Bitcoin Mining & Concepts in Blockchain Technology – Part III

Before you read this post, it is suggested to read the part – I and part – II of the series first.  In this post we will talk about mining difficulty and bitcoin mining pools.

  • Mining Difficulty

In part II of the series, we learned about the proof-of-work concepts which will help to understand about mining difficulty. Mining difficulty is a measurement of how difficult it is to find a hash which is below the target value (a 256-bit number) during the proof-of-work solving process.

As more miners join the network, the block creation rate goes up. Consequently, the level of difficulty rises to compensate with the intention of pushing the rate of block creation back down. Every two weeks or so, the target value is recalculated to calibrate with the current level of processing power as the Moore laws stated.

Any block released by miners that don’t meet the required difficulty target will simply be rejected by everyone on the blockchain network and the effort will be worthless. When a new block is discovered, the miner who discovers the block could be awarded a certain number of bitcoins, which is agreed upon by everyone in the network.

The currently agreed bounty is 12.5 bitcoins. Additionally, the miner is awarded the fees paid by users sending transaction. The fees are considered as an incentive for the miners to include the transaction in their block.  The explanation is shown with a figure below.

  • Mining Pools

Bitcoin mining pools are a way of bitcoin miners to pool their resources together and share the hashing or solving power. The rewards are equally divided according to the amount of shares they contributed for solving a block.

Bitcoin mining in pools started due to the increased difficulty that it could take years for slower miners to generate a block. There are many good bitcoin mining pools such as Slush Pool, BTCC , Antpool, Eligius, BitMinter, F2Pool and BW Pool. Among these pools, Antpool  has the largest hash rate under its control.

Now we all understand the concept of mining difficulty and the reason why pools are created. We will be learning more concepts on later posts.

Enjoy Learning !