What is Bitcoin Mining Actually Doing?

What is the point of Bitcoin mining? What is the value of the process?

What is Bitcoin Mining Actually Doing?The
answer to these questions lies the one thing that most of those who are quick to dismiss cryptocurrencies often miss or choose to ignore conveniently. And it is also the one thing that makes Bitcoin a disruptive innovation.

It is through understanding the process of Bitcoin mining that one comes to appreciate the real value of Bitcoin and how it is not only a unique technology but also one that has the potential to transform human society in ways we’ve not even begun to comprehend.

When Bitcoin mining is mentioned, what comes to the minds of many is an opportunity to earn digital coins by connecting powerful computers to the Bitcoin network. And indeed, over time, many have participated in Bitcoin mining without ever knowing its actual primary purpose. Their main focus in these cases is to get the mining reward, convert to fiat currency, and increase personal gain.

Designed to self-sustain

There is nothing wrong going into Bitcoin mining with earning the reward and increasing the personal worth as all that concerns you. This only illustrates the genius in Satoshi Nakamoto, the founder of Bitcoin.

Satoshi wrote a powerful piece of software to implement a truly decentralized electronic cash. But more importantly, the inventor designed a game theory that incentivizes self-seeking stakeholders to play by the rules to maintain the system. By trying to maximize their gain, stakeholders on the network end up effectively supporting the system.

So what is bitcoin mining actually doing?

The primary purpose of Bitcoin mining is to facilitate consensus on the status of a shared ledger on the network. This input is particularly important because the Bitcoin network is decentralized (peer-to-peer). It is composed of independent nodes (computers) with no central arbiter, but they all have to agree on what transactions are valid and who owns what at what time.

To understand the Bitcoin mining process, it is crucial to first acknowledge the critical role of a ledger in an electronic payment system. The term ‘blockchain,’ used to describe the underlying cryptocurrency technology, denotes a distributed ledger.

There is no electronic payment system that doesn’t have a ledger, a record of transactions. It is through the ledger that we get to know who owns what at what time. In centralized payment systems, there is an authority that maintains the payment ledger.

In a commercial bank, for example, the ledger is stored on the company’s servers. The process of assigning the rights of writing on the ledger is a straightforward one. A chain of command at the institution authorizes the bank teller (human or machine) to make changes on the ledger on behalf of the customer.

To maintain the integrity of the ledger, administrators hired by management strictly control and monitor access to writing privileges and rights.  

Bitcoin too has a ledger where records of who owns what at what time are kept. How the ledger is stored and updated is very different though.

Where is the Bitcoin ledger stored?

Before looking at how this ledger is maintained, it is important first to explain where it resides because that has a bearing on you understanding how and why mining is essential.

On a centralized payment system, like the one that a commercial bank maintains, the ledger is residing on servers. On the Bitcoin network, however, there is no server on which to store the ledger. Instead, each full node on the network keeps a duplicate copy of the ledger.

Also, unlike a commercial bank, Bitcoin does not have a central authority to assign the rights and privileges of writing on the ledger. Nevertheless, the need to update the ledger as users execute new transactions exists. And it is adequately and securely met.

When new transactions have to be added to the ledger, every one of the nodes on the network updates and synchronizes their copy with the rest. What Bitcoin mining does actually is to guide the process by independent nodes on the Bitcoin peer-to-peer network to update and synchronize their copies of the ledger. This is often described as finding a consensus on the status of the shared ledger.  

The protocol that guides the Bitcoin mining process is the first ever to facilitate peers on a public network to agree on the status of a ledger of payments. Up until 2009, all electronic payment ledgers were all maintained by centralized entities like banks.

What most of those who dismiss Bitcoin often miss is that with the launch of Bitcoin, for the first time people on a peer-to-peer network who do not know nor trust one another were able to agree on a single truth. They were able to accurately and securely maintain a ledger of transactions without the help of a central arbiter.

What is consensus on the Bitcoin network?

However, like most other terms in the blockchain space, the term ‘consensus’ as used to describe what Bitcoin mining achieves is a slight misnomer. It just happens to be one that explains what is closest to what actually happens.

What occurs during the Bitcoin mining process is that the computers on the network compete in some form of a lottery. The winning machine gets the rights and privileges to write the next block of transactions on the shared ledger for approximately 10 minutes.

