The purpose of Bitcoin mining

[Existing Alternatives]

Can someone explain to a newb, what’s the point of mining for bitcoins? Would it not be easier just to create whatever the final number of coins would be, dump it into the world and “break the mold”?

 

I clearly don’t know much about the bitcoins, left alone the mining side of it. But from what I can understand the mining is happening much faster than it was originally anticipated and within a couple of years the last coin will be mined. After that all the computing power that went into mining will become obsolete. If you are buying one of those devices now, are you sure you will actually mine something before they run out, at which point that would become a concern?

 

[Bastii]

Can someone explain to a newb, what’s the point of mining for bitcoins? 

Well, to "decide" who gets the Bitcoins. 'Cause who would get the 21 Million Coins if they just appeared out of nowhere?

And it also gives people some time to get used to the currency.

 

But from what I can understand the mining is happening much faster than it was originally anticipated and within a couple of years the last coin will be mined.

Yes it is happening faster but that's ok, it will still last to the year 2100+. Bitcoin value per mined block (which is basically what you mine) gets halfed every 4 years (at least that's what the network tries to do, in reality it is like 3.5 years) starting at 50 Bitcoins for a block in 2009 to late 2012. Now it's at 25 per block and in 2016 it will drop to 12.5. Doing some math reveals that even the last "full" bitcoin will be mined in about 80 years and then there's still the 8 digits to go.

[Existing Alternatives]

That's very helpful, Thanks!

 

Well, to "decide" who gets the Bitcoins. 'Cause who would get the 21 Million Coins if they just appeared out of nowhere?

And it also gives people some time to get used to the currency. 

 

Ok, that one is easy. Just a distribution mechanism.

 

Yes it is happening faster but that's ok, it will still last to the year 2100+. Bitcoin value per mined block (which is basically what you mine) gets halfed every 4 years (at least that's what the network tries to do, in reality it is like 3.5 years) starting at 50 Bitcoins for a block in 2009 to late 2012. Now it's at 25 per block and in 2016 it will drop to 12.5. Doing some math reveals that even the last "full" bitcoin will be mined in about 80 years and then there's still the 8 digits to go.

 

So, in another words, the issue is still way too far to get too excited about. But at some point the mining will become too easy, as computer power increases and "miners" futher optimise their approaches, right? Will we eventually get to the point when the next "miner" will simply become unprofitable? When there are millions of people and computers chasing that last coin (or worse that last digit), in will simple make no sense to start new mining operation, right?

[Wesley]

Miners are doing 2 tasks. The current task is they are doing the original unlocking of the coins by solving complex mathematical problems. This is actually a great way for coin introduction rather than a coin creator giving the coins to himself and his friends or otherwise coming up with who gets the coins. The point of this reward structure is to establish, over 100 years, the mining hardware to do the second task of mining.

 

Miner's second task is to validate and audit transactions to make sure that the system is valid. This Proof-of-Work system is a way of creating a distributed auditing and verification system that eliminates the problems of a centralized currency hub that can be shut down.Thus, in a sense the current reward system is paying miners for working for the bitocin system, which is very fair.

 

Over time, blocks will increasingly be released and the reward of releasing coins originally will get smaller and smaller. This is expected and not a big deal if they are released faster than expected.

 

During this time, bitcoin will also be increasing in value ass more adopters are aware of bitcoin.

 

Eventually, mining will still get rewards, but they will not be the main goal of miners. The main goal is to process transactions in which they will get as a reward the voluntarily input transaction fee of the sender as their reward. Miners will prioritize higher transaction fees, so it will be a great system where you can transfer money for free and it will take a long time, or you can put a large fee and get a much more instant transaction. Currently, transaction fee has almost no impact on the speed of your transaction as miners are trying to mine everything as much as they can in order to get the block rewards.

 

Thus, that mining power will not be obsolete, but essential (and still rewarded from transaction fees) for the long-term maintenance of the system.

 

I think you should NOT buy mining equipment unless you really know what you are doing. It is a highly competitive and specialized field with new technology coming out every couple months or so. Do your research before you engage in mining as you could easily spend more in electricity than you mine.

 

Miners also can join pools where if the pool makes a coin, they all split the profits which leads to a much more consistent income stream rather than playing the odds that you can make several thousand dollars or not on somewhat of a large dice roll every 10 minutes.

 

I think I have now answered your questions. If i have left anything out, feel free to ask and I will add more details.

[Existing Alternatives]

I think I have now answered your questions. If i have left anything out, feel free to ask and I will add more details.

 

Indeed you have. Greatly appreciated!

