1 00:00:04,675 --> 00:00:07,180 All right, welcome to the fifth lecture on Bitcoin. 2 00:00:07,180 --> 00:00:09,530 Today is going to be all about mining. 3 00:00:09,530 --> 00:00:13,110 So to recap, what did we learn about the miners so far? 4 00:00:13,110 --> 00:00:16,180 Well, we've heard about the miners quite a bit and we know that Bitcoin depends on 5 00:00:16,180 --> 00:00:19,220 the miners pretty heavily to perform a couple of important roles. 6 00:00:19,220 --> 00:00:22,890 Of course they validate every transaction, they build all the blocks, and 7 00:00:22,890 --> 00:00:25,320 we know that the miners earn some reward. 8 00:00:25,320 --> 00:00:26,440 Who are the miners? 9 00:00:26,440 --> 00:00:27,480 How do they get into this? 10 00:00:27,480 --> 00:00:28,370 How do they operate? 11 00:00:28,370 --> 00:00:30,030 What's the business model like for miners? 12 00:00:30,030 --> 00:00:31,770 What impact are they having on the environment? 13 00:00:31,770 --> 00:00:34,175 We're going to get to all of those questions in today's lecture. 14 00:00:38,280 --> 00:00:42,072 So we'll start by talking about what Bitcoin miners actually have to do in 15 00:00:42,072 --> 00:00:43,119 order to be miners. 16 00:00:44,460 --> 00:00:48,450 And maybe before we get into that, we'll talk about some historical miners. 17 00:00:48,450 --> 00:00:51,590 So if you're thinking about becoming a Bitcoin miner, 18 00:00:51,590 --> 00:00:55,280 I wouldn't want to completely discourage you. 19 00:00:55,280 --> 00:00:59,300 But I'd be remiss not to tell you that this is not a get rich quick scheme. 20 00:00:59,300 --> 00:01:01,530 This is a very long haul. 21 00:01:01,530 --> 00:01:04,129 So looking back at some historical gold rushes. 22 00:01:05,300 --> 00:01:10,020 They're full of stories of young people rushing off hoping to find fortune. 23 00:01:10,020 --> 00:01:12,480 A lot of them losing everything that they have, 24 00:01:12,480 --> 00:01:15,900 some of them really striking it rich. 25 00:01:15,900 --> 00:01:17,910 But a lot of hardship along the way. 26 00:01:17,910 --> 00:01:22,426 This is probably my favorite example from the Klondike gold rush in Alaska in 1898. 27 00:01:23,440 --> 00:01:25,970 This gold rush all happened within the matter of six months, so 28 00:01:25,970 --> 00:01:30,580 there was a huge rush to get there for the one summer mining season. 29 00:01:30,580 --> 00:01:33,240 And all of these people are trudging up this 30 00:01:33,240 --> 00:01:36,740 snowy mountain pass with all of their equipment at the same time. 31 00:01:36,740 --> 00:01:38,930 Doesn't look like the easiest way to get rich. 32 00:01:38,930 --> 00:01:42,240 And I'll argue that Bitcoin mining is starting to look 33 00:01:42,240 --> 00:01:43,600 like a similar proposition. 34 00:01:46,530 --> 00:01:51,020 So what do you have to do to be a Bitcoin miner in six easy steps? 35 00:01:51,020 --> 00:01:55,210 Well, you join the network, you become a Bitcoin node, you listen for 36 00:01:55,210 --> 00:01:57,460 all of the transactions that people are broadcasting. 37 00:01:57,460 --> 00:02:00,240 Of course you have to validate them. 38 00:02:00,240 --> 00:02:02,340 You listen for new blocks that people have found, 39 00:02:02,340 --> 00:02:05,660 you maintain a view of the current block chain. 40 00:02:05,660 --> 00:02:07,320 Course you want to validate all the blocks and 41 00:02:07,320 --> 00:02:09,170 all the transactions that are in those blocks. 42 00:02:10,870 --> 00:02:13,930 You start to assemble new valid blocks based on the transactions that 43 00:02:13,930 --> 00:02:15,260 you're hearing. 44 00:02:15,260 --> 00:02:18,040 Then you have to work really hard in step four here 45 00:02:18,040 --> 00:02:20,750 to find a nonce that will make your block considered valid. 