Bitcoin Management and Creation

There are two roles that a person assumes while dealing with Bitcoin.

Bitcoin User & Bitcoin Miner

Let’s look at each role in depth.

Bitcoin User

Bitcoin user is someone who buys bitcoins using local currency, with the intention to use Bitcoin cryptocurrency. Bitcoin user also sells owned Bitcoins in exchange of any fiat currency. To buy or sell Bitcoins, one must use Bitcoin exchange service like CoinAll, Coinbase, Binance, Kraken etc. Payments are typically done using a credit card, and Bitcoin value is decided by the market price at the time of transaction (buy or sell).

Once purchased, these Bitcoins are registered under the buyer’s name. In other words, the buyer will be marked as the owner of these Bitcoins on the blockchain. You can access them using Bitcoin Wallet. Please note that wallet stores public and private key of your account, not the actual Bitcoin. Public key is required to receive Bitcoins to your account whereas private key is used to send Bitcoins to someone. Public key is equivalent of a bank account, while private key be ATM pin.

Let’s say Michael wants to send 5 BTC (short for Bitcoin Currency) to Katie. Following are the sequence of steps that happens in the background.

(First of all, recipient of Bitcoin needs to be on Bitcoin blockchain so that he has the address to receive the cryptocurrency.)

  1. Michael initiates the transaction of 5 BTC using his wallet by specifying Katie’s address as destination. (Assuming that Michael has enough balance in his account to carry out this transaction).
  2. A negligible processing fee is added to transaction which is later used to pay miners.
  3. Transaction is queued up to be processed at every node of blockchain network.
  4. Following two conditions needs to be met before the transaction can be processed:
    A. A consensus is reached among the nodes of blockchain network that this is a valid transaction. Here, the validity can be that Michael must have 5 BTC and that Katie is able to receive them.
    B. A miner on blockchain network successfully solves the mathematical problem by generating correct output hash based on a specific input hash. This process is called Proof of Work (PoW).
  5. It takes few minutes for the transaction to be processed. Following happens as part of the processing:
    A. One block is added to blockchain, representing the transaction that Michael now have 5 BTC less in his account.
    B. Another block is added to blockchain, representing the transaction that Katie now have 5 BTC more in her account.
    (These blocks are immutable and irreversible)
  6. At this point, the transaction stands complete.

Let’s understand the role of a miner in Bitcoin blockchain.

Bitcoin Miner

A miner solves the mathematical problem and thus allows for the block to be added to blockchain. By doing so, a miner provides Proof of Work (See step 4.B. above) for that transaction. There are several miners who compete to solve the mathematical problem simultaneously, and only the winning miner is rewarded.

The reward that miner gets is the fraction of a Bitcoin which was added as a processing charge of transaction. The sole intention behind mining is to earn Bitcoin. So, an obvious question is why doesn’t everyone become miner then?

Simply because solving mathematical problem requires hell lot of computing power. Miners usually have Mining Rig which has multiple GPUs and cooling solution. Its complex to set up and difficult to manage.

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