Mining Bitcoin

Throughout 2018, Bitcoin’s price has slowly fallen from the highs near $20,000 to roughly $4000 today. Opposite this massive decrease in price, though, is the hash rate on the Bitcoin network: it has mainly gone up in 2018, starting the year averaging less than 15 exahashes per second, now averaging in the 30-40 exahash range, with a peak in November of ~60 exahashes. An exahash? That's a billion gigahashes per second, or a billion billion -- that's 1,000,000,000,000,000,000 -- hashes per second. That's a lot of hashes.

So what?

Hashing is used heavily within the Bitcoin protocol to secure the network, and Bitcoin has miners that are constantly validating transactions as they happen. The higher the hash rate, the more miners there are securing the network, the higher the transaction throughput can be -- all signs of network growth, currently very important for Bitcoin to reach it's goals.  

What's the link between hashing and miners though?

Well, hashing is what mining is all about. In the Bitcoin protocol, transactions are verified through consensus on the contents of its blockchain. The Bitcoin protocol specifies that miners will bundle transactions into blocks, which in Bitcoin today are limited at 1MB -- a contentious point that has created several forks of Bitcoin, such as Bitcoin cash. When a block is full of transactions and it is to be submitted onto the blockchain, the miner needs a Proof of Work (PoW) hash input in addition to the bundled transactions, and this is why miners hash so much.

Since hashing is a one way function, taking an input and hashing it to an output is computationally very simple. We just apply the function to the input, and an output is generated. To go from the output to the input, however, using the SHA-256 secure hashing algorithm requires heavy brute force. The way Bitcoin’s PoW works is very similar to Hashcash, except that instead of a 160-bit SHA-1 hash Bitcoin uses a 256-bit SHA-256 hash, and the required number of leading 0s, which in the original Hashcash algorithm is 20 bits, is variable in Bitcoin.

This variable is the difficulty measure, which is adjusted every 2016 blocks to keep block creation at an average of 10 minutes per block. This means the difficulty is adjusted roughly every 2 weeks: 2016 blocks * 10 min/block * (1/60) hr/min * (1/24) day/hr = 14 days. The current difficulty is 5,106,422,924,659 (5.1 trillion), indicating that there is a 1 in 5.1 trillion chance of finding the hash input that yields the target hash output for a given block.

By trying a large number of inputs, miners apply the SHA-256 hashing function to see if they match the target value. Due to the innate properties of the SHA-256 algorithm, this brute force method is the best way of finding the target, which is why the Bitcoin network has such a high hash rate. A less secure hashing algorithm would have recognizable patterns, which would make finding the target output not necessarily random, and break Bitcoin's core security infrastructure.

Mining is essentially attempting to guess a target value as fast and as often as possible, and occasionally getting lucky and earning a mining reward. With the difficulty measure making the chance of finding the target output 1 in 5.1 trillion, and each block requiring a new target value, aggregated hash rate like mining pools have significant advantages over solo miners, although they share the reward amongst the pool's miners, while a solo miner keeps all of his or her rewards.

With this in mind, as more miners bring full nodes online, bringing more hash power to the network, the more transactions can be processed. As more transactions need to be processed, Bitcoin needs more miners to bundle these into blocks and thereby verify them. This virtuous cycle is part of Bitcoin’s core growth engine. 

Why Play This Guessing Game?

Incentives! At the very beginning, every single block successfully added to the Bitcoin blockchain yielded 50 Bitcoin to the miner of that block, in addition to any transaction fees for the bundled transactions. Every 210,000 blocks, this reward halves, and the current reward is 12.5 BTC/block. We are a bit more than 70,000 blocks away from the next halving, which will bring the block reward to 6.25 Bitcoin. This geometrically diminishing reward was designed to incentivize and reward early adopters who would secure and evangelize the network to help it grow. Long term, though, Bitcoin mining will eventually rely solely on fees, although that is still a few years away since each halving takes roughly four years.

This incentive structure for miners is simultaneously the scaffolding for ever slowing currency supply growth until the cap of 21 million coins is reached. While at first, inflation in Bitcoin was staggeringly high, the supply only grows ~3% a year now, and this number will continue to trend towards 0 until roughly 2140, at which point all Bitcoin will have been mined and the supply will remain fixed.  

So while the price of Bitcoin has dropped significantly this year, the network itself has never been healthier with the hash rate more than doubling over the course of the year, while further development continues to chug along. The lightning network has just reached a capacity of 500 BTC, and Bitcoin’s market share has been above 50% for several months now. Bitcoin’s price might be down, but it doesn't look like it'll stay there forever.