The set of self-executing rules that guide the lottery are written in the core software that a computer has to install and run to communicate with others and be part of the Bitcoin network.

It is the set of self-executing rules that is known as a consensus algorithm or protocol. The rules can only be changed through an elaborate process, and all must agree to update their core software to a version that has new rules. This process is not easy to achieve, and that is the primary reason people trust the viability and longevity of Bitcoin.

How does the Bitcoin network achieve consensus

Here is a high-level presentation as to how a cycle of Bitcoin mining happens:

Each of the special nodes on the network known as miners collects the transactions users submit for confirmation. Each puts the transactions together into a batch known as a block.

The computers then compete in computing the data of the block into value and shape that is prescribed by the protocol. This process is known as hashing as it uses a mathematical hash function, which you could interpret as a mathematical multiplier. The Bitcoin network uses the SH256 hash function.

The mathematical computation process consumes a lot of energy. It also requires high computing power, and that is why today you can only join the Bitcoin mining process with application-specific integrated circuits (ASIC) powered hardware. This is powerful enough to do computation at the rate that is acceptable on the network.

The first miner to find the value, their block automatically joins the shared ledger as the next block. All the other miners update their copies of the ledger with the new block. While it takes time, computer power, and electricity to hash transaction data into a given value and structure, it is very easy for others on the network to prove that work was put into the process.

The miner whose block is recognized as the next official block of the shared ledger gets to keep the newly minted coin in that block. This is referred to as the reward, and its value halves every four years. Besides, the winning miner gets to keep the fees those sending bitcoins attach on their transactions.

These earnings are meant to compensate the miner for their time, investment in the mining hardware, and the electricity bill.

The process then starts all over again.

It is important to point out that even though a miner gets to write the next block of transactions on the shared ledger, they have to follow script rules. Otherwise, the network will ignore their block and add the next that follows all the rules.

Different types of blockchain consensus protocols

The electricity consuming consensus protocol that the Bitcoin network uses is referred to as the Proof of Work (PoW) algorithm. With the success of Bitcoin, other cryptocurrencies have been built. According to the digital asset tracking website CoinMarketCap, there are slightly over 2000 cryptocurrencies in circulation.

The increased number of cryptocurrencies has also seen an increased number of mining algorithms. Indeed, there are now over 20 consensus algorithms that have joined Bitcoin’s Proof of Work. Another most used consensus protocol is Proof of Stake (PoS) where a miner that writes the next block is chosen depending on native coins they hold.

The ultimate goal of all the consensus protocols used by blockchain network is the same; to help a peer-to-peer network pick the node that gets to write the next block of transactions on the shared ledger.  


A Blockchain Identity Solution Set to Change the Internet

Microsoft, IBM, Accenture and more than 70 other technology companies are working on a blockchain identity project set refurbish the Internet for the 21st century.


Blockchain Identity Solutions
Image by Gerd Altmann from Pixabay

The way people, devices, applications, websites and even email addresses are identified on the Internet is on the verge of being disrupted in a significant way.

You could say the biggest ever change to the architecture of the World Wide Web is about to happen, and it is all thanks to Bitcoin.

In May 2017 Decentralized Identity Foundation (DIF), a consortium to explore ways of using blockchain for identity management on the Internet was founded. The membership has since grown to over 70 technology companies and startups. Some of the most active members include Microsoft, IBM, Accenture, Hyperledger and MasterCard.

For the last two years, a DIF technical team has been working on a protocol dubbed Sidetree, a second layer scaling solution on the Bitcoin network. When implemented, this protocol will enable Internet users to create decentralized identifiers (DID) on the Bitcoin blockchain with little technical hindrance or transaction throughput limitations.

This is turning out to be the most ambitious of the blockchain identity projects. Indeed, several startups that have been working on blockchain identity solutions of their own such as Civic, Identos and DIID are members of the consortium.

On May 13, 2019, the team made a major announcement concerning the development of the protocol. Stakeholders, as well as other interested parties, now have access to the early preview of the Identity Overlay Network (ION), a critical protocol interface between DID and the Bitcoin network.

“We’re announcing an early preview of a Sidetree-based DID network, called ION (Identity Overlay Network) which runs atop the Bitcoin blockchain ……. This approach greatly improves the throughput of DID systems to achieve tens-of-thousands of operations per second.”