 

I think you should NOT buy mining equipment unless you really know what you are doing. It is a highly competitive and specialized field with new technology coming out every couple months or so. Do your research before you engage in mining as you could easily spend more in electricity than you mine.

 

I am nowhere near the comfort zone necessary to simply own the bitcoins, left alone mine for them. But wait, are you saying that dropping a pretty coin on the fancy equipment does not guarantee getting coins at the end?

[Wesley]

Mining bitcoins is a game of chance. If you happen to finish a block, then you get the reward for that block. The odds of you getting a block are [your hashing power]/ [all hashing power dedicated to mining bitcoin] and the difficulty constantly adjusts to try to make this occur every 10 minues.

 

Thus, it is a dice roll. You can statistically estimate how often you SHOULD get coins, but as we know it is possible to roll the dice many,  many times before your number comes up.

 

This is why people join pools. There are pools out there who own say 10% of the total hashing power. Thus, your odds of rolling someone in the pool is greatly increased. Then the pool splits the block to all of the participants based on the percentage of hashing power the member contributes to the pool. This will lead to a much more manageable and planned stream of income.

 

Right now, a 25 bitcoin block is worth about $15,000. You can take the odds that sometime over the next few years you get one, but you might not. If you have a massive mining operation that has as much resources as a pool, then you are more likely to take these odds as you are more likely to get blocks (and pools take a cut for maintenance).

 

If you are a guy with a couple mining ASICs, there are no guarantees so joining a pool makes more sense.

 

Now, my advice against mining is that you will make coin. What you will do is spend some $5,000 on mining equipment, and make $6,000 in Bitcoin, and spend $5,000 in electricity costs before the next generation of ASICs come out and your equipment is more or less obsolete. Obviously, I made up those numbers and you can make a profit as many do. Just whenever mining comes up I want to discourage noobs from entering the world of mining until they know what they are doing.

 

Mining is not something you play around with until you know what you are doing as there are many more chances to lose money than to gain money. Similarly, if you just heard about the stock market today for the first time, you shouldn't go drop $5,000 on the first stock the internet told you to buy. You go do research and learn and then run the numbers and finally decide what steps you want to take.

[Existing Alternatives]

At risk of sounding completely ignorant, so, if it all based on odds, could the following be a possibility… Can someone pick up a discarded outdated mining device (I assume there were a couple of generations of these by now), plug it into the wall and boom! out comes a bitcoin. As opposed to, another dude having invested millions in a state of the art farm not see any returns for a long time (or forever!)? I recognize that the odds will be stacked, but is there a chance like that?  

[Wesley]

At risk of sounding completely ignorant, so, if it all based on odds, could the following be a possibility… Can someone pick up a discarded outdated mining device (I assume there were a couple of generations of these by now), plug it into the wall and boom! out comes a bitcoin. As opposed to, another dude having invested millions in a state of the art farm not see any returns for a long time (or forever!)? I recognize that the odds will be stacked, but is there a chance like that?  

Well blocks are 25 BTC right now, and also there is a large set-up for older machines (they are getting more plug 'n play nowadays).

 

However, yes it is possible, just super unlikely. On average, you will spend many multiples the energy in electricity costs and never get any rewards.

 

Cryptography itself works on these principles where it is possible to break into your bank account, but the cryptography is strong enough that if you tried to brute-force it it would take thousands of years to get the right combination and cost you far more than the account is worth.

 

Or with bitcoin, you could take the power of the sun running for the lifespan of the earth and then possibly you would be able to break it, at least based on current code-breaking methods.

 

All of these are technically possible, but you shouldn't try to do them because the odds are so stacked against you (and many powers more for each example) that it isn't worth trying as you are mathematically guaranteed to not make a profit.

[Existing Alternatives]

Well blocks are 25 BTC right now, and also there is a large set-up for older machines (they are getting more plug 'n play nowadays).

 

However, yes it is possible, just super unlikely. On average, you will spend many multiples the energy in electricity costs and never get any rewards.

 

Cryptography itself works on these principles where it is possible to break into your bank account, but the cryptography is strong enough that if you tried to brute-force it it would take thousands of years to get the right combination and cost you far more than the account is worth.

 

Or with bitcoin, you could take the power of the sun running for the lifespan of the earth and then possibly you would be able to break it, at least based on current code-breaking methods.

 

All of these are technically possible, but you shouldn't try to do them because the odds are so stacked against you (and many powers more for each example) that it isn't worth trying as you are mathematically guaranteed to not make a profit.

 

Thanks for the explanation! This was just a hypothetical example that popped into my mind.