Bitcoin Mining Explained Like You’re Five: Part 1 – Incentives

Oh hey there! So I’ve finally given in to peer pressure and started a blog. A number of people have told me that I have a knack for explaining complex topics in a way that is easy to understand. I guess we’ll see if they’re right. These first few posts will be about Bitcoin mining. I’ve explained it in-depth to several newbies before, but have never written anything for a general audience. Hopefully, these posts will serve as a nice educational resource for beginners. In part 1 we will take a look at what Bitcoin mining is and how it makes this digital currency tick. Given that Bitcoin has been around since 2009, it’s easy to take this process for granted, but you shouldn’t! The incentive structure built into the system is a masterpiece of innovation and it’s definitely worth reviewing. ┬áIf you think you have a handle on the general overview, feel free to skip over to part 2 where we’ll discuss the technical side of mining and how the network is secured from attack. Don’t worry, you don’t need to be a computer scientist to understand the technical side. Bitcoin is surprisingly very accessible, and these are ELI5 posts after all. So let’s begin.

Genesis

As you may know Bitcoin was developed by Satoshi Nakamoto (whoever he is) in 2008. Bitcoin’s claim to fame is that it is the world’s first decentralized digital currency. Not the first overall digital currency, but the first one to solve the problems associated with decentralization. What problems may that be?

It’s fairly easy to use standard cryptographic tools, like digital signatures, to “prove” ownership of something. I can prove I own one bitcoin by presenting a valid digital signature. I can also sign over ownership of that bitcoin to you by attaching your bitcoin address to it before signing. The problem we run into, however, is that there is no way to know whether I also signed over ownership of that same coin to someone else (or even to another address controlled by myself) before transferring it to you. Since bitcoins are digital, they are not scarce and can be copied ad infinitum. Any digital currency that doesn’t tackle this “double spend” problem, will be destroyed by hyperinflation on day one.

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