46 00:02:20,750 --> 00:02:24,520 That's the really difficult computational step where all the difficulty really 47 00:02:24,520 --> 00:02:26,420 happens for the miners. 48 00:02:26,420 --> 00:02:29,010 Finally, if you're lucky enough to find a block, you have to 49 00:02:29,010 --> 00:02:32,720 hope that all of the other miners accept your block that they validate it and start 50 00:02:32,720 --> 00:02:37,860 mining on top of it, and that they don't accept some competitor's block instead. 51 00:02:37,860 --> 00:02:40,490 And if all of that happens, in step six, 52 00:02:40,490 --> 00:02:45,038 you finally get to profit, currently to the tune of over 25 Bitcoins per block. 53 00:02:45,038 --> 00:02:46,840 Worth about $15,000 US. 54 00:02:46,840 --> 00:02:52,580 And so a couple of these steps, all of the validation in particular, 55 00:02:52,580 --> 00:02:54,910 are what's actually useful to the Bitcoin network. 56 00:02:55,920 --> 00:03:00,590 So that's why we have mining at all, miners perform this validation step. 57 00:03:00,590 --> 00:03:01,850 The rest of it, the profit, 58 00:03:01,850 --> 00:03:06,570 and the race to find blocks, that's all just incentive to encourage the miners 59 00:03:06,570 --> 00:03:10,020 to do the validation which is necessary for Bitcoin to function as a currency. 60 00:03:10,020 --> 00:03:14,112 What does the process look like for finding a valid block? 61 00:03:14,112 --> 00:03:18,570 Well we'll have to look back to the data structure that we introduced two lectures 62 00:03:18,570 --> 00:03:23,880 ago, and recall that there are two main hash base data structures here. 63 00:03:23,880 --> 00:03:27,590 There's the block chain where each block header points to the previous block header 64 00:03:27,590 --> 00:03:29,060 in the chain. 65 00:03:29,060 --> 00:03:31,710 And then within each block there's this Merkle tree, 66 00:03:31,710 --> 00:03:36,520 this hash based binary tree of all of the transactions included within that block. 67 00:03:38,180 --> 00:03:42,490 So the first thing that you do as a miner is you assemble all of the transactions 68 00:03:42,490 --> 00:03:45,200 that you have from your pending transaction pool into this tree. 69 00:03:46,340 --> 00:03:49,460 You create a block with the right header that points to the previous block. 70 00:03:50,860 --> 00:03:54,420 And then, you have to start searching over this nonce field to try to have the hash 71 00:03:54,420 --> 00:03:57,830 of the block header start with the required number of zeros. 72 00:03:57,830 --> 00:04:02,060 So, you may start with a nonce of all zeros, that's a 32 bit integer. 73 00:04:02,060 --> 00:04:05,829 And when you try that, you'll get a hash that's incorrect. 74 00:04:07,570 --> 00:04:10,090 So you'll say, okay, let's move onto the next nonce, 75 00:04:10,090 --> 00:04:12,570 nonce number one, the hash is also incorrect. 76 00:04:14,050 --> 00:04:18,220 Step forward one more time, try hash two, also incorrect. 77 00:04:18,220 --> 00:04:22,090 So you can see where this is going, and a lot of cases 78 00:04:22,090 --> 00:04:26,470 you'll try every single possible value for that 32 bit integer. 79 00:04:26,470 --> 00:04:28,240 And in no case will the hash be correct. 80 00:04:29,520 --> 00:04:31,920 So, at this point you're going to have to make further changes. 81 00:04:34,270 --> 00:04:37,510 And you'll notice that there's this parameter in the coin base transaction and 82 00:04:37,510 --> 00:04:41,270 remember that the coin base transaction is where the miners are actually 83 00:04:41,270 --> 00:04:44,660 minting new coins and claiming them for themselves. 84 00:04:44,660 --> 00:04:46,990 There's also this extra nonce parameter in there. 