Bitcoin mining is often simplified to the point where the definition is basically meaningless. I will try to explain it as simply as possible but first we need to unlearn some unhelpful things.

The goal of Bitcoin mining is NOT to earn bitcoin

If we start with the premise that the goal of mining is to earn bitcoin, it makes everything 100x harder to explain. It's a nuanced point however, miners DO mine to earn bitcoin, but in the grand scheme of things, the main goal of mining is not to create or earn bitcoin.

I like to think of Bitcoin as a complex clock or watch, there are many small moving parts all coming together to keep the system working flawlessly. Take out one small part and the whole thing might fall apart. The goal of mining is to provide "immutability" and "finality" to all the events that occur on the Bitcoin network.

Understanding the anatomy of Bitcoin

Before we can understand the purpose of Bitcoin mining, we must first understand a little about the anatomy of Bitcoin and some of the properties it must uphold to be useful.

Consider your bank account; there is a balance associated with your name, but what gives that data integrity? Usually it is the fact that the data is coming from an authoritative source, a trusted third party. If I could get a copy of the bank's database, would you trust that the same data sourced from my machine was correct? Could I have modified the records before showing it to you?

Bitcoin does not rely on any authority. This is a very important part of its design and it is what allows Bitcoin to remain independent of any company or government. To achieve this, it relies on checks and balances to be embedded within the data that it contains. Bitcoin is fully transparent in order to ensure that anyone can audit its data. The most important thing to check, of course, is that the books are balanced, but beyond that, Bitcoin introduced personal digital signatures to ensure that records are authorised by individuals directly, and it introduced an ordering system.

Digital signatures not only prove that a record was created by the owner of the bitcoin being spent, but if the record is ever altered, the signature no longer matches; this means that we don't need to trust anyone to execute our requests faithfully.

Order is important to ensure that everybody can agree with which payments are valid and which are not. Imagine I write two identical cheques to give all of my bank balance to two different people. One will settle, the other will bounce. With a traditional bank, one banker will decide which came first and will decide which settles and which bounces. In a decentralised (not centralised) system like Bitcoin, we need to be able to introduce a robust and reliable ordering system that does not rely on a trusted authority. Beyond just ordering, there also needs to be some integrity to the data so that not only an order can be agreed upon, but also there can be no re-ordering. Determining an order without preventing re-ordering is basically useless.

Ordering records

You may have heard of the "blockchain". This technology is just a data format, but Bitcoin uses this technology to help lock in an order into the record system. In a blockchain, records are grouped into blocks, and each block must have a link back to its previous block, creating a chain of blocks; pretty self explanatory in hindsight.

Imagine somebody deciding to become part of the Bitcoin network, they wish to get a copy of all the bitcoin records, but there is a problem:

1. One person shows a series of records that fully balances, has all the other checks and balances, and it shows a payment from me to you.
2. Another person provides a similar series of records that also fully balances but it does not show that payment from me to you, it shows a payment from me to me in its place.

Which one is correct? Both pass all checks, but if I choose the first set of records, then the payment from me to me becomes invalid because it attempts to spend money that has already been spent, while if I take the second set of records, the inverse becomes true.

The blockchain allows us to declare an order, but we still need a way to lock that order in, such that if someone provides an alternative set of records with a different order of events, we can all use some robust and reliable set of rules to choose the same record set without needing to coordinate with one another or rely on some trusted authoritative source.

This solution also needs to be resistant to being gamed; one elephant in the room is the idea of relying on dates and times, but computers are terrible at agreeing on time and although data can travel at the speed of electrons, there are still bottlenecks that can lead to data arriving in a different order between different computers.

Using a game of chance to prevent changes

The most fair way to make an arbitrary decision such as this, where there is no real right or wrong answer (remember "date sent" can be gamed, so we can't base any decisions on that), but a decision still needs to be made is by introducing something that is statistically hard to undo.

You may know the game of Boggle. This is a game where you have a set of dice inside a tray with letters on the sides instead of numbers; you place a box cover over it, shake it, and then allow the dice to fall into a mould at the bottom so that they are all sitting alongside each other in a square formation (usually 4x4) with one letter facing up per die. Let's re-imagine that the goal of the game was simply to shake the box, align the dice and remove the cover and if there was a 4 letter word on each row, you win, and if not you must shake again.

