Central to the functioning and stability of the Bitcoin network is its mining process. Bitcoin’s defining feature is to have all transactions processed through a decentralized ledger, the blockchain, as opposed to ledgers operated by centralized authorities such as banks. Miners play a key role in validating and securing bitcoin transactions, in return receiving a reward in the form of newly minted coins. In addition, miners may pick up a very small transaction fee for processing transactions demanding faster confirmations.
Early on, mining proved to be a lucrative enterprise, earning its participants what was effectively free money. Bitcoin mining has since evolved into an industry and ecosystem unto its own, attracting increasingly intense competition and leading to an ‘arms race’ among manufacturers to develop the most powerful and efficient hardware. Whereas standard graphics cards were sufficient as recently as eighteen months ago, they are no longer capable of competing in the crowded network. Application-specific integrated circuits (ASICs), chips which have been developed specifically for the purpose of mining bitcoin, are now standard. Most miners have aggregated into pools, aggregating resources to maximize efficiency.
With the large-scale infrastructure already in place, operators have evolved toward offering mining contracts. These offer holders a stake of the income derived from large-scale mining operations without them having to worry about the complications of physically operating hardware, which include cooling issues, setup and wiring, electricity management and replacement of burnt out units. There are now several online marketplaces where these contracts
can be traded. Many large hardware manufacturers have in fact been gradually transitioning from marketing their units for home or business-based mining to offering contracts tied to operations on their equipment. Depending on the business model chosen, the practice has drawn criticism for potentially pitting mining operators against their clients, both competing for the same pot of bitcoin rewards.
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The fierce competition has been beneficial for users of the Bitcoin network. The high rate of hashing power (the work delivered to validate and secure transactions), reaching near 400 PH/s (400 x 1015 hashes, or encryption procedures, per second) in March this year, makes it virtually impossible for illegitimate transactions to take place. The total network hash rate is more than 10x higher than one year ago, and nearly 10,000x that of two years ago. Greater miner involvement also further entrenches the core foundations of the network, giving the broader ecosystem a better chance to thrive in the long-run.
The major drawback, however, is faced by the miners themselves. To be profitable, they must overcome (1) the capital costs of their equipment purchases, and (2) the operating costs arising from the mining process. A major component of these are due to electricity consumption, in addition to others related to labor and maintenance.
Many miners now struggle to generate a profit, the business not nearly as lucrative for most as it was during 2013 and earlier. The value of bitcoins awarded to miners has fallen by as much as 85% from their peak in late 2013, causing many to rack up losses throughout 2014.
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