[Perfect Soul]

This is meant to be an education thread and I will not be responsible for your actions using information found in this thread. This is my humble attempt to educate the beginners and introduce them to this new and brilliant field.Bitcoin is different than what you know and use every day. Before you start using Bitcoin, there are a few things that you need to know in order to use it securely and avoid common pitfalls.

Bitcoin is a cryptocurrency where the creation and transfer of bitcoins is based on an open-source cryptographic protocol that is independent of any central authority. Bitcoins can be transferred through a computer or smartphone without an intermediate financial institution. The concept was introduced in a 2008 paper by a pseudonymous developer known only as "Satoshi Nakamoto", who called it a peer-to-peer, electronic cash system. The bitcoin address is a logn string of characters which looks similar to 1dm20918md0129d029mdd21. There are many vendors out there offering you banknotes and coins which have bitcoin denominations on them. You'll get a bitcoin private key along with it while purchasing and you can verify your balanceby breaking a seal to get access to the key.

The processing of Bitcoin transactions is secured by servers called bitcoin miners. These servers communicate over an internet-based network and confirm transactions by adding them to a ledger which is updated and archived periodically using peer-to-peer filesharing technology. In addition to archiving transactions, each new ledger update creates some newly minted bitcoins. The number of new bitcoins created in each update is halved every 4 years until the year 2140 when this number will round down to zero. At that time no more bitcoins will be added into circulation and the total number of bitcoins will have reached a maximum of 21 million bitcoins. To accommodate this limit, each bitcoin is subdivided down to eight decimal places; forming 100 million smaller units called satoshis.

The basics for a new user

As a new user, you only need to choose a wallet that you will install on your computer or on your mobile phone. Once you have your wallet installed, it will generate your first Bitcoin address and you can create more whenever you need one. You can disclose one of your Bitcoin addresses to your friends so that they can pay you or vice versa, you can pay your friends if they give you their addresses. In fact, this is pretty similar to how email works. So all that is left to do at this point is to get some bitcoins and to keep them safe. In order to start using Bitcoin, you are not required to understand the technical details.

However, if you want to know more, keep reading!

Balances - block chain

The block chain is a shared public transaction log on which the entire Bitcoin network relies. All confirmed transactions are included in the block chain with no exception. This way, new transactions can be verified to be spending bitcoins that are actually owned by the spender. The integrity and the chronological order of the block chain are enforced with cryptography.

Transactions - private keys

A transaction is a transfer of value between Bitcoin addresses that gets included in the block chain. Bitcoin wallets keep a secret piece of data called a private key for each Bitcoin address. Private keys are used to sign transactions, providing a mathematical proof that they have come from the owner of the addresses. The signature also prevents the transaction from being altered by anybody once it has been issued. All transactions are broadcast between users and confirmed by the network in the following minutes, through a process called mining.

Processing - mining

Mining is a distributed consensus system that is used to confirm waiting transactions by including them in the block chain. It enforces a chronological order in the block chain, protects the neutrality of the network, and allows different computers to agree on the state of the system. To be confirmed, transactions must be packed in a block that fits very strict cryptographic rules that will be verified by the network. These rules prevent previous blocks from being modified because doing so would invalidate all following blocks. Mining also creates the equivalent of a competitive lottery that prevents any individual from easily adding new blocks consecutively in the block chain. This way, no individuals can control what is included in the block chain or replace parts of the block chain to roll back their own spends.

How do you get Bitcoins? The easiest way is to go to a market, and buy it outright but the market is really unpredictable and it is not quite the best idea. At around $135 USD per bitcoin, the direction of the bitcoin is not easy to guess. In short, you should probably mine some bitcoins. But what is bitcoin mining? To make it easy for you, think of mining as a work done by a very large group of people in solving a problem. For example finding the nth term of a huge series of numbers or maybe trying to find a key that can be used to decrypt the password for a file. And these are called blocks. But whenever you find one, it gets harder to find as time progresses. So nowadays you need high-performance computers to find them. But when it comes to Bitcoins, it is not about solving these problems; it is about finding a sequence of data which is usually called a block that produces a particular pattern when the Bitcoin 'hash' algorithm is applied to the data. So whenever a match occurs, the miner obtains Bitcoin. The size of the bitcoins you receive reduces as more bitcoins are mined.

The difficulty of searching and finding these blocks are increased to that it becomes more difficult to find one. So combining both these factors, it reduces the time rate at which Bitcoins are produced. Bitcoins are often rated in hashes per second. With the difficulty and the bounty settings at a particular time, it is possible to calculate the expected rate of a Bitcoin production. This requires heavy PC specs and nowadays, people use their Graphics Processing Unit (GPU) to do this work. They are massive and they are strong. With a good PC along a great graphics card, you could earn upto 0.04 BTC per day. But this can vary hugely depending on your specs. The process of finding blocks is so popular these days that the difficulty of finding a block is so high and it could take upto 3 whole years for you to find a block and generate any coin. While you could get a machine aside to do the job, by time you've mined some coins, the energy cost will cost more than what the actual bitcoins are worth. There is an ingenious solution to overcome this problem. And it is called Pooled Mining which we will see in the next section.

