Even if you have gotten your head around what cryptocurrencies like Bitcoin are, you’d be forgiven for wondering what Bitcoin mining is all about. It’s far removed from the average Bitcoin owner these days, but that doesn’t change how important it is. It’s the process that helps the cryptocurrency market cap grow and hit its peak potential.
To puzzle out the essence of Bitcoin, we need to plunge a little bit into the subject of mining. I will tell you about mining as an investment strategy later on, but for now, let’s consider drilling only regarding the emergence of Bitcoin.
A couple of years ago, many people viewed drilling, the producing of cryptocurrency or Bitcoins, as a kind of hobby. Many played that game until the critical situation with pizza happened. That day is known as the Pizza Day in the cryptocurrency community.
On May 22, 2010, a developer paid a fellow Bitcoin forum user 10,000 BTC for two pizzas. Back then, Bitcoin was almost worthless. These two pizzas cost the user approximately $25. Currently (October 2017), one Bitcoin costs more than $5,000. You can quickly calculate that those two pizzas cost that guy millions of dollars.
That was the first time Bitcoin penetrated the real world. This chart shows that Bitcoin has had its ups and downs. However, it has grown several-fold since 2016. Bitcoin was first mined on an industrial scale when its value began to zoom up.
First, computing power was used to mine Bitcoin. Later, miners started to use graphics cards to form the blocks. Now, they use specialized equipment called ASIC. The largest such farms are now located in China.
How the Mining Process Works Mining is the process of producing new cryptocurrency or bitcoins. Let’s sort out how the mining works. When, for example, you send money from your wallet to another person’s wallet, your transactions fall into the so-called “mempool.” The Bitcoin mempool is a collection of all deals waiting to receive a network confirmation. Miners, guided by their principles, collect deals in specific blocks and then try to insert them in the Blockchain. Every neighborhood in the Blockchain generates every ten minutes. This is the way we see Bitcoin transaction.
This is the way a computer sees it. A miner gets a reward for mining a block. Currently, the award is 12 bitcoins. That is, if you introduce a well-formed block into the system, you will get such a reward. By the way, the very first (Genesis) block was created by Satoshi Nakamoto.
Any person could find it and get 50 bitcoins for it. Today, the reward for an adequately formed block begins to fall. It is said to tumble to a little value by 2140. One day, miners realized that it was not profitable to mine on a standalone basis. The likelihood you will find such a block depends
On “hash rate” or how powerful your Bitcoin miner’s machine is. Under specific acceptable values, if say, your hash rate makes up 10% of the total hash rate, you will be able to find such blocks with a probability of 10% and get your reward. So, if you mine using your laptop at home, you’ll never see a new neighborhood. Therefore, to get a more stable reward, the miners unite in the so-called mining pools.
They use their federal hash rate to reap more regular profits. Now many miners began to think: Why should I mine if I can buy Bitcoin? It is also a good idea as the value of Bitcoin is determined only by the belief of those people who use it, while demand determines its cost. If no one buys your Bitcoin from you, it will cost nothing. Therefore, as long as people see this technology as an opportunity to use it anonymously, make substantial payments, and so on, the value of Bitcoin will gain momentum.
The first advantage is low transaction costs. However, we should bear in mind that Bitcoin is not good enough for micropayments. If you transfer someone $1 million, it will cost you a penny.
However, if you decide to pay for a cup of coffee, the fees will be significant compared to the cost of your coffee.
The second advantage is high-speed transaction processing. Here are also some hitches. In fact, every block in the Blockchain generates every ten minutes, i.e., the fastest possible transaction takes ten minutes. It seems this is rather quick if compared to the SWIFT transfer in a bank, which can take 2-4 days. However, Visa and MasterCard are much faster. They can process tens of thousands of times more transactions per unit of time than Bitcoin. It is worth noting that some other types of cryptocurrency now exist which were developed to be faster than Bitcoin.
The third advantage is the pseudo-anonymity of participants. We have already studied that anyone can track all transactions on the network. If you know the exact owner of a wallet, you can track absolutely all transactions carried out from it. Thus it cannot be said that Bitcoin is anonymous.
As soon as one manages to match your address with your personality, anonymity disappears. But if you observe so-called “internet hygiene,” meaning you do not show your wallet to anyone, then basically your transactions cannot be tracked. I should mention, though, there are other cryptocurrencies which are more anonymous than Bitcoin. By the way, if you want to stay anonymous when making transactions on the Bitcoin network, this is already possible. Many services wash your bitcoins.
