How Does Mining Work? What Is Crypto Mining?


What is Crypto Mining?

What is Crypto Mining?

Crypto mining is when a miner sends a transaction message across the cryptocurrency network, another miner’s computer picks it up and adds the transaction to the pool of transactions waiting to be placed into a block and the blockchain ledger. Cryptocurrencies are decentralized — that is, no central bank, no central database, and no single, central authority manages the currency network. The United States, for example, has the Federal Reserve in Washington, the organization that manages the U.S. dollar, and European Central Bank in Frankfurt manages the euro, and all other fiat currencies also have centralized oversight bodies.

However, cryptocurrencies don’t have a central authority; rather, the cryptocurrency community and, in particular, cryptocurrency miners and network nodes manage them. For this reason, cryptocurrencies are often referred to as trustless. Because no single party or entity controls how a cryptocurrency is issued, spent, or balanced; you don’t have to put your trust in a single authority.

Trustless is a bit of a misnomer. Trust is baked into the system. You don’t have to trust a single authority, but your trust in the system and fully auditable codebase is still essential. In fact no form of currency can work without some form of trust or belief.

"If nobody trusts the currency, then nobody will accept it or work to maintain it."

In the trustless cryptocurrency world, you can still trust the cryptocurrency community and its mechanisms to ensure that the blockchain contains an accurate and immutable — unchangeable — record of cryptocurrency transactions. Cryptocurrencies are established using a set of software rules that ensure that the system can be trusted, and the mining process is part of this system that allows everyone to trust the blockchain.

Cryptocurrencies have no central bank printing new money. Instead, miners dig up new currency according to a preset coin-issue schedule and release it into circulation in a process called mining.

So why is this process called crypto mining?

The miners put in work and are rewarded with an uncirculated asset. In gold mining, naturally occurring gold that was outside the economy is dug up and becomes part of the gold circulating within the economy. In cryptocurrency mining, work is performed, and the process ends with new cryptocurrency being created and added to the blockchain ledger. In both cases, miners, after receiving their reward — the mined gold or the newly created cryptocurrency — usually sell it to the public to recoup their operating costs and get their profit, placing the new currency into circulation.

The cryptocurrency miner’s work is different from that of a gold miner, of course, but the result is much the same: Both make money. For cryptocurrency, all of the work happens on a computer or rig connected to the cryptocurrency network — no burro riding or gap-toothed gold panners required!

Exploring the Role of the Crypto Miner

Cryptocurrency miners add transactions to the blockchain, but different cryptocurrencies use different mining methods. Different mining and consensus methods are used to determine who creates new blocks of data and how exactly the blocks are added to the blockchain. How you mine a particular cryptocurrency varies slightly depending on the type of cryptocurrency being mined, but the basics are still the same: it creates a system to build trust between parties without needing a single authority and ensures that everyone’s cryptocurrency balances are up-to-date and correct in the blockchain ledger. The work performed by miners consists of a few main actions:

  • Verifying and validating new transactions
  • Collecting those transactions and ordering them into a new block
  • Adding the block to the ledger’s chain of blocks (the blockchain)
  • Broadcasting the new block to the cryptocurrency node network

Exploring the Role of the Crypto Miner

The preceding process is essential work, needed for the continued propagation of the blockchain and its associated transactions. Without it, the blockchain won’t function. But why would someone do this work? What are the incentives for the miner?

The bitcoin miner actually has a couple of incentives (other cryptocurrencies may work in a different manner):

Transaction fees. A small fee is paid by each person spending the cryptocurrency to have the transaction added to the new block; the miner adding the block gets the transaction fees.

Block subsidy. Newly created cryptocurrency, known as the block subsidy, is paid to the miner who successfully adds a block to the ledger.

Combined, the fees and subsidy are known as the block reward. In Bitcoin, the block subsidy began at 50 BTC. (BTC is the ticker symbol for bitcoin.) The block subsidy at the time of writing is currently 12.5 BTC. The block subsidy is halved every 210,000 blocks, or roughly every four years; sometime around May 2020, it will halve again to 6.25 BTC per block.

How does mining work?

Mining work as the reward system, miners must set up their rigs (the computer equipment) and run that cryptocurrency’s associated software. Depending on how many resources the miner is committing, he or she will have a proportional chance to be the lucky miner who gets to create and chain the latest block; the more resources employed, the higher the chance of winning the reward. Each block has a predetermined amount of payment, which is awarded to the victorious miner for their hard work to spend as they wish.