85 00:04:48,060 --> 00:04:52,210 So after you've exhausted all possible nonces in the block header, for 86 00:04:52,210 --> 00:04:57,640 the extra nonce in the coin base transaction of all zeroes, 87 00:04:57,640 --> 00:05:00,820 you'll step the extra nonce in the coin based transaction up to one, 88 00:05:00,820 --> 00:05:04,190 and then you'll start searching nonces in the block header once again. 89 00:05:07,090 --> 00:05:09,890 And it's important to realize that when you change that one parameter in 90 00:05:09,890 --> 00:05:15,270 the coinbase transaction, the entire Merkle tree of transactions has to change. 91 00:05:15,270 --> 00:05:18,310 So that change will propagate all the way up. 92 00:05:18,310 --> 00:05:21,210 Changing the extra nonce in the coinbase transaction is much 93 00:05:21,210 --> 00:05:24,430 expensive than changing the nonce in the header, for that reason. 94 00:05:24,430 --> 00:05:26,910 So you do that as the outer loop, and the inner loop, 95 00:05:26,910 --> 00:05:30,090 where you're really working hardest changing the nonce in the block header. 96 00:05:33,322 --> 00:05:33,960 Okay. 97 00:05:33,960 --> 00:05:36,220 But once again, our first try didn't work here. 98 00:05:36,220 --> 00:05:38,990 So we'll have to keep stepping that nonce. 99 00:05:38,990 --> 00:05:42,220 And again, this is a really difficult computation, so the vast, 100 00:05:42,220 --> 00:05:44,469 vast majority of nonces that you try aren't going to work. 101 00:05:45,950 --> 00:05:50,420 But eventually, if you stay at it long enough, you'll find the right combination 102 00:05:50,420 --> 00:05:54,390 of the extra nonce in the coin-based transaction, and the nonce in the header. 103 00:05:54,390 --> 00:05:57,760 And you'll find a block with a hash that starts with enough zeros to be 104 00:05:57,760 --> 00:05:59,260 considered valid. 105 00:05:59,260 --> 00:06:01,700 And this is when you want to announce it as quickly as you can and 106 00:06:01,700 --> 00:06:02,959 hope that you can profit from it. 107 00:06:06,390 --> 00:06:09,520 So I said it was difficult, exactly how difficult is it? 108 00:06:10,800 --> 00:06:14,740 Well as of today, this is the mining difficulty target, so 109 00:06:14,740 --> 00:06:18,249 the hash of any value block has to be below this value here. 110 00:06:20,580 --> 00:06:25,350 And this is a 256-bit hashout, but we're using shaw256, the hash function, 111 00:06:25,350 --> 00:06:27,370 which is appropriately named. 112 00:06:27,370 --> 00:06:29,090 It's 256 bits. 113 00:06:29,090 --> 00:06:33,440 Currently at least the first 64 bits of the hash of any valid 114 00:06:33,440 --> 00:06:34,920 block have to be set to zero. 115 00:06:38,700 --> 00:06:43,417 Overall, the current difficulty is about two to the 66 which is 116 00:06:43,417 --> 00:06:45,060 a really huge number. 117 00:06:45,060 --> 00:06:48,240 If we try to write it out in decimal, that's what we get. 118 00:06:48,240 --> 00:06:54,220 That's 84 quintillion and this number is so big, it's difficult to even imagine. 119 00:06:54,220 --> 00:06:55,740 One approximation for 120 00:06:55,740 --> 00:07:00,070 it that you can think about is it's about the population of the Earth squared. 121 00:07:01,310 --> 00:07:05,820 So basically if every person on Earth was themselves their own planet Earth 122 00:07:05,820 --> 00:07:07,760 with seven billion people on it, 123 00:07:07,760 --> 00:07:10,470 the total number of people would be close to this number. 124 00:07:11,630 --> 00:07:15,670 Or another way to think about it is if all seven billion people on Earth 125 00:07:15,670 --> 00:07:16,850 shook hands with each other. 126 00:07:18,250 --> 00:07:21,460 Fewer than to 2 to the 66 total handshakes would have to take place. 