pools to increase their odds of success.


Bitcoin is a decentralized network. No single entity is trusted to update the blockchain.1 Instead, a subset of network participants, called miners, collectively take on this responsibility. This isn’t to say that miners run the network. Bitcoin’s history proves that they don’t.2 Instead, you can think of miners as security guards who are paid by the network for their labor.

Miners secure the network so that the same bitcoin can’t be spent multiple times by the same user. They do so by ordering the network’s transactions into blocks, or batches of transactions, which is akin to time-stamping them.

For providing this valuable service, miners are incentivized to bring computing power to the network with new bitcoins. Miners receive 6.25 new bitcoins3 — as of May 11, 2020 — for each block they add to the blockchain plus the associated fees from the transactions within that block.

Bitcoin’s pseudonymous creator Satoshi Nakamoto understood the temptation miners would have to break the rules to enrich themselves. So to discourage malicious behavior, he designed a system where miners have skin in the game.

Adding blocks comes at a cost. In what is known as “proof-of-work,” miners have to make an incredible number of simple computations to have a chance at winning a block (it is a competition, after all). Running so many calculations requires real-world energy consumption, and lots of it. In this way, mining connects the physical and digital worlds. A miner who would try to submit a block with invalid transactions does so at their peril. Other network participants would reject an invalid block, thereby wasting the miner’s own time and money in the process.

Miners’ Role

When a person sends bitcoin from one address to another, computers running the Bitcoin software (known as nodes) that maintain copies of the ledger (known as the blockchain) jump into action. The nodes check that the data is formatted correctly, is less than the block limit of 4 million weight units, and conforms to a host of other technical parameters.

If the transaction passes this initial test, it’s added to what is known as the mempool. The mempool is simply a repository of valid transactions not yet included on the Bitcoin ledger.

Here’s where miners come in. Nodes don’t add groups of transactions, known as blocks, to the blockchain. Miners do. When a miner discovers a new block, the competition for the next one immediately starts. Miners begin aggregating mempool transactions based on priority. Factors such as how long they’ve been in the mempool and the fees attached to them determine if they’ll get included in the next block.


While aggregating the transactions into a potential block is simple enough, mining is computationally cumbersome because of the proof-of-work required by the protocol. Consequently, for a valid block to get added to the chain, a miner has a task that, at first glance, might seem unnecessary.

At a high level, bitcoin mining is a lottery. Miners that do the most computations get the most tickets, which increases their odds of winning a block, but there's no guarantee. Like the lottery, finding a block is purely probabilistic.

This extra step serves an essential purpose. By imposing a cost for adding new blocks, proof-of-work discourages miners from including invalid entries like double-spends (using the same bitcoin in multiple transactions). If miners included double-spends, faith in the system would be lost.

However, it is possible, albeit unlikely, for a miner or group of miners to include invalid transactions in a block. In order to do this, miners would need to control more than half of the network computational power in what is known as a "51% attack." By controlling over half the network computational power, these malicious actors could insert transactions that would not be recognized by the rest of the network participants, potentially spending the same bitcoin multiple times. A 51% attack on the Bitcoin network is exceedingly improbable given the amount of processing power it would require. Still, it has happened on other blockchains4 that have far fewer miners. With these facts in mind, you can think of a blockchain’s security as a function of the amount and distribution of its processing power.

Contrary to popular belief, mining doesn't require solving a complicated mathematical problem. In reality, miners are just playing a guessing game with incredibly long odds. The first miner to generate a lower number than the current target set by the network wins. The catch is that, unlike a lottery, miners don't get to choose their numbers.


The numbers they play in the Bitcoin lottery come from what is known as a hash function. A hash function is an algorithm that takes a data input of any size and turns it into a numerical value. For example, Bitcoin uses the SHA-256 hash function, which the U.S. National Security Agency created in 2001. For data of any length, SHA-256 returns a value in hexadecimal format (a 64 character long string of numbers and letters that is just another way to write out what you'd think of as a typical number). It's worth noting that the hexadecimal number doesn't store the data used to create it. So knowing the number doesn't mean the SHA-256 algorithm knows what went into making it. You can quickly transform data with SHA-256, but the only way to discover the input is to guess.

The magic of SHA-256 is that the same input will always result in the same output, and each different input yields a unique output. So running "Satoshi" through SHA-256 will always produce the same result. But "Satoshi1" results in an entirely different value.

Satoshi Result


Satoshi1 Result


And how "Satoshi1" differs from "Satoshi" is unpredictable: the only way to determine how the two will vary is to run the SHA-256 computation.

