Bitcoin was quite a blow to the traditional money systems, which countered the problems faced by traditional money transactions, making them less complex, safer, much more private, and peer to peer. Bitcoin is a digital currency that runs on a peer-to-peer network; this decreases any form of tax that would have been imposed on the transaction and works with no or minimum charges. This makes the transactions cheaper (especially international) and easier for the two parties, which is generally untraceable towards the individuals’ personal identity. This, however, doesn’t mean that the transactions cannot be seen; quite contrarily, this transaction is uploaded on the world ledger, which can be seen by thousands of people on the network, making sure no transaction is forged.
However, the question controls such a complicated system, currency flow, transaction security and authentication, issuing of the bitcoins, etc. You would be surprised to know that any government or bank does not control the bitcoins as such. The demand and supply in bitcoins would determine the price of bitcoins in the market in terms of currency like Euros or Dollars or commodities like gold or silver.
The mining of Bitcoins does the supply of Bitcoins in the market. As already discussed above, any transaction that happens is added to the miners’ ledger who confirm the transaction. Thus, a blockchain is created of the digitally stored information about all the transactions that ever took place on the network. Miners make sure that the transactions are legit and the network hasn’t tampered with. Miners put the particular transaction in a process, and a mathematical formula is applied to it, creating a sequence of random letters and numbers which is unique. This sequence, which is easily producible from blockchain, is known as Hash. The Hash of each new transaction has a relationship with that of previous transactions. As the coding of one transaction is based on the previous one, any tampering will lead to change in the whole block, and everyone would come to know. The wrong transaction in a particular block can be spotted easily by a hash function looking at the changed hash; hence the fake can be spotted.
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These are the miners’ responsibilities, Give Us Life, but what is the reward of doing such things as sealing off the blocks and creating hash? Each miner has rewarded bitcoins for doing such functions. But creating the hash is very easy; the computers and hardware made specifically for bitcoin mining can make hashes within minutes, which would result in emptying up the bitcoin treasury. Thus, the supply is controlled by making the mathematical equations much more difficult to solve for computers when the supply has to be decrease,d and to increase the supply; the equations are made much easier. This is known as proof of work. As already mentioned, the hash should be new, and hence no older hash formats would work.
The bitcoin software demands that the hash is in a particular format, and the same data cannot generally be used. Here is what a nonce comes into the picture. The nonce is random data used so that the hash fits the format which is required. The nonce is changed again and again to break the code and steal the data. Multiple attempts are made to succeed.
The next question is how can we mine these bitcoins, and what are the requirements? As you read above, mining seems a pretty complex job for miners, like mathematical equations, nonce, conventions, and creating a hash. But all this is automated in software that uses the processor’s power to solve these equations. Initially, the bitcoins were mined through a normal computer. The more there was processing power, the faster the coins were mined. It was further found out that the gaming processors used were more powerful and could better mine the bitcoins.
But the basic disadvantage was that bitcoin mining demanded a lot from the computer, and the more the equations toughened, the more it became tougher for the normal computers. The other major cost included that of electricity. Now there is specialized hardware to mine these coins, which does it more efficiently and consuming less power keeping the cost low.