127 00:07:21,460 --> 00:07:25,715 So this is an incomprehensibly huge number. 128 00:07:30,110 --> 00:07:31,670 So where did this number come from? 129 00:07:31,670 --> 00:07:33,240 How is the mining difficult set? 130 00:07:34,510 --> 00:07:37,350 It's actually chosen again every two weeks, 131 00:07:37,350 --> 00:07:41,200 based on how efficient the miners were over the previous two weeks. 132 00:07:41,200 --> 00:07:45,625 So you simply take the amount of time that it took the miners to find the previous 133 00:07:45,625 --> 00:07:47,990 2,016 blocks, and 134 00:07:47,990 --> 00:07:53,480 you divide that amount of time by two weeks, and then you multiply that ratio 135 00:07:53,480 --> 00:07:58,050 by whatever the previous difficulty value was to get the next difficulty value. 136 00:07:58,050 --> 00:08:02,660 So you're just scaling it to keep a constant property true, which is that 137 00:08:02,660 --> 00:08:08,050 block should be found by the network, on average, about once every 10 minutes. 138 00:08:08,050 --> 00:08:12,210 That's the fixed constant that was chosen at the beginning of time for Bitcoin and 139 00:08:12,210 --> 00:08:16,290 every two weeks the difficulty is reset to ensure that property is maintained. 140 00:08:19,200 --> 00:08:22,809 So you can see that over time the mining difficulty keeps increasing. 141 00:08:24,050 --> 00:08:28,120 It's not necessarily a steady linear increase or an exponential increase. 142 00:08:28,120 --> 00:08:32,120 It depends on activity in the market, how many new miners are getting into the game. 143 00:08:32,120 --> 00:08:36,330 Which may be affected by the current exchange rate of Bitcoin. 144 00:08:36,330 --> 00:08:39,520 But generally more and more hash power comes online. 145 00:08:39,520 --> 00:08:43,589 More people are hashing, blocks are found faster, and the difficulty is adjusted up. 146 00:08:44,910 --> 00:08:48,010 So that it, again, takes ten minutes to find blocks. 147 00:08:48,010 --> 00:08:52,260 And you can see that, in the red line on the graph here, 148 00:08:52,260 --> 00:08:54,530 there's a step function of difficulty. 149 00:08:54,530 --> 00:08:57,950 Even though the overall network hash rate is going smoothly, 150 00:08:57,950 --> 00:09:01,120 because you only reset every two weeks the difficulty steps up. 151 00:09:05,210 --> 00:09:09,080 Another way to view this is to look at how long it takes to find a block on average. 152 00:09:10,360 --> 00:09:13,660 So here you can see a graph of, 153 00:09:13,660 --> 00:09:19,000 over time how many seconds elapsed between consecutive blocks in the block chain. 154 00:09:21,510 --> 00:09:25,140 You can see that this gradually goes down and then it jumps up again, 155 00:09:25,140 --> 00:09:26,820 and then gradually goes down. 156 00:09:27,960 --> 00:09:32,990 Of course, what's happening there is that every two weeks, the difficulty resets and 157 00:09:32,990 --> 00:09:36,660 the average block time goes back up to about ten minutes and then more and 158 00:09:36,660 --> 00:09:38,410 more power goes online. 159 00:09:38,410 --> 00:09:41,710 The difficulty stays the same, so the miners are finding blocks faster and 160 00:09:41,710 --> 00:09:42,810 faster. 161 00:09:42,810 --> 00:09:43,850 And then two weeks passed. 162 00:09:43,850 --> 00:09:45,990 The difficulty resets back up to ten minutes and 163 00:09:45,990 --> 00:09:47,540 the process starts all over again. 164 00:09:49,520 --> 00:09:54,182 So in actuality, even though the goal was for a block to be found every ten minutes, 165 00:09:54,182 --> 00:09:57,579 on average it's more close to about every nine minutes, and 166 00:09:57,579 --> 00:10:01,999 at the end of the two week cycle, it will get down to about every eight minutes.