It’s Lenten season, but still, I decided to take inspiration to write something about Cryptocurrency Mining in my own words-as I understand it.
I’ll be referring to Bitcoin mining most of the time. I will not discuss these how these miners work but rather the concept of mining, based on my understanding of it. It’s like discussing the concept to a lay person or just a newbie in crypto world. The science and mathematics behind this is a complex one (which applies also to most cryptocurrencies) – but a lot took time and invested on this because it’s one of the ways to earn extra income you’re sleeping and crypto mining helped me a lot during my those times I struggled financially. For Bitcoin overview, click here. Online resources are available for detailed information.
(Most images shown here are extracted from Google)
Cryptocurrency Mining Overview:
It’s a process of earning a digital currency (like Bitcoin) from verifying Bitcoin transactions all over the world using specialized softwares (ASIC-CPUs or USBs programmed to mine Bitcoin). Miners, like Bitcoin Miners get a block reward (usually 12.5 BTC today) as an incentive for doing such work to keep the network secure. As discussed on my previous post, that cryptocurrencies, like Bitcoin, are decentralized in nature – meaning no central authority authorized to keep all the bitcoin transactions or to just generate these virtual coins out of thin air.
Background:
Before, bitcoins can be easily mined by using the conventional computers or laptops we have at home. As interest on Bitcoin rose, specialized bitcoin mining software were been developed and technologies improved. Hashcoins, is one of the online companies who sells this type of software. These machines have increased the mining efficiency and profitability during these times.Huge investments were made to mass-produce these machines. Bitcoin mining farms grew in number, which made their presence online. They also said that in stocks, investing in semi-conductor companies is a profitable investment because of the demand for these software. Bitcoin mining especially in these farms resulted in high carbon footprint, which generates heat, and requires power than can power cities which sparked controversies.
Bitcoin Mining Farm is like an establishment housing vast amounts of Bitcoin mining hardware.
How Cryptocurrency Mining Works (Under the Hood):
Like a bank teller counting your money first before they process your deposit or like a bank manager checking the client’s information and request first before they process and improve a withdrawal. Bitcoin miners work under the same principle.
However, bitcoin miners don’t just simply verify the transactions. They are literally solving mathematical problems to validate these transactions. Bitcoin network (called blockchain) is programmed to work like this as a security measure to establish that the transactions being reflected on the bitcoin ledger (a listing of all bitcoin transactions – transfers or withdrawals ever created) are accurate and legitimate.
Puzzles are being solved in a way that machines have to guess what an input is from an output, which is more difficult than telling what an output is from an input. For example, miners have to guess what are the factors of 4 (can be 4 and 1, or 2 and 2), rather than guessing what is the product of 4 and 1 (4x1=4) or 2 and 2 (2x2=4).
To illustrate:
How school math works:
Find x: 6+2 = x, as x is obviously and only 12
How bitcoin math puzzles work:
Find xy: (x)(y) = 12, x and y, interchangeably, can 4 and 3, 6 and 2 or 1 and 12. There are multiple possible solutions but only one correct answer. Whichever machine guess it’s right first, they are the ones who’ll get the block reward.
Bitcoin Transactions Explained:
Unlike in banks in which most of the records can only be seen by the bank staff and account holders, bitcoin ledger can be seen by everyone (which may be a double-edged sword). This bitcoin public ledger is available online at (blockchain block explorer), which means that everyone can see each other’s transactions, not like in banks. Like having a passbook visible to everyone. Your passbook can also show your money transfers to other account, like a bitcoin transaction is – showing balances, transfers, deposits and withdrawals.
A good way to hide one’s identity especially is someone’s holding huge assets but not good enough because the wallet’s owner can still be traced through the transaction’s originating IP address.
And also, everyone can participate in Bitcoin Mining work, as long as you have the software, which in a way is like an investment. In banks, you need money to invest. In bitcoin mining, you will need software, resources and skills to participate, for your investment to grow.
Block mining difficulty is increasing is because, again, it’s part of the Bitcoin program. Bitcoins are increase in value (deflationary), as they are getting more difficult to mine, (hardware and software) work has been done before a reward can be given. Hence, it’s called the proof-of-work which gives Bitcoin its value. Bitcoin miner is just being programmed and then left to run indefinitely. It needs to be maintained (meaning watched most of the time) to maximize efficiency and not to waste any resources. The more difficult to generate Bitcoin, less supply it gets, as it becomes more rare, it’s value increase.
Our money has value because it’s designated by our government to have such, as a tender, to purchase something. Our money is generated always by printing. We get it, majority of us from active work, as our pay (money supply) increases, prices increase, our money’s purchasing power decreases (inflation).
Bitcoin Halving
Also, besides having an increasing difficulty of mining bitcoins, rewards get halved at a specified time. It is expected that bitcoin block reward will be reduced from 12.5 BTC to 6.25 BTC on May 31, 2020. The website for Bitcoin halving forecast is found here.
A block is a group of bitcoin transactions. It’s called blockchain because blocks are linked. The longest block is usually the consensus. Hence, the one deemed as legitimate by the network, where the rewards are usually granted. So, a miner mining a transaction on a short block, might be just wasting their efforts.
Types of Mining
1. Based on Number of Miners
Today Bitcoin mining farms accumulate Bitcoins faster because they have greater mining power and resources to solve these cryptic puzzles faster. Bitcoin mining is still profitable for them because some of these companies enjoy reduced electricity rates, reduced taxes from the government or they’re located in icy parts of the globe. It’s like survival of the fittest for the block reward of 12.5 BTC. Individual miners have a slim chance to make mining profitable as the network demands enormous hashpower and resources. It’s where pooled mining is born.
Individual Mining – you hold the software to mine for bitcoins, you also earn the profits alone
Pooled Mining – mining software power is shared to mine bitcoins, profits proportionally based on the power you have shared
Their differences are adequately explained in this video below:
2. Based on Mining Location
Physical Mining
· mining is done on-site (ie. Home, mining farms), you need to physically run and maintain the program
· bitcoins are credited or sent to the wallets found on the computer or on-site
· they take all the bitcoins mined
· earnings are based on the resources you have
· mining farms or physical mining sites usually provide the services of cloud mining sites
Cloud Mining
· you basically invest invest in physical mining farms to do all the work for you (ie hashflare.io, genesis mining, cryptomining.farm, minergate)
· share of bitcoins mined is shown in your online account which can be withdrawn and sent to your wallet
· your share is proportional to your investments
A Short Story:
*As I’ve shared on my previous post, I have lost around 0.5 BTC investing in Hashocean and Biteminer (scam cloud mining sites) but fortunately I was able to recover by investing in Hashflare. Just take note that investing on these sites has its own risks. For me, those great risks I took are actually the ones which gave me great gains. I would not recommend investing in Genesis Mining, though, as I’m still having issues with their Monero payouts which is taking years to resolve.
I’m looking forward to review some of the cloud mining sites where I have earned decently and withdrawn my shares already.
That’s it! Appreciate you taking time getting and reading on my post. Just feel free ‘Like’ to leave comments below so I can improve on my content. Feel free to share this post to someone who you think will need basic understanding on how crypto mining works. A lot of resources and videos can be found online to further discuss this and an overview has also been made by Hashflare on this link.
*I'm also the author of the similar post found in Wordpress.