In this part we’ll talk about mining of cryptocurrencies. I’ll try to keep it as simple as possible (again, my 82 year Mom should be able to understand it).
For the sake of simplicity, let’s focus on mining of bitcoins.
Bitcoin mining is the process of adding transaction records to Bitcoin’s public ledger of past transactions or blockchain. This ledger of past transactions is called the block chain as it is a chain of blocks. The block chain serves to confirm transactions to the rest of the network as having taken place. Mining is increasing the security of the network.
The list of blocks in the blockchain gets longer and longer and holds all transactions that ever took place.
When a block of transactions is created, miners start a process. They apply a mathematical formula to the information in the block. By doing that they turn it into something else: a sequence of letters and numbers known as a hash. This hash is stored along with the block, at the end of the blockchain at that point in time.
Hashes have some specific properties. It’s not hard to produce a hash from a collection of data like a bitcoin block, but it’s practically impossible to work back to what the data was just by looking at the hash. It may be very easy to produce a hash from a large amount of data, each hash is in fact unique. If you’d change just one single character in a bitcoin block, its hash will definitely change.
Miners don’t use only the transactions in a block to generate a hash, but also another piece of data: the hash of the last block in the blockchain, prior to the one they are mining right now.
It is because each block’s hash is produced using the hash of the previous block, it becomes a digital version of something we can compare with a wax seal. It confirms that this block – and every block after it – is legitimate and unique, because if you tampered with it, everyone would know.
Every time a block successfully is hashed, a reward of 12.5 coins is given. All miners compete to complete a block and get that reward.
Completion of a block and creating the hash isn’t very difficult. With all computer technology theoretically everyone would be able to complete a block in a very short period of time. Intentionally the protocol used to mine bitcoins adds a difficulty to it, which is called proof-of-work.
The bitcoin protocol will not just accept any old hash. It requires a block to have certain specifics. It must have a certain number of zeros at the start. It is impossible to know what a hash is going to look like until you produce it, and as soon as you include a new piece of data in the mix, the hash will be entirely different.
Miners aren’t supposed to mess up the transaction data in a block. However, they must change the data they’re using to create a different hash. They do this using another random piece of data called a ‘nonce’. This nonce is used with the transaction data to come up with a hash. If the hash doesn’t fit the required format, the nonce must be changed, and the hashing is restarted. It can take many attempts to find a nonce that works, and all the miners in the network are trying to do it at the same time. That’s how miners earn their bitcoins.
In the early phase of bitcoins many would start mining at home, using their own hardware and were profitable. But hardware has changed, technology has advanced and with advanced technology electricity required to mine has heavily increased.
It is for this reason that mining at home isn’t profitable any more and that has opened the opportunity for mining farms, cloud mining etc. The combined high volume of hash rate makes bitcoin more favorable, especially when costs of electricity can be kept low or at least in control.
If we’d look around on the worldwide web, we can find numerous mining companies offering their capacity for individuals. How tempting the offers may sound, unfortunately there are a lot of scams, opportunities who claim to offer mining, but no real mining is being done at all.
In the next episode of this series I’ll share with you how to identify scams yourself, so from there on you’d not only have a better understanding of blockchain, bitcoin/altcoins and mining, but also can make more educated decisions.