Watch our video version of this guide Why do we even need Bitcoin mining? Bitcoin is a decentralized alternative to the banking system. This means that the system can operate and transfer funds from one account to the other without any central authority. With a trusted central authority, transferring money is easy.
In this example, the bank has all the power because the bank is the only one that is allowed to update the ledger that holds the balances of everyone in the system. But how do you create a system that has a decentralized ledger?
How do you give someone the ability to update the ledger without giving them too much power—in case they become corrupt or negligent in their work?
Why do we even need Bitcoin mining?
All you need is to guess a random number that solves an equation generated by the system. Of course, this guessing is all done by your computer. The more powerful your computer is, the more guesses you can make in a second, increasing your chances of winning this game. Once your mining computer comes up with the right guess, your mining program determines which of the current pending transactions will be grouped together into the next block of transactions.
The solution is very hard to achieve but very easy to validate. Each computer that validates your solution updates its copy of the Bitcoin transaction ledger with the transactions that you chose to include in the block. The system generates a fixed amount of bitcoins currently Additionally, you get paid any transaction fees that were attached to the transactions you inserted into the next block.
But if you think about it, the mining part is just a by-product of the transaction confirmation process. So the name is a bit misleading, since the main goal of mining is to maintain the ledger in a decentralized manner.
As you can imagine, since mining is based on a form of guessing, for each block, a different miner will guess the number and be granted the right to update the blockchain. Where do I sign up? So the difficulty of the mining process is actually self-adjusting to the accumulated mining power the network possesses. If more miners join, it will get harder to solve the problem; if many of them drop off, it will get easier. This is known as mining difficulty.
Why on earth did Satoshi do this? Well, he wanted to create a steady flow of new bitcoins into the system. In a sense, this was done to keep inflation in check.