Cryptocurrencies, Miners, and mining are confusing at best and damn near impossible to comprehend at worst. For anyone that is not tech-savvy, it is the latter which they face when trying to figure out cryptocurrency. When trying to figure out how cryptocurrency is mined, blockchain technology security works, and how blocks are added, most people simply give up and walk away. This poses a huge problem for cryptocurrencies. This article hopes to demystify the process of mining cryptocurrencies at a level that most high school-aged kids can follow.
Cryptocurrency Mining & Miners
The process of generating correct proofs in order to add a block to the blockchain is known as ‘mining’ and the individuals that participate in the mining process are known as ‘miners’. Generating correct proofs is achieved by solving computational problems produced by Consensus Algorithms. Consensus algorithms are mechanisms that are used to achieve agreement on a single data value, and thus obtain reliability in a network that can involve unreliable participants.
The very first implementation of a distributed and trustless consensus algorithm is Bitcoin’s Proof-of-work (PoW) algorithm. There are also numerous other consensus algorithms that exist in the cryptocurrency space, such as, Proof-of-stake (PoS) and Delegated Proof-of-stake (DPoS).
Miners: Proof of Work Mining
In PoW mining, miners must take data from a block header as an input, and repeatedly run it through a cryptographic hash function, which in this case for Bitcoin, is Secure Hash Algorithm 256 (SHA-256). Miners hash slight variations of the input data by including an arbitrary number (a nonce) each time the input data is run through the cryptographic hash function. The correct hash is found when a defined number of leading zero bits is found. Producing a correct hash value in cryptocurrency proof of work systems is a probabilistically low activity that requires the generation of a considerable number of hashes before a valid hash is arrived at. However, possessing higher computing power will translate to an increased likelihood of generating a valid hash, due to the individual being able to simply generate more hashes.
Now, again in Simple terms:
Mining Steps: Miner Chooses Transactions to Include in Block
A miner looks through all of the recently performed transactions that have not yet been confirmed. He grabs enough of them to fill up a block. The transactions are placed into a file, called a block. The maximum file size can only be 1mb, so miners grab as many transactions as they can fit into the file. The transactions that a miner chooses are totally up to him. This is why people who pay more in transactions fees, usually get their transactions included in a block (confirmed) faster.
So now, there are hundreds, even thousands, of miners that have a file full of transactions and all of them want to submit it to the Bitcoin blockchain. However, they all cannot. In fact, only one miner can have his block submitted. With miners all choosing transactions as they please, the same transactions will appear in multiple blocks and if all of the miners could simply just submit those files, then it would be way too confusing to figure out which transactions were valid, which ones were submitted twice, etc.… Plus, a miner could simply makeup transactions that never really happened and effectively steal money. It would never work.
So, in order for the miner to get his file added to the blockchain, as a block, he must prove himself by having his computer beat all of the other miner’s computers in solving the Bitcoin Sha-256 Consensus Algorithm.
Miners Solving Hashes to Prove Work
With the file of transactions ready to go, the miner begins performing the calculations that are needed to solve the hash problem posed by the Bitcoin network. It is a hit or miss type of activity, essentially perfuming complex mathematical equations using a new, random number each time until you get lucky and solve the hash problem, or someone else finds it first.
Finding the solution to the hash problem first rewards you with two things: first, your file is now officially included in the blockchain as a block, with all of the transactions it includes becoming an official record and giving all of the people who are waiting for Bitcoin in those transactions their first confirmation. Secondly, the miner who is the first to solve the hash problem gets a reward in Bitcoin. The Bitcoin network automatically generates new bitcoins and gives those new Bitcoins to the miner who solves the hash problem each time a block is added (averages every 10-15 minutes). The number of Bitcoins rewarded to miners started out at 50 and has since been cut in half twice, meaning that currently, in 2018, the number of Bitcoins given as a reward is now 12.5.
Miners who do not find the bock first, basically destroy the file of transactions and go pick new ones and the process starts over again. This process runs 24 hours per day, 7 days per week, and 365 days per year (except in leap years, then it runs 366 days per year.) Cryptocurrency proof of work systems are constructed in such a manner that correct hashes are difficult to find, in that they are time-consuming and costly to produce, but they are also easily verifiable.
Due to the ever-increasing difficulty of solving these hashing problems, miners have gotten together, into groups called “Mining Pools”, which allow them to combine their computing power. A Pool acts as one individual, submitting one file of transactions. Mining pools who find the solution and add a block are given the reward of Bitcoin, which are then divvied up between all of the miners in the pool. The amount each miner gets is directly proportional to the number of hashes their computing equipment performed.