When Bitcoin first started, anyone with a simple desktop computer was able to mine. The would-be miner simply downloaded the Bitcoin software, installed it, and let the BTC roll in! As time went on, though, competition increased. Faster and more powerful computers were built and used for mining. Eventually, specialized processing chips called Application Specific Integrated Circuits (ASICs) were developed. An ASIC, as the name implies, is a computer chip designed for a specific purpose, such as displaying high-resolution graphics quickly, running a smartphone, or carrying out a particular form of computation. Specific SICs have been designed to be highly efficient at the forms of computation required for cryptocurrency mining — for example, for Bitcoin. Such a chip can be 1,000 times more efficient at Bitcoin mining than the chip in your PC, so in today’s Bitcoin environment, it’s go ASIC or go home!

How does mining work?

For high-difficulty cryptocurrencies, such as Bitcoin, the ideal environment is one with:

  • Low hardware costs: those rigs aren’t free.
  • Low temperatures: lower temperatures make cooling your rigs easier.
  • Low electricity costs: rigs can use a lot of power.
  • Fast, reliable Internet connections: you need to be communicating with the cryptocurrency network rapidly with minimal downtime because you’re in competition with other miners.

Fear not, though! With many different copies and mimicry of Bitcoin running rampant, Bitcoin is no longer the only game in town, and you can find lots of alternative choices, with varying levels of required computing power. Today, some of the most profitable cryptocurrencies to mine are lesser known and can be mined using off-the-shelf computer hardware due to less stringent difficulty levels that are associated with lower popularity and adoption. Currently, a large portion of the global cryptocurrency mining takes place in China, at perhaps three times the rate of the next closest nation (the United States). A combination of cheap electricity and easy access to cheap computer components for building rigs gives China an edge that Chinese miners have leveraged and so far, maintained, even with their government’s apparent disapproval of cryptocurrencies. This is a testament to how resilient and difficult to shut down distributed cryptocurrency systems such as Bitcoin are.

Mining algorithms

Different mathematical algorithms can be used to create consensus — to ensure that everyone working with any particular cryptocurrency agrees on what data should be included in the blockchain and what version of the blockchain is correct. We explain various aspects of different consensus systems:

Proof of Work Algorithms. The most secure, trusted, yet energy intensive of all the consensus systems, Proof of Work undeniably has the best track record. Having existed since the birth of Bitcoin, PoW has been instrumental in maintaining an unbroken chain of transactions since January 2009! The essential concept of Proof of Work is that in order to use a particular service — to send an e-mail for example, or to add transactions to a blockchain — one has to show that some form of work has been carried out. The goal is to inflict a modest cost (in terms of the computing power required to run the Proof of Work algorithm) on the person wanting to use the service once, but to make it very expensive for someone to use the service thousands or millions of times.

Proof of Stake Algorithms. The idea is to make miners stake their cryptocurrency as an entry ticket for adding blocks to the blockchain and earning transaction fees. The penalty for adding invalid transactions to the blockchain ledger would be loss of the coins staked. This was first proposed in 2011 by a user of the forum.

Mining algorithms

"Proof of Stake is similar to Proof of Work — it’s used to maintain consensus and keep the cryptocurrency ledger secure — but with one major difference: There’s way less Work!"

Delegated Proof of Stake (dPoS). Delegated Proof of Stake works similar to Proof of Stake, but with a more centralized concentration of block producers or witnesses in the dPoS ecosystem. Block producers are elected and take sequential turns to add blocks to the blockchain. Generally, the cryptocurrency owners get to vote for the validators in proportion to the amount of the cryptocurrency they own. And there simply aren’t many block producers, generally in the range of 20 to 100 (EOS has 21, BitShares has 100). dPoS systems also have validators who validate that the blocks the block producers are adding are indeed valid; anyone can be a validator.

In dPoS, there is also a voting mechanism to allow witnesses (block validators) to vote for or against other witnesses if some become bad actors by corrupting the chain with invalid transactions or other damaging behavior.

Delegated Byzantine Fault Tolerance (dBFT). In dBFT, blocks are put forward by speaker nodes and voted on by delegate nodes. Consensus in dBFT is achieved when at least two-thirds of the delegate nodes agree on a proposed block. Any user can run a speaker node, but to be a delegate node requires being voted in by large token holders. The risk is that this may lead to centralization of power and vote manipulation in the future, but so far dBFT implementations have maintained chain validity. With dBFT, once a transaction is confirmed and the block recorded into the chain, it achieves total finality and is irreversible. This leads to almost no chance of forking between delegate nodes.

