One of the challenges of understanding Bitcoin mining is that it is actually a terrible name for what Bitcoin miners are really doing with their computer power. Miners are actually the custodians of the transaction ledger known as the Bitcoin blockchain. Although Bitcoin transactions appear to take place instantly, they are not confirmed into the Bitcoin transaction ledger until they have been checked by a Bitcoin miner. Nodes can then use the transaction ledger to make sure that a certain Bitcoin address is not trying to respend bitcoins that they’ve already sent to another public address in the Bitcoin payment network. At its core, Bitcoin mining is what secures the entire Bitcoin network.
Bitcoin mining is resource intensive due to the amount of computing power that is required to mine a single block. Miners are able to prove the amount of computing power that they used to solve a particular block with the hashcash proof-of-work function. This system of proving one’s worth to the Bitcoin mining ecosystem uses cryptography to show that a single miner completed a certain amount of work on their computer. The easiest way to explain proof-of-work is to imagine that it takes a certain amount of computing power to solve a mathematical equation. To find the solution to a certain equation related to a new block, a computer must have completed a certain number of computations. These equations have become much harder to solve as more hashing power has been added to the Bitcoin network over time.
If people are going to be pointing some of their computing power to the Bitcoin network, then they need to get paid for their work. This is where block rewards come into play. New bitcoins are created every ten minutes, and those bitcoins are rewarded to the Bitcoin miner who is able to find the answer to the abovementioned mathematical equations before anyone else. In addition to the block reward, which is cut in half roughly every four years, miners are also rewarded with the transaction fees from all transfers of value that took place since the last block was mined. Without these valuable rewards for mining, there would be no reason for miners to point computing power to the Bitcoin network, and the network could not be secure without the large amount of computing power needed to attack the network.
Although it was rather easy to mine bitcoins in the early days of the network, the increased value of bitcoins has led to people finding more efficient ways to solve the mathematical equations involved with Bitcoin mining. Simple laptops could be used to mine bitcoins back in 2010, but the Bitcoin mining industry has evolved to the point where people now use chips that were created specifically for the purposes of solve blocks and receiving block rewards. This concentration of mining power in more expensive forms of hardware has led to a bit more centralization than what was found in the original creation of the Bitcoin protocol. Many people are priced out of the market due to the expensive nature of ASIC hardware devices.
Mining pools are a way for miners to make sure that they get paid on a more frequent basis. Even if someone has a large amount of hashing power to point at the Bitcoin network, it doesn’t necessarily mean that they are going to get a block reward on a regular basis. For example, someone with 10% of the network hashrate is expected to receive 10% of the block rewards. This means that the miner is going to receive nothing 90% of the time. If that miner joins a mining pool that collectively has 40% of the network hashrate, then he or she will receive a payment on 40% of Bitcoin blocks. A mining pool is basically a way for miners to pull their resources together to ensure more frequent payments, even though their share of those payments will be lower.