Miners: Note on Confirmations
As a side note, when waiting for 3 confirmations for your Bitcoin to become available, you are waiting for 3 blocks to be found. This is because the network accepting your transaction in the block it was mined with becomes the first confirmation that the transaction is valid. When a new block is added, it re-confirms that all previous blocks are valid, adding even more confidence by the network.
Miners Mining Using Proof of Stake (PoS)
Unlike Proof of Work, Proof of Stake (PoS) systems choose individuals who will add the next blocks to the blockchain. Individuals that are chosen to generate a block, also known as validators, are selected and depend on a different set of criteria. These criteria differ depending on the proof of stake system, but largely speaking, a validator is chosen to generate a new block based on their economic stake in the network.
A validators economic stake can include the relative value of his coin holdings and also the age of the coins he holds. Relative value is calculated by the total value of coins in the validator’s wallet (WV) divided by the total value of coins on the network (NV). This is written as WV / NV = Relative Value.
Coinage is defined as the coin amount multiplied by the number of days that the coins have been held in a wallet. Therefore, a validator possessing a large holding of coins over a longer time period is more likely to be selected to generate a new block.
With proof of stake, a validator generates a new block by sending a special type of transaction that locks up their deposit. This deposit (or stake) serves as collateral for the block generation process. If the validator attempts to cheat the system and validate fraudulent transactions, then their deposit is lost. Validators that correctly add and validate blocks of transactions are given back their deposit and also collect all transaction fees for the validation process.
Miners Mining Using Delegated Proof of Stake (DPoS)
Delegated Proof of Stake may sound like Proof of Stake, but it is actually different in how individuals are chosen to add blocks. In DPoS systems, anyone who has a wallet with a positive balance is given the chance to vote on who they feel should be allowed to add transactions to the blockchain. These elected individuals are called Witnesses. They do not need to put up any collateral, however, they risk losing the lucrative block reward for failing to complete their tasks sufficiently. Witnesses are given ratings based upon their performance, to help stakeholders make a better decisions. The witnesses are voted on daily, or weekly, depending on the coin network.
Stakeholders can only give a single vote to an individual, but they can vote on as many different individuals, as they wish. The network then selects a few Witnesses based upon who has received the highest number of votes for the voting period. The witnesses take turns adding blocks. If a witness fails to add a block, adds a fraudulent or invalid block, or, in any other way, falls short of a satisfactory job, his witness rating will go down and this will cause stakeholders to vote for others to replace him.
The DPoS system also utilizes Delegates, who like witnesses, are elected by the stakeholders. Delegates perform the roles of maintenance, administration, and things of that nature. However, they do not have total control over anything. A Delegate can simply propose a change or implementation to the network. Things like the size of blocks, the block reward, network upgrades, etc.…. can all be proposed by a delegate. Once proposed, the proposal is posted on the network and the stakeholders are given time to review the proposal, debate it, and come to an agreement (Hopefully). The proposal is then put to a vote. If the proposal receives a majority of stakeholder votes in favor of it, the proposed changes or upgrades are implemented. If it does not receive a majority in favor, then the proposal is struck down and no changes or upgrades it contained can be performed.
Miners Mining Algorithm Efficiency and Feasibility
Which of these consensus algorithms is best is always a topic of debate. While they all have their advantages and drawbacks, they have all proven successful at being viable options for cryptocurrency mining. Given that cryptocurrency is really still in its infant stages, you can be sure that new consensus algorithms will emerge, each with its own unique features, methodology, and implementations.
In consensus-style mining, the basic premise is always the same. It takes agreement by the entire network before blocks can be added to the blockchain. It is this very ideology that has allowed for trustless, direct transactions to take place and eliminate the need for a trusted third-party, such as banks. Mining cryptocurrency in this way has proven to be feasible and efficient.
In fact, the different algorithms have been used together, as can be seen with several different cryptocurrency networks. Combing the PoW and PoS mining systems proves to be an even more effective and secure way for the network to operate.
Miners Essentials: Hashing Out Hashes
Computer hash is an encryption algorithm that forms the mathematical foundation of e-discovery. Hashing generates a unique alphanumeric (Uses only the letters A-Z and numbers 0-9) value to identify a particular computer file, group of files, or even an entire hard drive.