This is analogous to Bitcoin mining. It is a pure game of chance, and if we had a bunch of them, we could turn the game into a race: who can create the longest chain of winning boggle shakes in a row!

To illustrate how the blockchain creates links between blocks, we can add an additional rule that the first die in a Boggle tray (we will call them blocks going forward) must match the last die in the previous block. This way, we know that the order of blocks cannot change as the link is being built up.

Here is an illustration of a chain from this game:

Finally, let's make it more interesting: the goal is to have as many blocks as you can on the longest chain. If you notice that someone else has a pretty long chain, you can abandon your own and start to build blocks for their chain instead. If you create a block that satisfies the rules and your first letter matches the last letter of their last block, your block can go on top.

We will start to notice the following things:

1. People will quite quickly start to abandon their own chains and work on top of one faster growing chain.
2. The chain with the most people working on it will naturally grow at a faster pace.
3. Those competing too hard to maximise the number of blocks they have in a chain will see their chain fall behind the fastest growing chain.
4. It takes a non-negligable time between rounds and usually one person wins at a time, there are rarely any moments where two people create a valid block for the same chain within moments of one another.

Using forks to change history

It gets interesting when someone notices something like an offensive word in the chain, let's call it "DUCK". A lot of people don't care, but a large group of individuals do, so they choose to "fix" the rules, making that block and all the blocks after it invalid too (because they all eventually link back to the invalid block).

They create a new block that continues off from the block before the offensive one, creating what we call a "fork". This new chain will inherit the same past as the original chain, but it will still be shorter than the original chain because during the time it took to create this alternative block to replace the offensive one, the rest of the players continued to build blocks on the original chain as normal.

Since this game is mostly based on chance, the chain that grows the fastest will be the one that has the most players contributing to it. Even if the smaller group appears faster for some time, over a long enough time, statistics will prevail; it is the same as how over enough coin flips, we will observe that there really is a 50/50 chance of heads over tails, even if the first few flips were mostly all heads.

If enough players are motivated to contribute to the shorter, profanity-free chain, then that chain will grow faster and eventually become, and remain, the longest chain. The other indifferent players will then jump ship and join the new longest chain in order to maximise the number of their blocks in the new longest and faster growing chain.

Fortunately, the more likely scenario is that the offended group is a minority and the original chain remains the longest and fastest growing chain. This natural phenomenon ensures that the history of events cannot easily be changed for simply arbitrary reasons. On a global scale, this phenomenon is ever more present, because not even laws, politics, nor what is considered moral can be agreed across the world.

Cheating

In a game like the one above, there are opportunities to cheat. Maybe you could choose not to shake your box, but place the dice by hand. Unless someone is constantly watching you, no one would ever know.

With Bitcoin mining, there are simply no such shortcuts. The fastest and cheapest way to produce a block is to play fairly. Let's dive into what Bitcoin mining really is.

What exactly is Bitcoin mining?

People often use analogies to describe mining; "it's like a lottery", "miners solve complex mathematical problems", "miners guess random numbers". The problem with analogies are that they tend to omit key details that ultimately mislead the reader.

Miners perform a series of tasks repetitively, simplified:

1. Collect the records that users create and compose them into a file.
2. Add a reference to the previous block.
3. Add a random number to the end.
4. Check if the file satisfies a certain special criteria.
5. If not, replace the random number with a new random number and repeat from step 3.

To check if a file satisfies our special criteria, we pass the file through a special program called "SHA256" and the program reveals a large unpredictable unique number. We check to see if that number is below a pre-determined target and if so, it has satisfied the criteria (i.e. given SHA256(FILE1) = 123 and TARGET = 20, is 123 < 20?).

SHA256 is a known as a mathematical "hash function". Although its output is unpredictable, it is also "deterministic", which means that given the same input file, it will always produce the same number. It is unpredictable because given the same file with even a small change will produce a completely different number altogether. We use these type of algorithms to give our files identifiers that make them resistant to tampering; it is very useful when downloading from torrents, where files can be downloaded in parallel, from multiple places, be reconstructed, and the file is only accepted if it resolves to the same identifier, ensuring that you get exactly what you asked for.

