How Bitcoin Mining Works

I wrote this to try to explain Bitcoin mining.

Here’s an analogy for Bitcoin mining.

Let’s say I open a giant factory to make origami sculptures. I open the doors and say that anyone that wants to work for me is welcome.

You bring your own paper.

I pay per piece and I pay in gold coins worth about $10 each.

I want an average of 3 sculptures per hour. If the people are producing more than that, I’ll make a more complicated pattern that takes them longer to fold.

Whenever someone brings me a completed sculpture, everyone else throws their paper in the garbage and the next pattern I want folded goes up on the big board.

The gold coin I pay per sculpture never changes but let’s say the price of gold goes up 10% every day.

Do you bring your paper and come work in my factory?

Also, China sends a giant delegation of expert origami artists to work for me.

Note that just because you're not very good at origami doesn't mean you can't take a crack at this and maybe get a gold coin.

If you like, you can get together with a bunch of your friends and even a bunch of complete strangers and come to an agreement that you'll all go to the factory and, if any one of you earns anything, you'll pool it together and then divide it up based on how many folds you made. Even if all your papers ultimately went in the garbage, you should still get something out of this.

Obviously you're gonna want some ringers in your group and they'll be folding way faster than you are and with more accuracy. It's only fair that they'll get a bigger share of the loot. So number of folds seems like as good a measure as any to divide it up.

Steve will collect all the coins for the group and put them in a bucket in his basement. He'll give you access to a spreadsheet so you can check whenever you like to see how many coins your group earned and how much of it is your share.

One day Steve will tell you he went to put the latest coins in the bucket but found it empty. There's no coins in it. Steve has no idea how this could have happened.

Steve will then buy a yacht.