But why is this a significant development?

At the moment, almost all identity management systems on the Internet, such as domain name and email address registries, are centralized. This goes against the spirit of Internet decentralization.

Identities are assigned, stored and updated on servers and data centers owned and controlled by mostly private companies and organizations. When you create a website, its ID is registered and accessed on domain nameserver, a database that a centralized third party maintains.

These entities, while striving to do a great job, are major single points of weaknesses.

The risk of massive data theft always exists as all it often takes to get control of the identity details of millions of users is to compromise single access points. With centralized data points, it is easier to carry out targeted sabotage attacks.

Indeed, the current architecture is designed in a way that the security of the system depends on being successful at blocking bad actors from accessing it.

What are the advantages of using blockchain for identity management?

Meanwhile, using blockchain for identity what Decentralized Identity Foundation is offering are identities that are not only secure, verifiable and censorship-resistant but also self-sovereign. What that means is that the identity can stand by itself with no need of it being referenced on a centralized registry, but even more, the user can carry it across platforms without the need to get permission from anyone.

The technology offers true ownership of identity on the Internet. Through public-private key cryptography, users have full control and can decide who to share details of their identities with.

The technology offers true ownership of identity on the Internet. Through public-private key cryptography, users have full control and can decide who to share details of their identities with.

In addition to a user not needing permission to create, update, share or move an identity, no one has the power to take it away from them. The current identity systems, it is possible to arbitrary remove users from registries, and that opens a window for censorship if the authorities in charge feel compelled to.

The security of each identity on the bitcoin network supported identity management systems is achieved through high-level cryptography. While it is possible to compromise access to a particular identity primarily through phishing, an attacker has to attempt a single identity at a time. There are no admin credentials one can steal to get access to multiple accounts or massive user data like it is the case with centralized systems.   

The Bitcoin network will provide the decentralized identity system with a ledger on which to create and secure user identity. It will also make the data related to identities immutable through the mining process or timestamping.

This is a powerful feature as even if users have full control of their identities, they are not able to go back in history to arbitrary make changes to suit particular current contexts. In other words, identity on the blockchain becomes verifiable even when it is the owner who controls its accessibility.

What this means for the Bitcoin network

With the decentralized identifiers system on top of its network, the value of Bitcoin is going to increase significantly, and I mean more than in terms of the price of its native coin (bitcoins) at the marketplace. The decentralized identity system is going to make Bitcoin even more powerful and useful.

In the previous post, we looked at how Bitcoin gets its value. Perhaps the most important takeaway from it is that the value of anything is considered to come from its usefulness in satisfying our needs.

And that is according to Carl Menger, who was a professor of political economy at the University of Vienna in the late 19th century and the founder of the Austrian School of economics.

If you haven’t read the post, take a moment to go through it.

After its launch, for a while, the general understanding was that Bitcoin’s best application is online money to be used in the place of fiat currencies like the US dollar. In particular, the kind that those who have something to hide can use to escape surveillance.

It turns out Bitcoin and the technology that powers it can do more than a digital currency for the dark web. Every sector you look at right now there is a startup building a robust and needed solution using the technology behind Bitcoin.

Why the Bitcoin blockchain?

With that said, there has been another misconception. And that is while the blockchain technology that Bitcoin introduced to the world can be applied in multiple use-cases, Bitcoin itself is rigid, and little innovation can be done on it to support more applications.

The Bitcoin network is now considered the world’s most powerful computer. In fact, it is more powerful than the world’s top 500 supercomputers.

The most cited weakness is its low transaction throughput. It is the reason the likes of Ethereum, NEO and EOS blockchains came into being. They were meant to overcome the shortcomings of the Bitcoin blockchain and make more decentralized applications possible.

However, Bitcoin remains the most secure blockchain owing to the amount of hashing (computer) power its network provides. The Bitcoin network is now considered the world’s most powerful computer. In fact, it is more powerful than the world’s top 500 supercomputers.

It is probably with this particular reason that the Decentralized Identity Foundation choose to use it instead of the others or to build a completely new one. The Identity Overlay Network that is out for early preview is meant to overcome the challenges of capacity and interoperability of the Bitcoin network.  


