Why is mining necessary for Bitcoin?

Many people are curious why people say Bitcoin is mined. Let me explain to you why blockchain projects like Bitcoin need "mining".

Transaction needs a bookkeeper

In order to conclude a transaction, the transfer of funds between buyers and sellers requires reliable people and institutions to keep accounts and settle accounts.

For example, if you transfer 100 dollar to a friend through Googlepay, Googlepay will decrease your account by 100 dollar, and your friend's account will increase by 100 dollar. In this scenario, Googlepay is the bookkeeper.

Information asymmetry problem

But Bitcoin was born without Googlepay and banks. Bitcoin is also not prepared to depend on these centralized institutions.

Its inventor, Satoshi Nakamoto, designed that anyone can help with bookkeeping, and bitcoins can be obtained as rewards for bookkeeping. But here comes the problem. There are many people who want to help bookkeeping to obtain bitcoins. Who should choose to bookkeeping with a low probability of error? This is actually a problem of information asymmetry.

The Bitcoin system wants to select credible people to keep accounts, but it does not understand the many participants who want to keep accounts. In order to solve this problem, many blockchain projects have come up with different tricks.

In order to make the bookkeeper credible, some blockchains simply allow individual users to keep accounts by themselves. This type of project is called a private chain.
Some blockchain projects need to be reviewed and approved by other members before joining. Such projects are called alliance chains.

There is also a type of blockchain project that allows anyone to join the bookkeeping freely. It is called a public chain, and Bitcoin belongs to this category.

Mining reduces information asymmetry

To solve the information asymmetry problem of "whether the bookkeeper is trustworthy", public chains need to use some means. In fact, each mining method is trying to solve this problem. The following briefly introduces the commonly used mining methods and the principle of solving the problem of information asymmetry.

1. POW(BTC uses POW)

POW is the abbreviation of Proof of Work. Participants need to prove that they have indeed spent enough work costs.

Satoshi Nakamoto designed a puzzle game that had to cost a lot of calculations to solve, requiring the purchase of equipment, consumption of power, and time spent. Whoever solves the puzzle first proves that it did cost a lot, and puts him in charge of keeping score and getting a reward. Then start again with another round of solving the puzzle, and so on. In this process, you drive the machine (computer) and search for treasure among countless numbers. People vividly compare it to "mining". POW is actually a common means of reducing information asymmetry in life. for example:

• In order to win the trust of leaders or elders, a sip of wine at the table. This is a self-inflicted behavior, is to show the other party to pay the "workload" cost.
• A brand in order to win the trust of the public, looking for a well-known and expensive celebrity endorsement, or advertising its high-end expensive production equipment, rich production experience. This is also to show the public the cost of their "work".

As you must have thought, POW proves to be not so reliable. Even if you pay the cost in the early days, when you're really in charge, you can still mess up, as human nature dictates. In response, Bitcoin has designed certain anti-attack measures, such as bookkeeping content must be approved by at least half of the computing power.

2. POS

POS is the abbreviation of Proof of Stake, and participants need to prove that they have enough shares.

The assumption is that you have a lot of equity in a system, the more credible you are. In each round, the participants are given a corresponding probability of being selected as bookkeepers according to their shareholding ratio.

POS is also a common means of reducing information asymmetry in life. for example:

• When a listed company holds a general meeting of shareholders, it proves the corresponding right to speak according to the shareholding ratio.

• The nobles in ancient times wore gorgeous clothes and wore gold and silver to prove that they had rich financial strength to reflect their status among the crowd.