BitcoinSV

What is Bitcoin Mining?

Bitcoin MiningWhat is Bitcoin Mining?

Bitcoin mining is the process where groups of computers compete with each other to order and validate transactions in exchange for earning payment in Bitcoin. These groups of computers are called nodes (synonymous with miners or transaction processors) and they should seek to put as many transactions in a block as they can. Once they have verified, collated and ordered all of the transactions being exchanged around the bitcoin network, these nodes perform proof of work where they run a complicated computer algorithm in a process known as hashing. These nodes compete for the right to extend the blockchain by using computing power on a hash algorithm, running it repeatedly to find a valid solution to a proof of work puzzle. Once a node solves the proof of work puzzle, it then propagates the resulting block that it constructed to as many of the other nodes on the network as fast as possible.

A node does not collect a reward until it both finds a solution to the hash algorithm for a block and also demonstrates to a majority of the other nodes that their block and solution are valid. The complete process that a node needs to complete is listed below:

1) New transactions are broadcast to all nodes.

2) Each node collects new transactions into a block.

3) Each node works on finding a difficult proof-of-work for its block.

4) When a node finds a proof-of-work, it broadcasts the block to all nodes.

5) Nodes accept the block only if all transactions in it are valid and not already spent.

6) Nodes express their acceptance of the block by working on creating the next block in the chain, using the hash of the accepted block as the previous hash.

The block reward is the incentive for transaction processors to compete for the right to add blocks to the Bitcoin ledger; it compensates the processor who found the block with a number of Bitcoins equal to the current block subsidy and sum of fees from all transactions included in that block. The block subsidy is set to reduce over time in order to incentivize the scaling of the network where the best nodes who propagate transactions the fastest are able to remain profitable and grow the network.

This coinbase transaction is the first transaction in a block that pays the processor who found the block. The subsidy portion of the block is set by the Bitcoin protocol, which began as 50 Bitcoins in 2009, but halves approximately every 4 years. After the most recent “halving” event in 2020, the current block subsidy is 6.25 Bitcoins.

Nodes are incentivized to be honest. This enables them to enforce rules which includes not propagating bitcoin associated with proceeds of crime. Each processor can select the transactions that they will include in a block ensuring that all others remain honest. Bitcoin is an evidentiary system and where nodes who attack the system or allow the transmission of dishonest transactions, the others can isolate and report the attacker node.

Bitcoin Halving

The Bitcoin halving is an event dictated by the protocol where the subsidy portion of the block rewards is cut in half after every 210,000 blocks are mined (approximately every 4 years). In the beginning, the subsidy was set at 50 Bitcoins per block as an intention to bootstrap the ecosystem, incentivize nodes to join and increase its network participants.

These halving events coded into the Bitcoin protocol are a clear indication by its inventor Satoshi Nakamoto that transaction fees are intended to replace the subsidy in order to persist an incentive for processors to continue to support the network.

text

The difficulty of mining is determined by how many blocks were found over a given time. The faster blocks are found, the higher the difficulty rises and vice-versa.

Chain death is a scenario where the revenue of the block reward does not justify a transaction processor’s cost of finding one. This scenario becomes a threat if the transaction fees do not offset the lost revenue from the dwindling subsidy, then processors will no longer support the network, potentially bringing the chain to a halt as no more blocks will be added.

Why is Bitcoin SV the Best Blockchain for Mining’s Future?

Blockchain Scaling & Transaction Processor Profitability - Understanding that the halving is coded into the Bitcoin protocol, processors must also understand their secondary role which is to assist in building out the transaction ecosystem. Transaction processors require a steady increase in total fee revenues in order to sustain their large upfront capital investment, thus have a strong interest in helping to increase transaction volume on the network.

Need Big Block Scaling & Transaction Fees - Processors should not only invest in their data center and technical operations but also in other businesses, education and events. The barrier to entry to mining is quite high, thus the upfront investment is such that if the Bitcoin network fails then they would be left with useless equipment. Therefore, it is paramount that transaction volume rises enough to sustain the processor’s business models.

New Transaction Fee Market Place - In addition to supporting businesses that use Bitcoin in their day-to-day operations, transaction processors can incentivize an increase in transaction volume by lowering the fees they charge to accept transactions. While this may seem counter-intuitive, it is simple economics. Lower prices can increase demand which benefit both businesses using Bitcoin and the processors themselves.

In the past, Bitcoin has had a specific fee rate of 1 Satoshi per Byte of data, but recently we have seen processors start to make private deals with high volume transaction generators providers to accept a certain amount of transactions at a lower rate.

Furthermore, some mining groups have announced lower rates (available to the public) ranging from 0.25 – 0.5 Satoshis per Byte. In the future, technical tools will likely emerge that allow BSV transaction fee rates to be pegged to fiat currency amounts, rather than number of Satoshi per Byte; this is important to help businesses have transaction fees that are reliable in fiat currency terms, rather than subject to volatility in the BSV coin price.

A dynamic fee market is a necessary step to encourage more direct communication between businesses and processors so that businesses can pay fees that are acceptable. An economy of scale can emerge in Bitcoin SV that benefits all market participants.

Node Specialization - With the block subsidy still representing over 95% of the current typical block reward, nodes have specialized in the realm of hashing. They have invested in ASICs (application integrated specific circuits) whose sole purpose is to hash in order to find a valid solution for blocks. They do not have a proper incentive to collect transaction fees as they are still largely negligible amounts.

