After reading the O'Reilly book and perusing online resources, I'm still confused about the value that the actual mathematical mining provides to Network (I understand it does provide value, but not clear how).

It seems like once a miner has verified transactions, the really valuable work for the network has been done. And when it starts hashing to win a competition for 25 btc, it's just playing a game that has the sole purpose of adding currency to the network (which I understand is important, no central govt. etc). I don't see how this hashing to find a value less than the difficulty actually provides a real service to the network such as verifying transactions.

Before I jumped into learning about bitcoin, I just assumed the math problems the miners were solving related to detangling or decrypting transactions, but I see now that's not the case. If the competition was a race to verify transactions, that too would make more sense.

Can anyone explain the value of this mathematical race?

  • 1
    Possible duplicate of bitcoin.stackexchange.com/questions/910/… (But Stephen's answer is probably better than the ones on that question.) – Nick ODell May 15 '15 at 21:10
  • I think the main point that you're missing is this: You can have two transactions, either of which alone is valid, but at most one of them is valid. For example, if I have one Bitcoin, I can send it to Alice or I can send it to Bob, but not both. So given the two possible transactions, there has to be some way to decide which is valid, with either answer being equally good. So it's not just verifying them, but choosing winners and losers in a way others can agree on. – David Schwartz May 18 '15 at 17:53
up vote 11 down vote accepted

As you mentioned, bringing coins into the network is one of the main purposes of mining. But this reward is just an incentive to do the other more important part of mining: 'processing' transactions.

Immutability

As detailed here, when a block has been solved, not a single bit can be changed without invalidating it.

This means that all of the transactions in the block have been processed, and are 'final' in the sense that they are in the blockchain and will not change (assuming that block is a part of the best/longest blockchain). Imagine how bad it would be if you could change the transaction ledger to mark someone no longer being paid, or not being paid the amount that you said you paid them.

Security

Requiring billions of mathematical steps to be taken to solve a block means that it is very hard to accomplish. Honest miners that mine on the tip of the blockchain get rewarded for this in the form of bitcoins. But attackers who try to go back in history and replace old blocks with new blocks are at a disadvantage because doing so requires an enormous amount of hash power.

While the attacker was going back and trying to re-mine old blocks, the rest of the network continued mining on the tip of the blockchain, making it even harder for the attacker to catch up. Hence, for someone to create blocks faster than the rest of the network they have to be in control of >50% of the network hash power. This would take millions of dollars, currently.

  • Is Ethereum susceptible to the 50% problem? – Pacerier Oct 25 '17 at 13:55

This is the beauty of Satoshi's dream. And unless you can see it completely and holistically you really can't see it at all. Mining is to the value of Bitcoin as mothers are to the human race. Bitcoin is worth what it's worth because of 9 years of collecting massive computing power. If that computing power was directed towards another crypto coin tomorrow, the value of Bitcoin would be drained into that new currency as investors left. That's why you get compensated with equal amounts of coin when there's a fork. Who would stay with a coin that could not make transactions? Mining "is" the worth of the currency because it makes the network or currency possible. But on the other hand, when you get right down to it, mining new coins into existence is inflationary but to a diminishing degree with time. But in the case of Bitcoin it is far outweighed by investor's thirst for this store of assets.

Validating transactions is not complex inherently. Since when does it need so much computing power to verify the correctness of a transaction? Hashes are easily created and compared, and this is what encryption of traditional banking transactions relies on. Do you think that "classical" electronic transaction providers like paypal, apple pay etc. need tons of computing power to secure a simple transaction ? Nonsense.

So, binding complex mathematical work loads that are self-serving the bitcoin ecosystem has two purposes: stabilize the numerical value (not real value) of the "currency" for those who trade in it and creating an illusion of real value. Bitcoin mining accomplishes no measurable counter value to society. What real values are backing it? In short, it accomplishes nothing but the illusion of counter value itself. 1300% up in a year, 1300% down in a week. Good luck BC gamblers.

  • You seem to be missing the point that Bitcoin is decentralised. If there was a central authority (like a bank), the Proof of Work that miners perform wouldn't be necessary. If a bank goes into liquidation, funds are at risk. Giant financial institutions behaving badly and failing to repay peoples funds appears to be exactly why Bitcoin was created. – Highly Irregular Dec 2 '17 at 8:32

I may be wrong but i think all the mining does is advertisement. That's why you see many well known cryptocurrencies drop mining profitability after a while when they get momentum. All the advanced securing, finding coins or making transactions in mining an other mambo jambo technical terms that no one really understands is nonsense - way more efficient ways could exist to do the same. A cryptocurrency is very often willing to pay a hefty price to miners in hopes to get as much media coverage as possible. This attracts investors. The rewards for mining gives a false impression about it's value and it actually drives the price of cryptocurrency down, because many miners will convert it to money instead of keeping it - this are people that get money from the cryptocurrency's value without investing actual money in it. On other hand having investors fooled that mining is useful for the cryptocurency gives a strong impression that it's value in the future is secure and stable. If anyone let's say had 50 billions right now and wanted to create a new cryptocurrency and gave 2x-3x rewards for mining compared to other cryptocurrencies, first - all the miners would leave other cryptocurencies and it would arguably become #1 cryptocurrency shortly after because of the media coverage and investors, not because mining actually does anything to it's value.

  • 1
    Completely wrong. Mining validates transactions, and by requiring a large amount of work to do this, it discourages attackers would could otherwise attack for free. It's like if they were to charge for email, spam would drop significantly. The fee's and difficulty are attempts to encourage mining, and also discourage it in order to keep transactions running at a predictable rate. Difficulty rises when there are too many miners, so raising the difficulty slows how fast they can mine, which slows transaction speed. When not enough miners are mining, difficulty drops to increase the tx speed – Mr.Nobody Jul 6 '17 at 0:32
  • Also, mining fee drops as difficulty rises, again to discourage mining after there are too many miners. This is an attempt to keep fees stable as well (too many miners drops fees, not enough raises them) – Mr.Nobody Jul 6 '17 at 0:35
  • @ErikFunkenbusch: It sounds to me like you're saying that mining fees and difficulty are causally related. This is not the case. Difficulty is a function of the time the last blocks took to be discovered, and the block subsidy has a fixed schedule.—I agree though, that this answer is incorrect. – Murch Jul 7 '17 at 16:23

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