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Bitcoin Mining: Step by Step

Bitcoin Mining !

The following thread will guide you through the step by step process underlying the mechanics of mining BTC

Let's get started!

🧵 ⛏️🔑

The Dynamism of Digital Mining The Dynamism of Digital Mining

How it works?

🔹Step 1

In order for a miner to receive a block, miners must compute a SHA256 hash function and solve a puzzle. A hash function takes any length of data input and produces an output of a set length ...

🔹Step 2

The computation winner, which is determined by amount of energy contribution, is able to store their transactions into the mempool (waiting room) and get paid block rewards

However,

Before you are paid for your contributed work...

🔹Step 3

Transactions are sent to every node on the network.

Nodes relay and broadcast the transaction information and determine whether it adheres to the consensus rules. This is a process that bridges faulty transactions (i.e. double spending) ...

🔹Step 4

These unconfirmed transactions are then kept in what’s called a mempool, which you could think of as a waiting room until miners have selected their choice of block.

The selected transaction will gift the original miner for their service ...

Miners will receive both block subsidy (minted Bitcoin) and transaction fees.

The selection of the transaction is dependent on the state of storage limitations and fees. Miners will prioritize transactions with highest fee-to-data ratio...

Once a block is chosen...

🔹Step 5

A confirmation is made! The transactions are then cleared from the mempool and added onto the chain, ready to be picked up by a new miner.

🔹Step 6

Subsequent blocks are added to the chain over time

There is no central governance that decides block validity or set of transactions. Work is the arbiter of truth and for that reason, Bitcoins security becomes scalable over time.

Subsequent blocks are added to the chain overtime - this builds layers on top of the networks durability, legitimacy and trust-ability.

With security comes growth in conviction, and over time we see improved technologies, and dynamic approaches to capitalize on operation etc..

The proof is in the hash rate.

Some explanation for rise in hash power:

🔸Dollar denominated value of bitcoin becoming

increasingly lucrative 🔹incentive to expand operations 🔸Metcalfs law 🔹The dynamic ways to deploy and use mining

hardware ...

Okay the proof is in the hash, but what about the cantillon effect?

This was a problem Satoshi had anticipated,

Satoshi had designed the system to limit power hungry miners who had skin in the game early on. The way Satoshi battled the very nature of this effect was with...

A cyclical and deterministic issuance of bitcoin over time - an idea governed by two innate protocols:

🔸difficulty adjustment

🔹block intervals

Since the thread is about the mechanics, let's figure the part out!

When a miner hashes the information, they encode a block timestamp into the block header. The system is then able to determine the block intervals (the time it took the miners to compute a hash function).

An automated difficulty adjustment then responds to reach a target...

It adjusts to a predetermined target zone of 600s (10 min). Just note, the actionable response to the average block interval occurs roughly every 2 weeks (2016 blocks)

and in a longer time frame, the reward having every 210,000 blocks (roughly 4 years) ...

This keeps the monetary system fluid and difficult to take advantage of. Which is why the proof of work mechanism works so well...

As you can see in the figure, hash rate 🟡 and difficulty 🔴rise monotonically.

Just keep in mind, difficulty responds to the functional change of computational power (hash output). In an instance when a block is produced at a faster rate than the average base rate...

Here we are, the innate protocol monitoring block intervals (avg time to compute a 256 hash). To understand this...

Let's focus on 2 lines. When the 🟠(mean block interval) crosses the threshold (600s) ⚫️ in either direction, a difficulty response will occur later (2016 blks) ..

But 1st, the system monitors the intervals.

These areas are highlighted when.

🔵the avg time to mine a block had surpassed the threshold to the upside, meaning blocks were on avg being mined quicker 🔴 to the downside, meaning blocks were on avg being mined slower

When block intervals are 🔼🔵, it suggests that hash 🟢has been 🔽. We could also say, the time it takes to mine a block has been quicker than usual

Vice versa, with hash rate 🔼, block intervals start to move below the threshold (blks time slows),

what happens next?

Well since difficulty responds to the functional change of computational power (hash output).

We can now see that as hash rate 🟢precedes the action of difficulty 🟣

This really helps the system ...

to ultimately drive the fluidity and deterministic issuance of supply.

🔸avoid congestion & rapid accumulation

🔹allow this state of fluidity and mathematical

determinism

🔸reduce inflation rate 🔹avoid the common cantillion phenomona

I hope this ADJUSTED thread helps to simplify the proof of work mechanism! 🧵

@glassnode @_Checkmatey_ @TXMCtrades @CryptoVizArt @jameslavish @knifefight @JanWues @TheRealPlanC @BaroVirtual @OnChainCollege @Trader_XO @level39 @knifefight @JanWues @JMellerud @jameslavish

This post is based on this twitter thread.

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