Mining cryptocurrencies: 101
As of publishing of this post, Ethereum barreled through $100s with vigor and now sits around $373. What a great time to be a miner. We support the infrastructure of the decentralized ecosystem and are rewarded by the network for that work.
I felt it was time for me to follow-up my last post with a new edition of my crypto-series: Mining is the lifeblood of the digital currency technology, and dig more into the topic.
UPDATE: Ethereum hit $373
Bitcoin is the largest and most successful coin because it has something other coin networks (Alt-coins) cannot easily duplicate: a large infrastructure of miners.
In a few weeks, I’ll be pulling in a friend and my mining mentor to guest-post on mining. That post will be a deep dive into mining so we’ll use this as a primer.
Miners, as we’re called, lend their computers computational power to the blockchains to verify transactions and secure the network. These miners are completely independent and do not need to know each other. Even though there is no direct relationship between each miner on any given blockchain they all participate together in the system that facilitates trust through a financial incentive known as the block reward (more on this later).
Computers that are set to mine are actually doing the work of a central bank, PayPal, credit card company, etc. At first glance, this may seem like a small point but is fundamental to the disruptive capabilities of the distributed ledger. These miners are what is behind thousands of computers “hash” over the thousands of transactions that occur and ensure that money moved the way a transactor intends and hasn’t been compromised.
Example: Person A wants to pay person B for mowing their lawn. A would send B 1 bitcoin (I’ll agree that’s an expensive mowing). All of the miners will see this transaction request take place. They review the activity using the highest levels of cryptography protocols available confirm the facts of the transaction before B actually receives any bitcoin (an important point to remember). If a few miners were to try and trick the system into thinking A or B was paid 2 Bitcoins by sending confirmations of 2 Bitcoins over the network instead of the 1, the other miners, all independent, also see this transaction. However, since their confirmations only saw 1 coin move, they will not confirm any movement.
Arguably unlike any other system in existence, with blockchains majority rules. In order for a nefarious person to manipulate a transaction on the blockchain, they would need to control over 51% of that network if they were to even have a remote chance to trick its ledger into thinking coins were moved that had never been authorized.
Now considering the sheer size of the Bitcoin network which now boasts more processing power than any other project ever conceived, that task is near inconceivable.
By verifying the thousands of transactions occurring over networks any given moment, the source code rewards those miners who’ve lent the computational power of their miners to the network by granting them minted new coins and small transaction fees between the network of miners: the block reward. You can think of mining as thousands of computers using all of their computational power to compete to solve a mathematical equation.
In Bitcoin, there will be a winner every 10 minutes. The miner who found the block has earned the block reward of all transaction fees and new coins coming into the network over that last 10 minutes, or block, and the network of miners begins searching for the next solution to the next block. As we have seen over time, more and more people have joined the Bitcoin mining network, so they are collectively able to solve the equation faster. The goal of the network is to have 10-minute blocks the network code automatically adjusts by making the mathematical equation more difficult to solve. This is called difficulty. The number of attempts a computer can try to solve this equation is called its hash rate. We use hash rate to measure the health or security of the network. The higher the hash rate on the network, the more secure the network is because it takes 51% of the hash rate to trick the network into falsely believing there was a transaction. Currently, Bitcoin’s hash rate sits at over 3,600,000,000 Gigahashes or 3.6 Trillion hashes (or attempts to solve the equation) per second. That’s a difficult problem to solve!
In closing, I think it’s important to stress that not only can mining be profitable, but to acknowledge that when you choose to mine you are directly contributing to strengthening the global decentralized network and this technology’s existence going forward into the future.
If this interests you, visit the blockchain security specialists at www.BitCap.co We’d love to help you get started!
