Authors: Kimberly Burns, Mahdi Shams

Blockchain mining is the process by which transactions on the blockchain are validated.

Integral to the functioning of cryptocurrency networks such as Bitcoin, blockchain mining involves solving mathematical problems to validate data recorded on a block on a blockchain. The completion of a block entitles the person who completed it to receive a reward payable in cryptocurrency.

Bitcoin mining is the only way by which new bitcoins can be created. In order to limit the supply of new bitcoins, the rewards that miners can receive are mathematically controlled such that once a certain number of new blocks has been mined, the amount of new bitcoin that miners can earn is reduced.

The first block on the Bitcoin blockchain, called the “genesis block” was created in January 2009, for which the creator of the block (a person or persons known as Satoshi Nakamoto) received a reward of 50 bitcoins. At that time the bitcoin mining process was so new, relatively little computing power was required in order for individuals to economically and successfully mine Bitcoin. To become a miner, a person would set up a computer, download the software, become a “node” in the blockchain, and start using the computer’s processing power to validate the transactions on the blockchain.

Since 2009, the scope of blockchain mining has changed.

First, individuals started to form mining pools to aggregate processing power and share rewards, providing the individuals with the benefit of more regular payouts, at the price of a fee or cut of profits to the administrator of the pool.

Second, the positive economics of mining led to businesses setting up warehouses full of computer hardware (like ASIC chip miners) and hiring staff to monitor the equipment. This was a global movement, and the new blockchain mining industry started to make headlines in 2014.

There are a number of factors that affect the economics of blockchain mining.

Most blockchain networks use a proof of work system for determining who performs the functions necessary to earn a reward. The higher the hash rate (basically, a measure of computing power) of a miner’s equipment, the faster that miner is processing transactions – and the more likely it is that that miner will be the first one to complete a block and receive a reward. To increase the hash rate, a miner acquires as much of the latest and fastest computer hardware as it can and operates it continuously.

Blockchain mining operations tend to use a tremendous amount of electricity and a high cost of power will decrease profits, so miners search for low cost power sources and locations.

A final factor, outside of the miners control, is the difficulty of the blockchain algorithm. The difficulty fluctuates with the aggregate network hash power of the blockchain – meaning that the more miners and more hash power available, the more difficult the problems become. The bitcoin blockchain algorithm difficulty fluctuates to keep the rate of the blockchain growth to approximately one new block each 10 minutes.

Why is blockchain mining technically difficult and expensive?

Ensuring committed, regular miners increases the stability of the blockchain, and the level of mathematical difficulty helps prevent double spending, network spam, and hacking.

We are excited to bring you a weekly blog series on blockchain, cryptocurrency, coins, tokens, capital market regulations, and legal approaches to this new industry. This is our sixth post, and you can expect to see at least one each week over the next few months.

If you have questions, or want a particular legal topic explored one week, please contact one of our team members with expertise in this area: Mahdi Shams, Steven Robertson, Kimberly Burns.

Read our previous blog post, “Is Your Token a Security?.”

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Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.