Rules of the Game

The rules of the Bitcoin lottery are deceptively simple. Miners compete to be the first to find a hash that has a numeric value that is lower than the target number. The data they input to create the hash isn't arbitrary, however. If it was, miners could recycle prior hashes with known values. As such, hash inputs must obey a set of rules.

You can think of the inputs used to create a hash as falling into two buckets for simplicity. First, there are constant components. Each input for a hash must include the hash of the previous block and the current target  value,  among  other  requirements. The  second  component  type  is  variable.  This  part  of  the  entry  is  known  as  the  nonce.5  The  only  limitation  set  upon  what  the  miner  uses  for  a  nonce  is  that  it  must  be  a 32-bit positive number.

Essentially,  miners  keep  entering  combinations  of  these  constant  and  variable  components.  They  change  the nonce value with each attempt until someone produces a hash with a value that is lower than the current target.  Because  there's  no  formula  for  the  SHA-256  algorithm,  miners  don't  know  what  nonce  value  will  result in a winning ticket when added to the required components. Just like the lottery, the only way to see if you'll win is to play the game. In the case of bitcoin mining, that means creating as many hashes as you can, as quickly as you can.

Theoretically,  a  miner  could  hit  on  their  first  try.  Still,  on  average,  it  takes  quadrillions  of  hashes  to  find  a  sufficient  one.  These  minuscule  odds  are  intentional.  The  protocol's  design  tries  to  have  blocks  mined  approximately  every  ten  minutes.  There  are  two  reasons  for  this:  to  allow  nodes  enough  time  to  acknowledge  changes  to  the  blockchain  and  to  keep  new  bitcoin  issuance  on  its  predetermined  supply schedule.

Since  the  discovery  rate  varies  with  the  network's  hashrate,  the  target  value  is  modified  every  2,016  blocks,  or  roughly  every  two  weeks.  This  modification  is  what  is  known  as  the  difficulty  adjustment.  For  example,  the  protocol  will  lower  the  target  value  automatically  if  miners  produce  blocks  quicker  than  the  desired  ten-minute  pace.  Conversely,  if  the  average  block  creation  time  were  above  ten  minutes,  the  target  would  increase,  creating  more  winning  hash  values,  and  making  it  easier  for  a  miner  to  “win”  the game.

For a sense of how the difficulty adjustment works, consider the example of rolling a pair of dice. If the target is 12, any roll other than two sixes would be a winner. That works out to a probability of success of 97.2%. But if the target drops to 3, only one combination works, and the success rate plummets to less than 3%. The higher the target, the easier mining becomes.

In  this  way,  the  network  constantly  adapts  to  the  number  of  miners  on  the  system  and  advancements  in  processing power. No matter how fast the network grows, miners can't add blocks to the chain much quicker or slower than every ten minutes.  And because of that fact, miners can't create all 21 million bitcoins until about 2140.

While it takes quadrillions of guesses to find a winning hash, once found, it only takes one computation to confirm it. The miner who first discovers a good hash sends out the inputs they used to the network. Other miners and nodes can then run a single computation to verify its validity.

Mining Pools

After the rest of the network verifies the winning hash, the miner has the right to add the new block to the chain and receive the block reward and associated transaction fees via a coinbase6 transaction.

Because mining is quite literally a numbers game, it's become economically infeasible for individuals or even small companies to go at it independently. But that doesn't mean mining is only for industrial-sized operators. Smaller miners can join pools, essentially mining collectives, to increase their odds of success.

Pools distribute the mining rewards they earn to their members based on the proportion of hashrate each contributes.  So,  for  example,  a  miner  that  makes  up  10%  of  the  pool's  computing  power  would  get  a  10%  share of the pool's bitcoin rewards whether their machine was the one to find the block or not.


1 The blockchain is the history of transactions made on the network.

2 Between 2015 and 2017, a faction of Bitcoin developers proposed changing the code to increase the block size beyond one megabyte. The largest miners at the time were in favor of this modification, yet the proposal never gained consensus among node operators and ultimately failed to be implemented.

3 The amount of bitcoin miners receive for discovering blocks is cut in half approximately every four years in what is known as a halving. This regular event is programmed into the protocol. Halvings occur, arguably, for two reasons: 1) Satoshi anticipated that with the rising value of bitcoin it would take less of a reward (in bitcoin terms) to incentivize miners to participate and 2) halvings limit the supply of new bitcoin resulting in a decreasing rate of inflation.

4 In August 2021, Bitcoin SV endured such an attack.

5 In practice, other components of the hash input can be slightly changed as well, but for this overview we’ll only consider the nonce.

6 Coinbase here refers to an element of the Bitcoin protocol, not the popular exchange. A coinbase transaction is the first transaction in a block and it’s how miners reward themselves for finding a new block. The coinbase transaction creates new bitcoin.


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