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The Bitcoin Mining Network

An Intricate Mining Process


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By Swagato Chakravorty
Friday, May 24th, 2013

Bitcoin has been hitting the news recently. About a year ago, you’d pay roughly $5 for 1 Bitcoin. This April, the exchange rate hit $266, and it's still as high as $122.

A lot of this violent fluctuation had to do with economic trends on a global scale – consider the financial fiasco in Cyprus, for example, or the protracted Eurozone downturn. Or even gold’s run of good fortune seemingly expiring as investor attention turns increasingly to equities and platinum group metals.

bitcoin 2Meanwhile, Bitcoin, the virtual currency, gained a certain luster as it appeared more bulletproof compared to real-world currencies. Not a lot of these news stories have focused much on the process of Bitcoin mining, though.

Bitcoin was the brainchild of an anonymous hacker that went by the name of Satoshi Nakamoto. The fascinating bit is that Bitcoin operates on a peer-to-peer (p2p) network that can, at any given instant, total as much as 1,000 petaflops of computing power, thanks to the thousands of computers that form part of the network, CNNMoney reports.

If Bitcoin were to run on a single electrical network, it'd be drawing approximately $200,000 each day. Every ten minutes, Bitcoin’s core algorithm generates a batch of Bitcoins. This algorithm is designed to generate a total of 21 million Bitcoins, of which 11 million have been released. But that’s not all.

On the one hand, you have the core algorithm generating batches of Bitcoins. On the other hand, you have computers that must solve complex algorithms that go up in complexity in order to ‘win’ the Bitcoins. Meanwhile, the so-called “blockchain” operates as a sort of digital ledger, keeping track of every Bitcoin mining and transaction.

In case the picture isn’t clear yet, consider this. Originally, you could let your home computer or laptop work on the mathematical algorithms and eventually win a few Bitcoins. Now, the situation is so complex that extremely powerful, dedicated computers are required to keep the mining going.

And that’s generated a whole sub-economy comprised of Bitcoin fund companies like BitPay and BitInstant. The latter, by the way, is spearheaded by the Winklevoss twins (remember The Social Network?). Presently, the total Bitcoin economy could be worth as much as $1.4 billion.

Bitcoin Mining Opportunities

Butterfly Labs is one of the companies working to position itself as a leader in the Bitcoin mining economy. Obviously, given that Bitcoin mining has quickly evolved way beyond the capacity of most home computers, and the fact that there’s significant profits to be made by setting up dedicated mining operations, entrepreneurs have paid close attention.

Butterfly Labs has designed its ASIC Bitcoin mining products, the first few shipments of which have just gone out. As an indicator of just how much demand such a solution generated, consider that orders have been backlogged since June of 2012.

The devices come in varying computing capacities, and a variety of technical problems kept delaying the first shipments. The purpose of these devices is simple: they exist to run the increasingly difficult algorithms that must be solved in order for Bitcoins to be mined. In other words, they are digital miners.

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Every ten minutes on the Bitcoin p2p network, a random lottery event occurs whereby some device ‘wins’ 25 Bitcoins (in addition to what it’s already mining). That’s the essence of the whole operation.

For the tech-minded among you, Wired recently put its Butterfly Labs unit to test; it’s been averaging 5.5 billion hashes per second. Wired’s team paired up with the Eclipse Mining Consortium (a Bitcoin mining group) to pool computing power.

Over ten days, and accounting for the share split, Wired was able to mine a little over 2 Bitcoins. Evidently, Bitcoin mining is not meant to be an easy task.

However, consider that at the present exchange rate, that’s actually almost enough to pay for the Butterfly Labs unit, which cost $274. That’s not too bad at all.

The big question now is what’s next for Bitcoin. It’s different from the forms of virtual currency we’ve been accustomed to in the past (reward points and the like). For one, Bitcoin is big – very big. It’s a worldwide phenomenon, it’s innovative, and it’s made a serious impact on the real-world market.

On the other hand, there is a finite limit to how many Bitcoins can be created. We don’t know, at this point, what comes after that. 

 

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