How Does Bitcoin have Value?

Courtesy of Flickr

The price of Bitcoin is always swinging high and low. In December 2017, we witnessed an all-time high of close to US$20,000 per Bitcoin, and a market capitalization of slightly over US$300 billion.   

Then the market went bearish in the following months as the crypto winter set in. The price rolled down, and it reached slightly above US$3,000 in December 2018. The market capitalization bled to under US$100 billion.

Right now we seem to be on the edge of another rally that could take us to new all-time highs in price and market capitalization.

The cycle of low and high has become part of Bitcoin. However, the general trend is the increase in its value.

But even with this volatility, how exactly does Bitcoin have value?

Is it the energy it consumes?

An argument those who don’t think Bitcoin is a good idea often make against it is that it lacks intrinsic or inherent value. Ironically, many in this school of thought hold the view that fiat currencies like the dollar have some intrinsic value. And that it comes from the backing by the state through central banking.

An argument those who don’t think Bitcoin is a good idea often make against it is that it lacks intrinsic or inherent value.

In response, Bitcoin enthusiasts have explained that the value of a bitcoin comes from the amount of energy the Bitcoin network consumes to mine it. According to a study by Crescent Electric Supply Company, a US-based electric hardware supplier, it costs US$4,675 to mine a bitcoin in the US. In China, the cost is US$3,172, South Korea $26,170 and Venezuela$531. The variation is brought about by how much electricity costs in different countries.

This explanation of how Bitcoin gets its value has its shortcomings. First, it is hard to reconcile the different costs of mining in different countries. Secondly, it means any amount on the price of Bitcoin above the cost of mining can never be justified.  

The question of what constitutes value is one that economists have sought to answer for decades.

Renowned economist has a better theory

Carl Menger was a professor of political economy at the University of Vienna in the late 19th century and he is regarded as the founder of the Austrian School of economics. In his book Principles of Economics, he explains that what constitutes the value of an item is its utility.

He states that ‘value is…nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being.’

‘Value is…nothing inherent in goods, no property of them, but merely the importance that we first attribute to the satisfaction of our needs, that is, to our lives and well-being.’

In other words, value is the usefulness of something in satisfying our needs. This way of looking at value can be a great foundation in understanding the value of Bitcoin. The value of Bitcoin comes from its usefulness as a digital ledger that is immutable, tamperproof and decentralized.

Bitcoins also have value because of its usefulness as money that is durable, portable, fungible, scarce, divisible, and recognizable. Most importantly, Bitcoin is valuable because it is a less costly, fast and reliable mode of payment across international borders.

This usefulness of Bitcoin in meeting our needs translates to the demand of its units at the marketplace and corresponding prices. If there are more people finding it useful its price will keep going up. The value is further increased by the fact that Bitcoin is a deflationary currency; there will only be 21 million bitcoins.

The Bitcoin protocol is set in such a way that about every ten minutes new bitcoins come into circulation. However, the rate halves every four years so that around the year 2140 the release of new bitcoins will stop. By then all bitcoins ever mined will total 21 million.

