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Bitcoin Mining: The Nuts and Bolts

Dave Carlson

by Dave Carlson

Updated Aug 4

History of Bitcoin

Who is Satoshi and Where is He Now? (Bitcoin Wiki)

Satoshi Nakamoto is the founder of Bitcoin and initial creator of the Original Bitcoin client. He has said in a P2P foundation profile[1] that he is from Japan. Beyond that, not much else is known about him and his identity. He has been working on the Bitcoin project since 2007.[2]

 His involvement in the Bitcoin project had tapered and by late 2010 it has ended. The most recent messages reportedly indicate that Satoshi is “gone for good”[3].

His identity and nationality are unknown. The few bits of information available[1] about him point to Japan, he never wrote a single line of Japanese, the Bitcoin client has no Japanese version and there is no Japanese page on bitcoin.org.

He is entirely unknown outside of Bitcoin as far as anyone can tell, and his PGP key was created just months prior to the date of the genesis block. He seems to be very familiar with the cryptography mailing list, but there are no non-Bitcoin posts from him on it. He has used an email address from an anonymous mail hosting service (vistomail) as well as one from a free webmail account (gmx.com) and sends mail when connected via Tor. Some have speculated that his entire identity was created in advance in order to protect himself or the network. Perhaps he chose the name Satoshi because it can mean “wisdom” or “reason”.

 Hashes, Nonces, Shares and The Block Chain – Genesis of the Bitcoin

If you are new to cryptology, all these terms are new as well.  Don’t get overwhelmed – its best to experiment with a CPU mining client while you try to understand how this works.  You will be able to see the primary components that make up a Block, which translates to the creation of new Bitcoin.

 Lets start with the ultimate computational goal of the whole system – the Block.  Blocks make up the transaction record of the Bitcoin system, and are publicly tracked in a series called the Block Chain.  When you exchange Bitcoin, your transaction ultimately ends up in the Block Chain.  In order for the transaction to be recorded, a Block must be found.  This is where mining comes into play – and also why there is a Bitcoin reward paid to the miner who finds each Block.  The constant need for ongoing Block discovery, combined with transactions that need to clear produces a self-supporting system.

Hashes, or Hashing refers to the repeated performance of a cryptology algorithm called SHA-256, which outputs random numbers in a way which requires a predictable amount of processing effort.  The miner is looking to create a target value that matches the requirements of the Bitcoin system (i.e. extremely rare and difficult).

Nonces are essentially a seed value to the hash of the block, such that the Block created will be an extremely rare one – meeting the scarcity requirement of the Bitcoin network.  Essentially, the definition of a highly rare Block is simple: the hash of the Block must contain a run of zeroes – a very difficult task indeed!  Once the Block is solved, the Block and its correct Nonce is presented as a proof of the work that was done.  With the Block and the Nonce, the network can easily and quickly confirm that the Block is valid, and out go another set of transactions into the Block Chain.

 The Bitcoin network self-manages such that on average, a new Block is found every 10 minutes – across the entire network.  This means that the system will increase the difficulty of the Block requirement if it sees Blocks coming in at a faster rate.  So, as hashing power increases or decreases across the network, so does Difficulty.  You will often see miners announcing the next difficulty with excitement (or dread).  In fact the Difficulty is already such that that you could mine on your own for months or even years before ever making a Block of your own!

To mine Bitcoin, you really don’t need to be too concerned with the Blockchain, or Nonces.  You’ll want to know your hashrate, i.e. the processing power you have, and unless you have a very large mining operation, you’ll mine for a Pool of some kind.  This is a good time to talk about Shares and Pooled Mining.

The realization of the difficulty to solo-mine blocks has quickly brought a novel approach to mining:  Mining Pools.  In order to keep lower performance miners interested, a collective approach was created.  Instead of mining for years to get a 50 BTC reward, these Pools provide a concept of a Share – a hash which is easier to create than the real difficulty, but still provides proof that you have done valid work towards finding the next Block for the Pool.

There are several popular types of Mining Pools, oriented around the miner submitting shares. The more shares you can calculate and submit, the more fractional ownership you achieve in the next found Block reward.  Mining Pools provide websites with stats and account management to make it easy to connect and monitor your hashing power and most importantly your BTC generation.  Stale shares happen when a block has been found in the pool, but your miners were still working on the old work.  You will sometimes see a stale share just after the mining software determines that a block has been found.  Stale shares should not persist – if you are seeing a large amount of stales, you may have a configuration issue in your mining software.