These files containing records are traditionally called "blocks", and once an acceptable block has been produced (aka mined), it is shared with all the online Bitcoin nodes and we all move on to mining the next block. As we observed before, attempting to ignore the latest mined block is counterproductive and would result in a fork and put you on a path of creating blocks for a new chain that no one would care about and that everyone would simply discard as invalid data.

As you can imagine, this process is very repetitive. One round is hardly power intensive, but the chances of success are so low, that it takes many cycles to find a successful block. The process of mining is very power intensive due to the nature of the process being a repetitive process with a low chance of success.

The incentives

Many people who focus on the "number guessing" and "repetitive nature" side of things tend to consider this process to be pretty arbitrary, however this repetitive chance-based system is key to ensure that it cannot be cheated. As we have discussed, it introduces order, and solidifies it to bring robustness and reliability to Bitcoin.

This process also incurs a cost. Computers draw electrical power to perform their operations, and when people are competing with one another, this power draw becomes non-negligible very quickly.

Miners do earn bitcoin when they mine. As they create blocks, they include an entry allocating bitcoin to themselves. This is their incentive to add the most number of blocks to the chain, as the more blocks they add, the more bitcoin they can earn.

The amount that a miner can allocate to themselves is based on two things:

1. Transaction fees (aka fee market): users can see what transactions are waiting to be mined, what fees they are offering, and can offer a competitive fee to get their transactions prioritised. Miners will often pick the transactions that offer the highest fees to include into their blocks; this ensures that they are earning the most amount of Bitcoin that they have available to them at all times.
2. Block reward: Every block can issue a fixed amount of new bitcoin which the miner can allocate to themselves. Around every four years, the amount of new bitcoin that can be issued is reduced in a controlled manner, and in the year 2140, there will be no more bitcoin left to issue, meaning that miners will need to remain profitable using transaction fees alone.

The block reward satisfies two purposes:

1. Bitcoin must be distributed fairly; there are no licenses or authority based limitations that restrict who can mine bitcoin. Anyone with access to energy, a computer and internet can participate, and therefore new bitcoin can land in the hands of almost absolutely anyone around the world, based purely on fair chance.
2. People must be incentivised to participate in the running of the Bitcoin network, Bitcoin is nothing without a diverse and distributed mass of people running it. Early adopters earn more, while as we get closer to the year 2140, we expect that a critical mass of people will rely on Bitcoin and a plethora of tools, technologies and infrastructure have been built to support it.

These incentives are why people think the goal of mining is to produce more Bitcoin. While for a miner, the main goal is to earn bitcoin, for the system as a whole, mining serves a very different, important and distinct role and the rewards are there merely to ensure people are motivated to do it.

The difficulty adjustment

To get a complete view of Bitcoin mining, the "difficulty adjustment" feature of Bitcoin addresses the elephant in the room: as more people compete to mine bitcoin, wouldn't blocks get produced more quickly?

Bitcoin blocks are produced every 10 minutes on average. Every 2 weeks, or more precisely, every 2016 blocks, a "difficulty target" is redetermined based on the historical production rate of the previous 2016 blocks. All the participants who help to run the Bitcoin network are able to follow this well defined rule automatically on their own computers and will come to the exact same result.

The difficulty target is a way to change the odds of the chance based game, such that we can maintain the average of 10 minutes per solve. Doing this on a regular basis, ensures that even if more miners enter, or if the hardware becomes more efficient, or if they get access to even more energy and computing power, or even if many miners exit, the network can adjust itself and ensure that the network runs smoothly and at a constant pace.

There are also many extra rules that ensure that even this part of the system cannot be gamed. Many developers, mathematicians and philosophers have evaluated Bitcoin deeply and have not found ways to easily game the system.

The 10 minute pace of the system is important for a number of reasons:

1. The issuance of new bitcoin as a reward should not happen too quickly; people need time to discover and adopt bitcoin in order to ensure that bitcoin can be distributed as fairly as possible.
2. Chance is unpredictable and there are cases where multiple miners do find blocks within moments of one another, and this creates forks in the system. The chances of this happening consecutively is rare, and this allows the network to very quickly settle on a single chain and continue operating without issue. Reducing the 10 minute average interval would amplify this situation, causing problems with the smooth running of the network.
3. Considering that blocks can be up to 4mb in size, 10 minutes is ample time for it to be distributed to all bitcoin computers across the world wide web, even over slow network infrastructure and old hardware. 10 minute block times ensure that all computers can remain up to date and not be left eternally catching up as more blocks are being produced faster than their computers can download and validate.