Bitcoin for Beginners: Purchase, Protect, Mine, and Trade

  • Bitcoin is officially considered an asset by the Internal Revenue Service but it is not considered a true currency. Bitcoin can be used as a payment method and is often referred to as digital money, virtual currency, and crypto currency. Bitcoin is also the transaction network by which you send and receive this digital asset. Acquiring bitcoin, using bitcoin to purchase items, and trading is 100% legal and you can even expect a tax bill on your capital gains. I have spent considerable time researching how to acquire bitcoin, protect my bitcoin, mine bitcoin, and trade. I am writing this article to share what I have found to be reliable and trustworthy vendors and websites engaged in bitcoin.
  • Security and documentation are important and while not exciting, it is where you should begin your bitcoin investing strategy.
    • Install a two factor authentication (Android | Apple | Windows) and turn on two factor authentication for all of the accounts that provide it. This includes email, bank, google drive, one drive, and blogs.
    • Consider a safe place that you can write down and/or print paper wallets to help protect and diversify storage of your bitcoins. (Think home safe or bank safe deposit box)
    • Many internet users do not consider the danger of accessing confidential / financial websites on public computers, work computers, public wifi, or a friends cell phone. As you enter into the high risk / high ROI opportunities of the digital asset bitcoin some rules should be considered. Make certain that you access your accounts over secured wifi and trusted wifi networks. Your personal laptop, PC, tablet, and smart phone should be the only devices used for bitcoin transactions.
  • There are many websites providing services to buy, sell, and transfer bitcoins. Global events in China and Tokyo have increased the risk that a retail customer, investor, and merchant must consider when selecting a bitcoin website. Coinbase.com, Binance.org, and Bitpay.com stand out as professional and reliable full service bitcoin websites. Retail consumers, Nonprofits, and Merchants can all benefit from the full line of services available at these websites. This is evident in my personal experience, my hosting companies merchant account, and in the extensive online research that my team continuously reviews.
    • Buy and sell bitcoin, ethereum, bnb, alts here: www.Coinbase.com
    • Accept Bitcoin Payments or Gifts here: Bitpay.com
    • Watch your bitcoin transactions here: www.Blockchain.info (All bitcoin transactions are saved to a global transaction log called the blockchain. This is public information and available if you have the ID in question)
    • Import/sweep paper or offline wallet bitcoins into an online wallet here: www.Blockchain.info
    • Contact me directly if you are within the U.S., prefer a paper wallet or hardware wallet, and want to skip the online accounts: Bitcoin @ doshost . net
  • Use BitAddress.org to create paper wallets, offline wallets, and to diversify the bitcoin wallets you have so they are not stored in one place.
  • Finally the advanced opportunity to utilize a decentralized exchange (DEX) along with the financial self custody enabled by a secure mobile wallet.

*Updated 5.15.2019

Bitcoin PSA

Public Service Announcement – Buying Bitcoin

1) What Is Bitcoin

A global payment network and a new kind of money.

2) No Really, What Is It?

Bitcoin represents a vote for a new financial system and protocol for data transfer that is decentralized, distributed, trustless, and permissionless. This is an inclusive architecture that levels the playing field globally.

3) But Traditional Technology?

Better, faster, cheaper – BlockChain Technology Amazoned traditional technology

4) How Can I Understand This?

Be a dedicated lifetime learner. This is a new tool and you will not make good decisions without proper education.

5) Should I Buy Bitcoin?

Can you explain what a fork is and when the next one is scheduled? If the answer is no, you need to learn more before buying.

6) Should I Mortgage My House? How Much To Buy?

#LunchMoney that is what you invest, on a weekly or monthly basis, nothing more. Average in over several years so you can sleep and enjoy this beautiful world!

7) Ignore At Your Own Peril.



What’s missing in our world of digital currency?

A currency that is backed up by something substantial to help support it during the bad times, and to be the gold standard during the good times.





Accept Bitcoin Payments on Your Corporate Website

Bitcoin eCommerce & Bitcoin POS Systems

Executive Summary from Digital Merchant Consulting

A growing number of large companies and 30,000 mid- to small-sized firms now accept Bitcoin electronic currency as an alternative to the U.S. dollar. Among these are household names including Expedia.com, Overstock.com, Kings College, Dell Computer, eBay, Dish Network, 1-800-FLOWERS, Newegg and Sir Richard Branson’s Virgin Group. Further bolstering the Bitcoin economy, the U.S. government auctioned and sold nearly 30,000 Bitcoin with a market value of about $16 million in June, 2014.

What is Bitcoin?

Bitcoin is a decentralized electronic currency produced by an international network of computers. No bank or government controls its value or its creation; it has no central bank. The current value of all Bitcoins in the market totals about $6.45 billion (July, 2014), which increases each day as new Bitcoins are created through that network.

Bitcoin Is Ideally Suited for eCommerce

Customers find it convenient and secure. They have no need to login and expose their user ID and password, nor to enter a credit card number into new and unfamiliar websites. For those who do not have bank accounts, (about one in every 12 Americans according to Forbes Magazine), [4] Bitcoin provides the opportunity to purchase online. Bitcoin currency wallets are free, secure, and users cannot be surprised with an overdraft or other fees.