The imminent need to earn more in transaction fees will force transaction processors to start specializing in additional areas, such as:

Merchant API development and management to broadcast transactions directly from the transaction generator to the node (transaction processor)

• Double-spend protection/insurance

• Network infrastructure and uptime management

• SLAs (service-level-agreements) and partnerships with businesses

• Optimization of Script validation

These types of offerings will become key as more businesses emerge that cannot bear the costs of running the node software themselves. The need for more specialized mining services could see processors deviate from simply being ASIC hashers to start catering towards certain transactions types, like processing of complex scripts.

Variable Rate Configurations – Currently, the fee evaluation for Bitcoin transactions is maintained inside the Bitcoin SV Node software. In order to promote a more dynamic fee market, the software is being modified to allow fee validation to be done outside of it. This implies that transactions can potentially be allowed to enter a node’s unconfirmed transaction set under the assumption that its fee was already calculated.

This change allows more flexibility with pricing fees as they can be defined outside of software inside legal contracts. Nodes can accept transactions via the Merchant API from authenticated users, where the user is mapped to the fee per their contract with the transaction processor.

For example, if WeatherSV (a BSV application that writes climate data to the blockchain) has a contract with the Mempool mining pool, their agreement could indicate that WeatherSV pays 0.1 Satoshi per Byte. Mempool would allow WeatherSV transactions to be sent directly to their node authenticated with user/password credentials; based off the sending username, Mempool would associate the fee rate to the transaction instead of allowing the node software to calculate the fee.

Another modification that can be done is to price data bytes differently than other bytes in a transaction. Satoshi pricing for data bytes could be cheaper since they do not need to be validated as opposed to opcodes, signatures and other transaction value which require some computation to validate.

Miner ID - Miner ID is an optional protocol where transaction processors can identify themselves by injecting cryptographically verifiable data into the coinbase transaction of the block that they win. In the past, processors have done this by simply inserting their name into the coinbase string, but this is prone to spoofing since in theory anyone who wins the block can write any value into the coinbase.

This protocol promotes trust within the ecosystem. Service providers can view the blockchain and evaluate the following metrics in order to determine reputation:

• Evaluating total hash rate

• Number of transactions are being placed into blocks

• Meeting service-level agreement goals

For example, a service provider might require that a transaction processor have 30% of the overall hash rate before they will engage in contract negotiations. Once the contract is agreed upon, it may state that the processor must maintain at least that 30% rate over the contract period, or the deal becomes void.

The Miner ID mechanism will facilitate more of these types of partnerships by establishing trust leveraging the Bitcoin SV blockchain itself.

Profitability Calculator

A profitability calculator is a tool that Bitcoin transaction processors can use to determine how much profit they can potentially make given certain attributes of their operation.

The following values are typically required:

• Hashing power

• Power consumption in watts

• Cost per kilowatt

• Mining pool fee (if any)

The output of this calculator will display profit ratios, and profits in fiat/Bitcoin values per day, week, month and year. These calculators assume the following network variables:

• Current overall network hash rate

• Exchange rate of bitcoin in fiat value

• Subsidy portion of block reward

Notice that these calculators do not account for transaction fees included in each block– this is a result of the subsidy being the overwhelming majority of the reward. Profitability calculators as they are will become less accurate over time as the subsidy is reduced, and a more dynamic fee market emerges.

Bitcoin SV Node Software

BitcoinSV.io - The Bitcoin SV Node software is used by nodes on the network in order to process and validate transactions and potentially win blocks. The software is available for free usage on the Bitcoin SV blockchain.

Teranode (Enterprise-class node software for Bitcoin SV)- Teranode is an upcoming enterprise-class Bitcoin server software rebuilt from the ground up. The intent is to offer microservices to fit customer needs. The Bitcoin SV Node software is monolithic and can be categorized as purely mining software. Teranode intends to break up pieces of that software in order to offer functionality that businesses can leverage in their day-to-day operations. The intent is to offer high availability, front-end configuration, store, index and retrieve data from the blockchain.

Mining Pools

What is a Mining Pool? A mining pool is an operation where hash rate is combined from many different parties. A pool lowers the resource-intensive barrier to entry since smaller nodes can join and realistically compete for some revenue without having to setup and invest in large numbers of mining rigs and run an entire data center on their own.

A pool distributes its rewards to all those that contribute to it. The two most popular distribution systems are:

Proportional

o Contributors are paid out relative to the hash rates they supply

Pay-per-Share

o Each contributor receives shares for contribution, regardless of the timing when a block is found or not. Shares can be exchanged for payouts.

In comparing a pool to a private transaction processor, a private processor keeps the entirety of block rewards but only earns revenue for blocks it finds itself. In contrast, if a processor contributes to a pool, that processor can earn Bitcoin without itself ever finding a block.

Bitcoin SV Mining Pools (Public):

BTCC

Mempool

Nourpool

Poolin

Prohashing

Sigmapool

SV Pool

TAAL – for enterprise clients

ViaBTC

Other Mining Groups:

CoinGeek (private mining group)

BSV Mining & Network Information

Coin.dance Page - Various statistics about the Bitcoin SV network, compared to the other SHA-256 hashing chains can be viewed, including:

• Fee comparison

• Mining profitability comparison

• Size comparison in bytes

• Hashrate breakdown of transaction processor

o Based on which processor won how many blocks over certain intervals