Pooled mining is a mining approach where multiple generating clients contribute to the generation of a block, and then split the block reward according the contributed processing power. Pooled mining effectively reduces the granularity of the block generation reward, spreading it out more smoothly over time. With increasing generation difficulty, mining with lower-performance devices can take a very long time before block generation, on average. For example, with a mining speed of 1000 Khps, at a difficulty of 14484 (which was in effect at the end of December, 2010), the average time to generate a block is almost 2 years.

To provide a more smooth incentive to lower-performance miners, several pooled miners, using different approaches, have been created. With a mining pool, a lot of different people contribute to generating a block, and the reward is then split among them according to their processing contribution. This way, instead of waiting for years to generate 50btc in a block, a smaller miner may get a fraction of a bitcoin on a more regular basis.

A share is awarded by the mining pool to the clients who present a valid proof of work of the same type as the proof of work that is used for creating blocks, but of lesser difficulty, so that it requires less time on average to generate.

This is the equation of how it works:

(25 BTC + Block fees - 2% fee)*(shares found by workers)/total shares in current round)


When this equation is simplified, you can easily identify how the entire system works. You work for shares in a block and when you complete fixed percentage of the block, less fees. So this is basically the whole concept. Pooled mining effectively reduces the granularity of the block generation reward, spreading it out more smoothly over time. There are lots of approaches that are created to mine coins.

The slush approach

Bitcoin Pooled Mining (BPM), sometimes referred to as "slush's pool", follows a score-based method. Older shares (from beginning of the round) have lower weight than more recent shares, which reduces the motivation to cheat by switching between pools within a round.

The puddinpop approach

(As of February, 2011, there are no puddinpop pools running.)
Another approach is the 'metahash' technique, used by puddinpop's remote miner. Clients generate hashes, and also submit 'metahashes', which are hashes of a large chunk of generated hashes. The server checks that the metahashes are correct (in a round-robin fashion, picking up a metahash from a client that hasn't been checked on the longest), thus preventing clients from simply claiming that they have done work without actually doing it. The withholding of good blocks by the clients is prevented by the server's possession of the private key, just as in the previous approach. Rewards are distributed based on the number of metahashes submitted by the clients.
The generated blocks contain multiple keys in the generation transaction, giving fractional bitcoin amounts to each key in proportion to their hashing contribution for that block.

The Pay-per-Share approach

The Pay-per-Share (PPS) approach, first described by BitPenny, is to offer an instant flat payout for each share that is solved. The payout is offered from the pool's existing balance and can therefore be withdrawn immediately, without waiting for a block to be solved or confirmed. The possibility of cheating the miners by the pool operator and by timing attacks is thus completely eliminated.
This method results in the least possible variance for miners while transferring all risk to the pool operator. The resulting possibility of loss for the server is offset by setting a payout lower than the full expected value.

Get A Wallet - A wallet is basically what the name is. A Wallet in the Bitcoin world is a place where you can store your Bitcoins. It allows you to do transactions and gives you the ownership of an address which you'll use for the transactions. You can either store your wallet on your PC or store it online. Coinbase is an online wallet which is fairly easy to set up and use. Click here to go and choose your own wallet. There are no preferred wallets but basically all of them does the same thing. It's always wise to choose an offline wallet for obvious reasons. And once you've created your wallet, you should get an address like stated above.

Join A Pool -So now that you've got a Bitcoin address, you need to join a mining pool. So you have to work with a group of miners on blocks. One of the most popular pool is Slush's pool. So go ahead and check it out. There are lots more pools you can find easily but most of them differ by the fees they charge per block. So the basic idea is, if there are less members in a pool, it will take longer to discover while pools with many members result in very small payments. What you need to do now is go to Slush's pool and quickly create an account. You now need to login to your account and create two-three workers. The workers are sub-accounts you have with their own individual usernames and passwords. Make sure you enter your wallet address into the respective field.

Get A Miner - There are so many options for multiple platforms. Miners use spare GPU cycles to power the mining operation. You can use a simple tool like GUIMiner which is a very simple solution for windows users since it allowed you to create miners using almost any graphics card. 50Miner is another cool alternative miner you can check out. But keep in mind that you need to enter your worker info and pool in them before they start mining coins for you. Linux Users can use CGMiner which is a great miner. And for OS X users, we have the DiabloMiner, which is quite old and works in command-line. Though it is quite slow, it works quite well. So this is the end of the guide. I've explained most of the things you need to know about Bitcoins and I can guarantee you that if you've read this guide properly, all your common Bitcoin doubts have been cleared. If you still have any more doubts, drop a comment below. But to end this guide all I have to say is, if it costs you more to run your hardware than you gain in bitcoins, you're probably doing something wrong.

I took a lot of this from contributions in other threads so I cant claim all this information is my own.

[Illuminati]

Nice and detailed guide, however at this stage mining bitcoins is 100% useless unless you own a super computer. You'll end up losing money. However, there are other crypto currencies to mine, such as Dogecoin.

[Perfect Soul]

This is basic and introduction tutorial for noobs who don't know anything about Bitcoin. But I agree with you that mining bitcoins is 100% useless.

[Skitstep]

I would love to buy a $13,000 mining rig that has about 700GH/s. I would get about .7 BTC per day, which would be really nice. Great tutorial though, more of a "What is Bitcoin" tutorial though.

[Perfect Soul]

Hope everyone like my tutorial