With the difficulty property, the Bitcoin network can grow at a constant pace, and yet everyone can still tell which chain has had the most effort contributed towards it. When a computer comes across two chains, two versions of history, it does not look to find the "longest" chain, but it looks for the one that has the solved for the most amount of difficulty. The result is the same, the chain of data that is considered official is the one that has the most amount of man and electrical power behind it.

I recently had a short conversation with my uncle about saving in Bitcoin. The conversation wasn't very long, but we touched on the difference between trading Bitcoin and saving in it, but I got a little stumped after telling him that the money in the bank was merely a promise. His response was: why is Bitcoin NOT a promise?

I tried to think of an answer, but being technical myself, and having a very technical understanding of it all, I couldn't find a satisfactory answer that was understandable. I needed to walk away and give it some thought. This article is the result.

What is the definition of a promise?

Before we begin, let's take a moment to differentiate between two things that people think about when they hear "promise" in the context of money:

1. The "promise" of money having value in the future
2. The "promise" of you always having access to money to use for trade

Money has taken shape in many forms in history, from shells, to gold, and now paper money issued by government. There is no promise of any form of money having value in the future. It is possible for our central banks to make such a promise, but this is not something that they have absolute control over; money is merely an expression of what we, as individuals, wish to use for trade and savings.

Currently, most people use government issued currency for trade and as a unit of account, however as trust in our governments and central banks erode, people start to look for alternatives. There is good reason to look for alternatives in today's world, our money is being used against us; our money is inherently political - not only regarding how taxes are handled, but also how newly issued money is directed towards political causes while newly issued money causes debasement of our savings. The 2% target inflation is always framed as a noble goal, but in fact it is a promise to constantly debase your money.

But I digress, the second promise is what this piece will focus on. The promise of you always having access to money to use for trade.

As long as there is a middleman facilitating your payment, or facilitating the withdrawal of the thing you use to transact with, there is a promise.

If there is a middleman between yourself and a trade, then there is a risk of that middleman refusing to honour your transactions. Worse still, if a bank goes bankrupt, something that has started happening again recently, there is no guarantee that your balance is refunded in full.

In the UK, the FSCS protects 100% of the first £85,000 you have saved, per UK-regulated financial institution (not per account). This is needed because the bank may not have the funds owed to you, the money that you thought was yours may never have been there at all.

This is a risk that applies to all forms of custody. If you purchase gold, but the gold is held by a third party in a secure facility, then you do not have gold, you have a promise for gold; when you go to claim your gold, you may find that it is no longer there.

Banks often break their promise

The 2008 financial crisis is a historical event, it showed that banks took risks so large, that they could not fulfil their duties to their customers. Banks were considered too big to fail and bailouts paid for the survival of a predatory industry, effectively through money printing. At the same time, small businesses were allowed to fail, people lost their jobs and their homes, and yet the wealthy class became wealthier and banking became more prominent and structural to our society.

More recently, in early 2022, a large number of Canadian citizens found their bank accounts frozen, including their business accounts, leading to concerns of being unable to pay employees, as well as being unable to buy groceries, fuel or medicine. This action was initiated by the sitting government using emergency powers against their own citizens who were protesting government policy, without court orders or any sort of trial, and in the aftermath the Canadian federal courts ruled that the use of emergency powers to roll out these actions was unreasonable. Although this action was temporary, it had a profound effect on many.

In the UK in mid 2023, Nigel Farage had his Coutts bank account in the UK closed with no reason being provided. Nigel is a controversial figure in the UK, one who has been accused of being racist and bigoted, and therefore it was hard for many to empathise with this story. During this event, after Nigel made this issue public, the bank then made a statement to the public via BBC News with a reason: that his account was underfunded, without first sending the reason privately. Then it came out that this was a lie made by the bank to safe face, as they changed their reason to Nigel having views that were "at odds with our position as an inclusive organisation".

This story was interesting, however what was less publicised, was the stories coming out about ordinary people receiving similar treatment, with no reasons being provided, and much harsher personal consequences.

