Mining Analogy

The steady addition of a constant amount of new coins is analogous to gold miners expending resources to add gold to circulation. In our case, it is CPU time and electricity that is expended.

- Satoshi Nakamoto, Bitcoin Whitepaper

As nodes extend the chain of proof of work and are awarded coins distributed from the initial issuance the quantity of coins in reserve is depleted. The analogy is akin to a group of miners digging out a stope to find gold to add to a circulating economy.

In the case of Bitcoin, nodes perform the work of ‘mining’ by compiling transactions into block templates then digging through hash combinations looking for a particular combination that solves the block difficulty puzzle. This exercise is costly in terms of computing power and requires both energy and infrastructure so it is similar to real world mining. Hash providers are incentivised to find efficiencies such as lower cost energy and more efficient machinery.

A good analogy is that in 1850, it was efficient to mine for gold with a shovel and a pan, thanks to the exceptionally high concentrations of gold in the available ore, however by 1900 sluice guns and larger machinery was needed to remain competitive as most of the easy to find gold had already been pulled from the land.

In today’s mining industry, large players spend hundreds of millions of dollars purchasing and operating plants and machinery as the amount of available gold reduces over time. This doesn’t mean one can’t find gold with a pan and shovel, however the rewards for doing so are much less than they were back at the beginning of the gold rush.