Bitcoin and Cryptocurrency Technologies

Trivial to verify. ​Let’s now turn to the third important property of this proof of work function, which is
that it is trivial to verify that a node has computed proof of work correctly. Even if it takes a node, on
average, 10​ 20​ tries to find a nonce that makes the block hash fall below the target, that nonce must be
published as part of the block. It is thus trivial for any other node to look at the block contents, hash
them all together, and verify that the output is less than the target. This is quite an important
property because, once again, it allows us to get rid of centralization. We don’t need any centralized
authority verifying that miners are doing their job correctly. Any node or any miner can instantly
verify that a block found by another miner satisfies this proof‐of‐work property.
2.5 Putting it all together
Cost of mining. ​Let’s now look at mining economics. We mentioned it’s quite expensive to operate as
a miner. At the current difficulty level, finding a single block takes computing about 10​ 20​ hashes and
the block reward is about 25 Bitcoins, which is a sizable amount of money at the current exchange
rate. These numbers allow for an easy calculation of whether it’s profitable for one to mine, and we
can capture this decision with a simple statement:
If
mining reward​> ​mining cost
then miner profits
where
mining reward = block reward + tx fees
​mining cost = hardware cost + operating costs (electricity, cooling, etc.)
Fundamentally, the mining reward that the miner gets is in terms of the block reward and transaction
fees. The miner asks himself how it compares to the total expenditure, which is the hardware and
electricity cost.
But there are some complications to this simple equation. The first is that, as you may have noticed,
the hardware cost is a fixed cost whereas the electricity cost is a variable cost that is incurred over
time. Another complication is that the reward that miners get depends upon the rate at which they
find blocks, which depends on not just the power of their hardware, but on the ratio of their hash rate
to the total global hash rate. A third complication is that the costs that the miner incurs are typically
denominated in dollars or some other traditional currency, but their reward is denominated in
bitcoin. So this equation has a hidden dependence on Bitcoin’s exchange rate at any given time. And
finally, so far we’ve assumed that the miner is interested in honestly following the protocol. But the
miner might choose to use some other mining strategy instead of always attempting to extend the
longest valid branch. So this equation doesn’t capture all the nuances of the different strategies that
the miner can employ. Actually analyzing whether it makes sense to mine is a complicated game
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