They are called “mixing services” and are used to mix one’s funds with other people’s bitcoins, intending to confuse the trail back to the funds’ source. As you see, new technologies have appeared to step up the anonymity of cryptocurrencies. And, finally, now more than 16 million bitcoins circulate in the world, while a total of 21 million will be mined. The algorithm of the network itself programmes such figures. The limited amount of Bitcoin makes inflation of this currency impossible. This currency does not depreciate over time because only a certain amount will be issued.
Bitcoin even has a deflationary model: many people lose their coins by forgetting the password for the wallet or sending money to the wrong address. Therefore, the number of bitcoins will gradually decrease.
Proof Of Work and Why It’s Important
Today, the most significant problems of the Bitcoin network were as follows: how to make sure that the transactions are truthful; how to make sure that a miner does not deceive anyone; what should be done to choose the right block and build the Blockchain. All these issues are settled via the consensus algorithm.
The Proof of Work protocol confirms that a miner does a tremendous amount of work to find a correct nonce and get a successful hash. You should spend much time to see the needed one. I’ll explain in more detail. The block difficulty is adjusted every 2016 blocks and depends on how many zeros are at the beginning of a particular hash. It is not difficult to find the hash itself, but it takes pains to see a successful hash with a certain number of zeros.
If you have the hash of a previous block as well as timestamp and transaction data, it seems that it is straightforward to make a new hash from this and process this block.
However, you need to find a nonce, whose value is set so that the hash of the block will contain a run of leading zeros. Much time is required for that. Once miners find this successful hash, they send
A block to the Blockchain. That is, they have already confirmed all transactions, having done some work. So, there is no point in deceiving someone as such action is very difficult to do. After that, all information is distributed in the nodes.
First, a miner sends one node. It can run a check on whether, for example, those people who sent money from point A to point B had that money, i.e., whether all the transactions are valid. Then the nodes start to exchange this information with each other, and thus, the block is formed. In theory, two miners might create the same block. How will Blockchain choose which block is better? The first principle is speed. T
he second principle is “success” of a hash. Therefore, “success” of a hash is exactly the efforts which the miners should make within the Proof of Work protocol. Another reason why you need to choose a “successful” hash is an adjustment of the network difficulty. The more miners appear, the more network difficulty grows, which means that transactions can be processed more quickly. If the miners slow down in finding the blocks, the problem goes down. Let me add a few more words about how to settle the situation when several miners create identical blocks on the network. The essence of the Blockchain consensus is that the most extended chain of blocks is considered to be fair. If the blocks begin to be built in a direction different from yours, then your first block will again fall into the pool of unconfirmed transactions.
This often happens when the network is overloaded. So to make sure that the next blocks are built precisely under your block, and you will get the reward, wait until several more blocks are formed after yours. If more than five blocks are formed, the money is yours.
Let me add a few more words about how to settle the situation when several miners create identical blocks on the network. The essence of the Blockchain consensus is that the most extended chain of blocks is considered to be fair. If the blocks begin to be built in a direction different from yours, then your first block will again fall into the pool of unconfirmed transactions. This often happens when the network is overloaded.
So to make sure that the next blocks are built precisely under your block, and you will get the reward, wait until several more blocks are formed after yours. If more than five blocks are formed, the money is yours.
Any mining pool can unite its efforts to such an extent that the probability of generating the next block in this pool can be 51%. The cryptocurrency community once witnessed the situation when the members of the Chinese mining pool artificially restricted new members in their system and managed to generate about six blocks in a row. It was after this incident that it became clear you have to wait for the confirmation of transaction for one hour, not for ten minutes. That is if you create five blocks, and each of them is formed for ten minutes, we multiply by five and get 50 minutes.
Perhaps equally importantly, monero is built around algorithms that let people with ordinary computers take part in the typical mining process, whereby users are paid to log transactions to that digital ledger. Other currencies, including bitcoin, can effectively only be mined with specialized machines that would consume large amounts of electricity. The other way of increasing your crypto portfolio is participating in ICOs.
In conclusion, bitcoin mining is a great way to own bitcoins. When Bitcoin was first introduced in 2009, mining the world’s first and premier cryptocurrency needed little more than a home PC — and not even a fast one at that. Today the barrier to entry is far higher if you want to make any profit doing it.
That doesn’t mean it’s impossible, but it’s not the amateurs, and it is essential that you educate yourself before entering this field.