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Berentsen and Schär
ated Bitcoin units through this activity. The miner can succeed in doing this if he or she can
convince all other network participants to add his or her block candidate to their copies of
the Bitcoin Blockchain.
Bitcoin mining is permissionless. Anyone can become a miner by downloading the respec-
tive software and the most recent copy of the Bitcoin Blockchain. In practice, however, there
are a few large miners that produce most of the new generally accepted blocks. The reason is
that competition has become fierce and only large mining farms with highly specialized hard-
ware and access to cheap electricity can still make a profit from mining.
For a block candidate to be generally accepted, it must fulfill a specific set of predefined
criteria. For instance, all included transactions must be legitimate. Another important crite-
rion is the so-called “fingerprint” of the block candidate. A miner obtains this fingerprint by
computing the block candidate’s hash value using the hash function dSHA256.
For example, we will look at the hash value for the text, “Federal Reserve Bank of Saint
Louis.” The fingerprint of this text, which was calculated using the hash function dSHA256, is
72641707ba7c9be334f111ef5238f4a0b355481796fdddfdaac4c5f2320eea68.
Now notice the small change in the original text to “federal Reserve Bank of Saint Louis.” It
will cause an unpredictable change of the fingerprint, which can be seen from the correspond-
ing new hash value:
423f5dd7246de6faf8b839c41bf46d303014cffa65724ab008431514e36c4dba.
As suggested by this example, a data file’s hash value cannot be prognosticated.
This characteristic is employed in the mining process as follows. For a block candidate to
be accepted by all miners, its fingerprint must possess an extremely rare feature: The hash
value must be below a certain threshold value—that is, it must display several zeroes at the
beginning of the fingerprint. An example of a fingerprint of a block that was added to the
Bitcoin Blockchain in 2010 is given in the following example:
Block #69785 (July 23rd, 2010, 12:09:36 CET)

0000000000
1 4 2 4 3 293b78a2833b45d78e97625 f 6484ddd1accbe0067c2b8 f 98b57995
Need to be zero
Miners are continuously trying to find block candidates that have a hash value satisfying the
above mentioned criterion. For this purpose, a block includes a data field (called the nonce)
that contains arbitrary data. Miners modify this arbitrary data in order to gain a new finger-
print. These modifications do not affect the set of included transactions. Just as with our
example, every modification results in a new hash value. Most of the time, the hash value lies
above the threshold value, and the miner discards the block candidate. If, however, a miner
succeeds in creating a block candidate with a hash value below the current threshold value,
he or she broadcasts the block candidate as quickly as possible to the network. All the other
network participants can then easily verify that the fingerprint satisfies the threshold criterion
by computing it themselves.
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First Quarter 2018
Federal Reserve Bank of St. Louis REVIEW