Proof of Work — Actual Steps

• Collect transactions from the transaction pool and

build a complete block such that its size does not
exceed 1 MB.

• Calculate the hash by applying SHA-256 twice to

the Block header (Version + Previous Block Hash
+ Merkle Root + Timestamp + Difficulty Bits +
Nonce )
Proof of Work — Actual Steps

• Compare the result of Step # 2 with the expected

number of zeros. If not matched then increment the
nonce by 1 and go back to Step # 1. Technically
speaking the hash value is compared with a target.
The target is a very large number and known to
every bitcoin client. For the block to be accepted,
the hash value has to be less than the target.
Proof of Work — Actual Steps

• Keep comparing the result such that the hash

is less than target i.e the hash has the
expected number of leading zeros.
Proof of Work — Actual Steps

• Once miner finds a winning block then send it to all

participating nodes and they can calculate the result
for themselves. Once all agree then the node which
calculated the winning block is rewarded with
newly created Bitcoins. The winning block is first
checked by each node individually for a long
checklist of items. So, if one miner is adding, say
10000 bitcoins in coinbase transaction, it is
immediately rejected by all.
Proof of Work — Actual Steps

• As time progresses, more high computational nodes

join (or may even drop out of) the network. Hence,
the puzzle can be solved much faster and block
creation time is reduced. Remember, that the block
creation time is set to 10 minutes and this can never
change. So after a fixed time of approximately 2
weeks or exactly 2016 blocks the difficulty is re-
adjusted. Increase in difficulty means target
decreases.
Proof of Work — Actual Steps

• If nodes receive 2 blocks at the same time then the

one for which more computation power was used
(i.e had higher difficulty) is selected.
What determines bitcoin’s price?

• The price of a bitcoin is determined by supply and

demand. When demand for bitcoins increases, the
price increases, and when demand falls, the price falls.
There is only a limited number of bitcoins in
circulation and new bitcoins are created at a
predictable and decreasing rate, which means that
demand must follow this level of inflation to keep the
price stable. Because Bitcoin is still a relatively small
market compared to what it could be, it doesn't take
significant amounts of money to move the market
price up or down, and thus the price of a bitcoin is still
very volatile.