Vendors find that customers using Bitcoin often spend substantially more [2] than traditional purchases made with credit and debit cards – reportedly 30 to 50 percent more in some cases. [2] Because no bank or credit card company regulates the transaction between buyer and seller, merchant transaction fees fall to zero, giving vendors an opportunity to cut the cost of sales significantly. Bitcoin provides protection against fraud and charge-backs. It makes international payments fast and simple. Finally, the expense and administration involved with Payment Card Industry (PCI) data security standards compliance are moot, for there is no “payment card” involved in the transaction.

E-commerce, the “sweet spot” for Bitcoin, is expected to continue increasing as a percentage of all commerce. The U.S. Census Bureau [1] estimates that Internet sales accounted for more than $71 billion in the first quarter of 2014, which is a 15 percent increase from the year prior. Forecasts from eMarketer [3] predict worldwide electronic sales will reach $1.2 trillion in 2014, then nearly double to 2.07 trillion by 2017.

Today, with the advent of Bitcoin ATM’s [5] and POS systems, consumers can buy from major national retailers and even food truck vendors, making Bitcoin an ever-growing method of payment.

Digital Merchant Consulting

These e-commerce trends and the growing acceptance of Bitcoin raise the question for many CFO’s at B2B and B2C companies …

How can I accept Bitcoin?

Digital Merchant Consulting, (DMC), a division of DOSHOST.NET, provides consulting and implementation services to add a robust and secure Bitcoin payment method to any existing e-commerce website.

DMC, through its partnership with Bitpay, delivers a robust and proven solution known as an API – an application programming interface. The API seamlessly connects the services of Bitpay to your web site so with each Bitcoin transaction you receive the full value of the sale: If you charge one dollar, you receive one dollar with instant conversion to U.S. currency, with bank deposits made daily and with no transaction fees.

DMC’s solution includes …

  • A payment gateway with seven ready-made libraries that scale to accommodate both domestic and international sales.
  • More than 20 plug-ins that integrate with a wide range of shopping carts and e-commerce systems.
  • Full functionality for mobile users working from smartphones and tablets.
  • A merchant’s ability to accept Bitcoin in 150 different currencies, and to receive settlements in nine currencies via direct bank deposit, vastly simplifying international sales.
  • Conversion from Bitcoin to U.S. dollars occurs instantly after each purchase to avoid the risk of exchange rate fluctuation.
  • Cash from sales is transferred to your bank account daily and appears in the account after two business days. Settlements are made with as little as $20.00 in sales each day.
  • Quickbooks integration allows exporting sales data from Bitpay directly into Quickbooks for subscribers to the Business and Enterprise level plans.
  • For retail brick and mortar establishments a POS application accepts Bitcoin for any retail point-of-sale system that can access the Internet.
  • For mobile sales reps and field service personnel, the application accepts Bitcoin payments through smartphones and tablets running Apple IOS or Android operating systems.
  • Options are available to retain some or all sales revenue in Bitcoin.

Plan Options

In addition to three levels of service summarized below, DMC offers a free starter plan for companies wishing to test the system. The starter plan levies a one percent transaction fee on each sale. However the full-service plans outlined below charge no transaction fees. Your monthly cost is fixed and understandable, while you benefit by accepting Bitcoin as an alternative form of payment.

Professional Business Enterprise
$30 / month $300 / month Contact DMC
Free, instant conversion to dollars Free, instant conversion to dollars Free, instant conversion to dollars
Daily bank deposit Daily bank deposit Daily bank deposit
Retail POS application Retail POS application Retail POS application
22 eCommerce integrations 22 eCommerce integrations 22 eCommerce integrations
Email support Phone & email support Priority phone & email support
Up to $10,000 daily sales Up to $100,000 daily sales Unlimited daily sales
Quickbook sales integration Quickbook sales integration
Dedicated account manager
VPN access
Enterprise engineering & integration services available

Learn More

Digital Merchant Consulting has deep knowledge of eCommerce and the Bitcoin economy. Further, with years of technology experience through its parent, DOSHOST.NET, the company has substantial resources to help in most any kind of technology venture. Now, through the relationship with Bitpay, DMC is uniquely positioned to assist you in adding Bitcoin payment capabilities to your eCommerce site. We’ll provide in-depth consulting, advice and implementation services required to bring you “live” so you can begin taking advantage of this growing trend in electronic commerce. For more information, please visit www.DigitalMerchantConsulting.org, or contact us directly.

Business: 701-203-2002

Email: info@DOSHOST.NET

Author: Allen R

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