Proof of Burn (PoB). Proof of Burn is a consensus mechanism that proves that adequate resources are expended in the creation of a particular coin or token. This can be an expensive method to choose but can be effective to kickstart a new cryptocurrency utilizing the accumulated Proof of Work of a more secure chain. A PoB cryptocurrency typically sits on top of another PoW, cryptocurrency blockchain. Essentially, a coin that has been created in the Proof of Work blockchain is sent to a verifiably unspendable address (sometimes known as an eater address) — that is, to a blockchain address that the community has verified is unusable. Such an address may have been created randomly, rather than the usual process of creating a private/public key pair and then hashing the public key. If the address was created randomly, then the private key cannot be known, and thus the address is unspendable. Thus, any cryptocurrency sent to that address can never be used again (There’s no private key that can be used to send the cryptocurrency to another address). The cryptocurrency has been, in effect, burned!

There’s more, of course. There’s Proof of Capacity (PoC); miners save a database of puzzle solutions to the nodes storage, and when a block contest runs the node accesses the puzzle solutions to find the correct one. There’s Proof of Elapsed Time (PoET); nodes are randomly assigned a wait time and then blocks are added based on the sequence of wait times (the lowest wait time goes first). There’s Proof of Activity (PoA), a particular form of hybrid PoW/PoS, Limited Confidence Proof of Activity (LCPoA), and more. And more turn up all the time.

There is no perfect consensus mechanism, so the evolution goes on, as new ideas arise and new models are tested.

The main ways of mining cryptocurrency

The main ways of mining cryptocurrency

Over the first ten years of bitcoin mining, the competition for finding blocks steadily increased as network popularity and notoriety increased. Miner ingenuity combined with increasing economic incentives led to the development of a more efficient process. The decade between 2009 and 2019 saw a computational arms race incentivizing the construction, acquisition, and operation of the most effective and efficient hardware:

  • CPU mining. Personal computers consist of a few key components chief among which is the central processing unit, the CPU. Central processing units are very flexible computer chips, good at computing a wide variety of tasks from email to web browsing to word-processing. They are capable at performing all these tasks, but aren’t exceptionally efficient or specialized in any of them. An off-the-shelf CPU today could perform roughly 20 to 200 Hashes per second (H/s) when pointed to a proof of work protocol. However, deploying a CPU to mine on the bitcoin network today would be an exercise in futility, like going into battle against a modern army, equipped only with arrows and spears. A CPU simply can’t compete against the specialized equipment in use today. However, there are still cryptocurrency blockchains with lower network hash rates and unique algorithms that can be effectively mined with a CPU.
  • Pool mining. The users who participate pool their computational resources together and work as a team to find blocks. If a pool user were to find a block, but at the time is only contributing to ~5 percent of the total pool hash rate, that user would collect ~5 percent of the total block reward associated with that block. This distributes the costs and gains in a very fair manner across the pool based on each miner’s contribution. By the way, even though the thousands of participants in a pool think of themselves as miners — and for the purpose of this book, we’re going to call them miners — from a system standpoint, they are not. A miner is really a mining node, and from the perspective of the cryptocurrency network, the pool itself provides a mining node, and the individual members of the pool are really invisible to the network, behind the node. That is, you’re not setting up your own node; pool mining is far simpler than solo!
  • Cloud mining. Cloud mining operations are mining farms — data centers dedicated to mining — that sell or lease hashing power. The essence of the service is that a third-party hosts equipment and provides access to the rewards associated with the equipment. This method has many advantages and disadvantages. For one, the user must trust the cloud provider in a space ripe with scams and frauds. The user is not in control of the equipment or how it is used. The advantages, of course, are not having to fill your home with computer equipment, not having to deal with the noise, the heat, the power consumption, and the upkeep of the mining equipment, and so on. Essentially, you outsource the work.

Whether you want to be a hobbyist miner, or a serious commercial miner, or somewhere in between, you must ask yourself an important question before you go any further down the cryptocurrency mining path. Answering this question will enable you to properly determine which cryptocurrencies to mine and will help you become the most successful crypto miner you can be: What is your goal for mining cryptocurrency, and how will you reach it?

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