Many such stories exist, but get lost in a swarm of noise and often become forgotten after some time as if it never happened. Much smaller stories exist too, I personally had a payment blocked, and after making a call to unblock it, they asked a series of questions and then decided that they would not honour the transaction. Fortunately, I was able to move my funds to another bank account to make my payment.

Others still have had their bank accounts closed with no reason given, even though they are not criminals, and are not involved in anything suspicious to their own knowledge. Too many people rely on bank accounts, cash is being painted as a tool for criminals and being phased away, and with a bank account being the only way to participate in the online commerce space, the systems we have built as a society place too much power in the hands of middlemen and not enough in the hands of citizens who rely so heavily on this infrastructure to partake in normal activities.

Is Bitcoin a promise based system?

Bitcoin is virtual, most perceive it as being "on the internet" and conclude that therefore it must rely on middlemen and servers just like everything else online.

Bitcoin is more like BitTorrent; for most people, this is a technology most familiar as the tool for finding pirated movies, music and other content. This technology connects people around the world and provides a way for people to share files and data, its most popular, or at least most publicised application just happened to be piracy, and yet it still exists today. Even though industries tried, It could not be shut down because it is not a centralised service reliant on a single company or server somewhere.

Bitcoin is not a business, anyone can and will participate in the operation of Bitcoin, it is more like a community project where the people who operate it also rely on it for savings and trade. Such a system cannot be found and shut down, nor will such a system be abandoned easily.

No user accounts

One of the most significant innovations that bitcoin uses, is the ability to have security without user accounts. A lot of people who are introduced to Bitcoin will first look for a regulated exchange so that they can learn how to purchase bitcoin, unfortunately, exchanges are for-profit businesses and they would rather you remain a customer to them, than you progress to taking custody of your bitcoin. When you purchase bitcoin on an exchange and do not withdraw them to a wallet that you control, you once again have a promise for bitcoin.

Even the most popular exchange, Coinbase, has terms and conditions that state that they may suspend, restrict, terminate, deactivate or cancel your transactions or your access to your account. Also if they go bankrupt, user assets could become subject to bankruptcy proceedings.

To clarify: if you are registering for an account, providing an email address, password and other personally identifiable information to some service provider, and you use this service to manage your bitcoin, you do not really have bitcoin.

Let's explore the two main aspects that make Bitcoin a self service operation with no middlemen:

1. The Bitcoin address,
2. The mining function

The Bitcoin address

The ownership model of Bitcoin doesn't allocate funds to people, instead it allocates funds to unique numerical identifiers which we call "Bitcoin addresses" and the use of these addresses help to separate the relation between an individual and the bitcoin that they might have control over.

Think about cash, the cash exists as an independent thing, I may own a £5 note now, but if I hand it to you, now you own it. In the same way, if I have control of an address with 0.5 BTC and I hand over that control to you, now you own that money.

Bitcoin is not quite the same as cash, because control over bitcoin isn't physical. Controlling bitcoin requires the possession of private information, and typically, just like an idea, information can only be shared and cannot be transferred like physical objects can. Products like the Opendime provide a practical way to produce and contain this private information in such a way that it can be trusted to only exist in a physical form, this then behaves exactly like cash because when I hand you the device, I no longer have possession of the information within it.

The ability for such a product to exist is not to be taken lightly. Imagine being able to trade one of your bank accounts for goods or services, or even just as a gift without having to inform or ask permission from your bank! Even if the banking services are down for the day, you still have a means of trade as long as you believe the bank will eventually resume operations.

Normal operation

Of course, the usual way to use Bitcoin is online or using mobile or desktop applications. To load a Bitcoin address with funds, a payment needs to be made and broadcast to the Bitcoin network.

When we wish to move bitcoin between addresses, we use our bitcoin applications to create a transaction, we can think of it like a blank cheque, and we use our private information to apply a digital seal. The private information is called a private key, and the digital seal is called a cryptographic digital signature.

Unlike a signature on a physical cheque, the digital signature cannot be forged; If bitcoin moves between addresses, the only people that could have moved it are the people who own the private key(s).

Once the bitcoin has been reallocated, the new owners need assurance that the bitcoin cannot be "double spent"; that is, the customer must not be allowed to attempt to move the same bitcoin to an alternative destination. To ensure this, Bitcoin introduced a function called mining.