Dupe shares are another bad share type.  These are fairly rare, but do happen: computing a dupe share literally means someone else out there on your pool computed the exact same share value as you did for the current round.  Many pools have a stat called ‘Other’, that represents all other types of bad shares.  These numbers should be low – around 1%-2% total.  If you are seeing a high number of rejected shares, you may have a problem with your hardware creating bad data.  Most mining software catches these and do not submit them to pools.  NOTE: there is one exception to the 1%-2% rule – if you are mining with P2Pool, you will see a higher percentage of stale shares – usually closer to 10%.  This is because of the different way that P2Pool achieves its block-finding.  P2Pool runs in a mode that reduces difficulty significantly within the network.  Difficulty is maintained such that blocks are found (within the pool only) every 10 seconds.  Every time a block is found, the work definition changes, and you get some stales.  Despite the higher stale rate, miners may make the same or even slightly more BTC as a result of transaction fees paid to the miners and donations that support the P2Pool concept.

That’s it! You’re created money for nothing – right?  Well, not exactly.  Its very important to consider the power and cooling requirements involved in mining, if your goal is understand your profitability.  We’ll talk more on the ROI calculation of Bitcoin mining later in this eBook.

Ok, you’ve experimented with running a CPU miner for a couple days, or you used GUIMiner to discover your current GPU and did some mining with that.  What does it take to really get mining?  You’ll need a Mining Rig.  A Rig is simply a stripped down minimalist setup providing support for running only necessary mining hardware – usually a collection of graphics cards (GPU’s) or Field Programmable Gate Arrays (FPGA’s).  We won’t go heavily into detail on the innumerable hardware options available, as there are great resources available online.

A GPU Mining Rig will involve a substantial power supply, a minimalist motherboard (CPU capability and RAM are less of a requirement here), high end graphics cards, open air cases and significant cooling capability.  GPU rigs make a lot of heat and take a lot of power.  If your goal is to generate bitcoin at a profit, you’ll need to understand your power costs.  For those of us without free electricity available, GPU mining is quickly becoming at least an almost even exchange of our home currency for BTC.  Some may look at this as simply a cheaper way to buy BTC – it depends on your point of view, how much work goes into managing the GPUs, and what you intend to do with the BTC you earn.  Once your GPUs are operating at a loss, you are essentially paying more for BTC through your power bill than you can buy it on the open market.

 An FPGA Mining Rig is much less labor intensive, but currently more expensive.  The technology is still fairly new, so reliability can be in question. The Field Programmable chip allows a custom hashing program to be loaded onto a highly performant chip, giving much higher capacity per watt as compared to a GPU.  FPGA’s are also much smaller and produce much less noise (or none at all) as well as less heat.  The FPGA Rig involves a power supply, though much less capacity is required.  A single 750W CPU power supply can be used to power dozens of individual FPGA chips.  No motherboard is required, however FPGA arrays have to be connected to a controller computer, usually via USB (yes the Raspberry Pi works).  The controller computer manages loading the FPGA bitstreams, and runs the mining software, doling out work assignments to each of the FPGAs as they return shares.  As the FPGAs return shares, the controller sends them on to the pool.  Highly optimized hashing programs, called bitstreams, have been created to generate up to 245 million hashes per second (MH/s) from a single 1” x 1” FPGA.

As of this writing there are several efforts underway to bring ASIC (Application Specific Integrated Circuit) technology to Bitcoin mining.  ASICs are purpose-built, permanently programmed chips with the application printed into the chip at the time of manufacture.  This approach produces hashing capacity many times greater than that of FPGA’s and GPU’s.  However, the design and manufacture of ASIC is a very expensive and time consuming process – the cost of an ASIC design can run into the millions of dollars.  In addition, if there is a fundamental change to the Bitcoin protocol, say for example a change to the hashing algorithm used, these ASICs could be rendered worthless.  At the time of this writing, there is only a single manufacturer promising availability of ASIC mining technology to the retail market.  Since the capacity brought by ASIC is so great, some say that the massive addition of hashing capacity to the network will cause difficulty to skyrocket, thus putting many GPU miners out of business.  Again, this all depends on what you pay for power, and what your approach to mining and Bitcoin is.

Here are some current performance statistics and price points to help you get a sense of the current Bitcoin market at time of this writing:

CPU Mining: Dual Core 2.4 GHz Intel CPU produced about 5-7 Mhash/s


  • GPU Mining: Older Nvidia GTX 6600 produced 32 Mhash/s
  • GPU Mining: Newer ATI Radeon 5970 ($800) produced 700 Mhash/s
  • Single FPGA chip ($275) produced 210 – 240 Mhash/s
  • Quad FPGA array ($1100) produced 840 – 960 Mhash/s
  • BitForce Jalapeno  3.5 GH/s  –  $149  (ASIC, release date TBD)
  • BitForce Single ‘SC’  40 GH/s  –  $1,299 (ASIC, release date TBD)
  • BitForce Mini Rig ‘SC’  1,000 GH/s  –  $29,899 (ASIC, release date TBD)


Next Section: Facing Failure

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