A hash algorithm turns an arbitrarily–large amount of data into a fixed-length hash. The same hash will always result from the same data, but modifying the data by even one bit will completely change the hash. Like all computer data, hashes are large numbers and are usually written as hexadecimal. Bitcoin mining uses the SHA-256 hash algorithm to generate verifiably “random” numbers in a way that requires a predictable amount of CPU effort. Generating, or mining, an SHA-256 hash with a value less than the current target solves a block and wins you some coins.
In a very rudimentary and basic view, a hash in cryptocurrency mining is a guess. Essentially, in mining, miners are guessing a new number to try, in order to achieve a value lower than the hash value of the hashing problem posed by the network. The first miner to guess right wins the mining rights for the next block.
Miners: Mining Hashrates Demystified
Mining capability is measured in the number of attempts to find a block a miner can perform. Each attempt consists of creating a unique block candidate and creating a digest of the block candidate by means of the SHA-256, a cryptographic hashing function. Or, in short, a hash. Since this is a continuous effort, we speak of hashes per second or [H/s].
Mining Hashrate Denominations
- 1 kH/s is 1,000 (one thousand) hashes per second
- 1 MH/s is 1,000,000 (one million) hashes per second.
- 1 GH/s is 1,000,000,000 (one billion) hashes per second.
- 1 TH/s is 1,000,000,000,000 (one trillion) hashes per second.
- 1 PH/s is 1,000,000,000,000,000 (one quadrillion) hashes per second.
- 1 EH/s is 1,000,000,000,000,000,000 (one quintillion) hashes per second.
- 1 ZH/s is 1,000,000,000,000,000,000,000 (one sextillion) hashes per second.
Mining Hashrate Conversions
- 1 MH/s = 1,000 kH/s
- 1 GH/s = 1,000 MH/s = 1,000,000 kH/s
- 1 TH/s = 1,000 GH/s = 1,000,000 MH/s = 1,000,000,000 kH/s
- and so forth
SI unit prefixes
The denomination of mining hash rates follows the International System of Units (SI). Hereby, the prefixes kilo, mega, Giga, Tera, Peta, Exa, and Zetta each translate to an increase by a factor of one thousand.
Please note, that the symbol for kilo is a lower-case “k”. As “K” is the symbol for kelvin, the unit of thermodynamic temperature.
Miners Mining Essentials: Hashes All Hashed Out
Hashes are that simple. Well, at least for the purposes of a cryptocurrency mining article, they are that simple. So, this is where we leave them. Think of them as a guess, albeit, an educated guess, but a guess nonetheless, which miners use in cryptocurrency mining. The faster you can perform hashes in mining, the more money you will earn when you or your mining pool finds the solution and gets the block reward.
Miners Mining Blockchain Blocks
As was referenced earlier, in cryptocurrency mining, a block is nothing more than a file that includes multiple transactions that need to be included in the blockchain. If a block is a file, then the blockchain is simply the balance sheet, or ledger, in which all transactions are logged, verified, and stored for all time. By adding blocks of transactions, the mining process creates a chain of blocks. It is that simple. There was no ingenious reason in naming things what they are named in cryptocurrency.
What makes blockchain technology so special is that it can be used for more than just cryptocurrency record keeping. We see it in use already, with the Ethereum network and smart contracts, but it doesn’t stop there. Utilizing blockchain technology can and will help to make things like logistics, global shipping, record keeping, and legally binding document tracking, to name a few, more efficient, less expensive, and free from error, loss, or theft. The possibilities are endless. The technology, given to the world for free by Satoshi Nakamoto, the creator of bitcoin and Blockchain, is so cutting edge and so versatile, that there are reportedly 500,000 entities, in both the public and private sectors, that are researching, implementing, or already using the blockchain in their daily activities.
Cryptocurrency Mining & Miners Future
10 years ago, no one could have predicted where we would be today, and in the same turn, no one, myself included can predict where we will be 10 years from now. The one thing that can almost be guaranteed is that cryptocurrencies will advance even further and at a faster rate. With these new advancements, there will be advancements in mining, as well.
Miners and Hashes and Blocks Conclusion
Mining cryptocurrencies has proven to be a profitable, and yet, very competitive field. Concerns about over-centralization in mining, different methods of mining, and costs associated with mining will most likely always be in the mix. However, mining is a necessary function of cryptocurrencies. It is the mining that is at the heart of what makes cryptocurrencies work at all.
Whether you are looking to enter the world of cryptocurrency mining, or are just simply trying to better understand everything, keeping up on the latest in technology is an important part of staying on top of things. With each passing day, new and better tech is emerging, and with it, new opportunities in the crypto sphere.