The mining function

Mining is at the very heart of Bitcoin, and this is where the question of whether there are middlemen appears to become a little muddy.

The miner performs two tasks:

1. First they collect and choose a set of transactions to cement into a block.
2. Then they attempt to cement the block and broadcast the data to the rest of the network.

Choosing transactions

Once a transaction is cemented into a block and broadcast to the network, any alternative signed transactions that attempt to spend the same bitcoin are can simply be discarded as garbage. This is the assurance that recipients need.

Miners cannot modify transactions in any way and they cannot redirect funds or make their own transactions on your behalf, however since miners choose the transactions to put into a block, it could be concluded that they can also choose which transactions to omit from blocks too. If this were true, then miners would inherit the power to freeze funds and censor transactions as they see fit.

Fortunately, mining is a competitive business, transactions offer fees in bitcoin for miners to earn, and opportunity drives competition. Bitcoin mining requires nothing more than access to energy, computers and the internet. This means that mining has competitors from all around the world. If a miner chooses to omit a transaction from a block and broadcast it, the transaction will simply be mined in a future block by another miner.

Cementing blocks

To draw an analogy of mining, imagine a game competitors draw parts of a face in a particular order. Let's say everyone needs to draw the left eye, you draw your eye, then everyone races to win a game of chance: everyone must roll 10 dice at a time and the first person to roll all ones wins the round and submits their drawing before the game moves on to another drawing.

The dice game takes time and energy to complete and out of all of the competitors, it really is anyone's game. This is similar to how mining works; miners work with odds so low that it takes 10 minutes on average to complete a round, and the winning miner submits their choice of transactions with a mathematical proof that they beat the odds. We call this proof "Proof of Work (PoW)".

Consider that as more people join, and as miners get faster, the rounds would start to shorten. Bitcoin naturally readjusts itself to ensure that this is not the case, and so more effort put into the network leads to a higher assurance of security.

Breaking the cement

The cost of time and energy assures that anyone attempting to change the historical records in any way would need to expend more energy at a faster rate than the rest of the miners in the network working together.

To visualise this, imagine that there is a group of builders building a fleet of houses. You as a solo builder wish that houses had a flat roof, so you start building your own fleet of houses of the same quality, but you start a little late. You hire your own team who agree that flat roofs are the best, but you need to pay them out of pocket because you don't get paid until you have built more houses than the other team who is still building at a steady pace.

Assuming you manage to build as many houses as the other team, there are a few more hurdles for you to jump over, but you now have a chance at swapping out all the old houses for your flat roof alternatives and you get paid. All that risk and cost might have paid off, but attempting to build the same quality at a faster rate means that the payout will likely not cover your costs.

Bitcoin is harder to break than cement. It may require constant human action to work, but incentives keep it going in the same way that keeping a fire alive requires people to fetch wood, and let's say those who fetch wood are rewarded with food, the overall win for everyone is that they can cook food and stay warm, so the system works.

Is Bitcoin a promise?

No. Bitcoin has a lot of complexity, and this complexity is a trade off for achieving digitisation without other compromises. The potential of Bitcoin to become the next evolution in money is real, and for some it is even realised. No one in this system has power over anyone else, as long as you have bitcoin in an address that you own, it will be there for as long as forever, and when you wish to move it, there will always be someone available to cement that transaction into a block.

Yes, it is digital, yes it is mostly accessed via the internet today, but people are already building technologies to overcome these limitations. LoRa devices (long range radio communication) are being explored as an alternative to the internet as Bitcoin doesn't require much bandwidth to operate, in Africa bitcoin payments happen over USSD, a technology similar to SMS that works on old "feature" phones like the old Nokia phones that were popular early in the year 2000.

Even if all electronics and cross border communication shut down for some time, Bitcoin doesn't stop, the lack of communication will cause some problems, and another money like gold might be better for local trade for some time, but eventually communications will come back and the system is elegant enough to resolve and continue operation.

Also remember that while gold is less complex and easier to understand, it is only trustworthy and cost effective to use for local trading. This is why, in the digital global economy that we are in today, gold is not suitable, and in a brighter future, a system like Bitcoin is better money that can replace all of the trusted institutions with greedy middlemen that we have needed until now to operate in this modern economy.