Have you ever thought, how any network could be secure in the blockchain technology and how every transaction verified? If not then answer is mining, so what is Cryptocurrency mining and how it works?
While we talk about central authority such as banks who are responsible for securing and verifying every transaction in the network.
While we talk about a server of facebook, which is been secured and maintained by Facebook to create a data privacy and prevent hacking.
But in all the cases we are dependent on a centralized server which could by hack any point as technology is getting advanced day by day.
To overcome this probability, a new form of technology call Blockchain Technology has been introduced and security of that network is maintained by the miners.
So who are miners and what is CryptoCurrency mining and how Proof of Stack (POS) and Proof of Works (POW) works?
The answer to all your possible queries is explained here in this ultimate guide of what is Cryptocurrency mining, but before that, I advise to learn first about What is Blockchain technology in our detail guide.
Lets First discuss what is Cryptocurrency mining and why this is required.
Table of Contents
What is CryptoCurrency Mining?
If you all know about Bitcoin than this is the first use case of Blockchain technology, where a digital currency Bitcoin was introduced.
The blockchain is a decentralized platform where no party has any control over the network. That means no one is monitoring your fund’s transfer or any data transmission.
If you are having an account with the bank then every transaction you initiate on their network will be registered somewhere in the bank ledger.
Which is visible to banks and you only and security and privacy of data are dependent on the central server of the bank.
Every transaction will be validated by the bank whether it is valid or not and Banks will have full control over your funds and private financial data.
Your personal data stored somewhere at any central server location like Facebook, YouTube, Banks or any doc repository may vulnerable to alter any point.
Hence to overcome this issues blockchain based decentralized platform came into the picture.
The decentralized platform is a network on which no central authority has any control over it, It is a free and open source platform.
So who will verify your transactions or any operations performing on the Blockchain based decentralized network?
If you set up your network on the blockchain network then every transaction initiated on the network will be validated by Miners.
Miners are independent people like you and me and using computers try to make secure blockchain network and validate every transaction on the network.
Well, why you do this job as miners, will you get anything out of it?
The answer is yes, you will get free money if you are working as miner or mining the blocks of the blockchain network.
Well, this whole guide is centric around blockchain technology so I assume that you have already gone through the Blockchain technology guide.
Cryptocurrency like Bitcoin and Ethereum are based on such blockchain technology and as they are the decentralized platform.
To validate transaction of that Cryptocurrency you would need mining or in simple terms validation of transactions.
I hope I have answered what is Cryptocurrency mining, next we will talk about why mining required and who is a miner?
Who is a miner and why they mine?
Well till date every blockchain based technology is using a digital currency or token to use that platform, Either you have to stake that token or to pay as a fee to use the network.
In all the cases to confirm your transaction on the network, you would need mining.
Mining is a method which is used to solve the mathematical problem associated with each Block initiated in the blockchain network.
Let me brief about Blockchain Technology.
Every transaction in the network is unconfirmed unless its block verified by the miner. The blockchain is designed in a way that all transaction is contained in a block.
Where you can consider block as a container of transactions which are yet unverified and waiting to validate.
Hence to confirm any transaction in the network every miner or computer has to solve a mathematical puzzle which is a random guessing number.
Blockchain network generates a random alphanumeric number which is a combination of alphabets and numbers.
The person like you or me who is using a computer try to guess that number, where every computer is installed with specific software.
The software connects your computer with that blockchain network and starts guessing that number.
To guess that number you would need high hashing power which usually comes from your CPU, GPU or special mining hardware devices like ASIC.
Because this is not easy to guess that number manually, you would need a powerful computer for that job, here powerful means high hashing power.
Whoever is able to guess that number will generate a block, here block will have a specific size. In case of Bitcoin it is 1 MB however Bitcoin Cash 8MB and so and so.
The newly created block will contain all the unconfirmed transactions based on its data size capacity as in case of Bitcoin it is 1 MB.
Here General block will have three data.
- Hash Name (Unique identity of the block)
- Transactions (Sender, recipient address and Amount)
- Hash of the previous block
That means, every transaction will be confirmed by the block creator and validated whether the sender or recipient address exists and does the sender has sufficient balance to send or not?
If all verified than the generator of the block sent this information to all other nodes or miner on the same blockchain network and seek for their approval.
Every other node will also verify the same which seeks approval from 51% of all network user and then block will be verified and will be added to blockchain registry.
Here the person who is guessing that random puzzle is known as the miner who is responsible for validation of network.
After successful mining of the block, all the rewards generated by network and the transaction fees associated with that block will be given to the miner who has guessed the block first.
In general, Bitcoin is working on the same machine where the average time to generate a block is 10 minute each.
Current reward for the miner is 12.5 BTC /Block, which will reduce to 6.25 after May 2020.
With this reward miner also get all the transaction fees associated with that block transactions.
We have prepared a guide on how long does bitcoin takes to mine, read out for best of your mining practices, will give you an idea is mining profitable or not?
The current price of the Bitcoin is close to 5000$ which was in 2017 around 20,000 $, so you can guess how much miners could make money.
In a 24 hour day, around 144 blocks generated with a total of 12.5 BTC each will result in 1800 BTC per day.
Here we have prepared a list of top 10 best cryptocurrency to mine using CPU and GPU, thought this might help you if you are interested.
Here validator or miner is like you and me who has high hashing power generating computers, hence we as a community secures this network.
No transaction or block will be verified unless it got consensus from another node of the network.
Hence to hack this network you need 51% of total hashing power where already billions of computers running on the network.
This makes it impossible to hack the network and improve security. I hope you got an idea who is a miner and why mining is required?
Now in this what is Cryptocurrency mining guide, let me tell you how to mine using Proof of work and Proof of stacks mechanism.
How to Mine CryptoCurrency?
Till this point in what is cryptocurrency mining guide, you got the reason why we need miner and why they want to mine and I hope you too.
But if this is a way to get free coins just by setting up a computer then why don’t you start today and even everyone on the earth wants to set up a computer who could make them money by own.
Do you really think is this that much simple?
No, it is not like that. I can clear Your doubt by explaining the types of mining and process behind mining.
In general, mining is done throw two ways Proof of Stacks and Proof of work, where Proof of stacks is further divided into subcategories.
But will focus on an idea only not in detail, let me start first with What is Proof of Work.?
What is Proof Of Work?
We already learned the need of mining, without it no block or transaction will get confirmed and will not be added into blockchain registry.
So validator has to follow some process, which we call the way of mining which was first introduced by Bitcoin.
Proof of Work is the oldest mechanism of mining which requires more and more hashing power to generate, in order to solve the puzzle for the creation of the block.
In proof of work mechanism, every individual or node or miner on the blockchain network try to solve that puzzle at a time.
That creates competition among each other to solve or guess quickly and in this race, only one will win.
Which means you need a more hash power generating computers, who could do that guessing of the puzzle very fast.
Simply, If you want to mine any Cryptocurrency than every Blockchain network has its own software to connect with the network take an example here how to mine Ethereum.
You would need to install software which connects your computer to that blockchain network, this is the easy part to set up.
But the biggest challenge is the generation of hash power if we talk about bitcoin than the generation of hashing power using CPU will not make any sense.
Bitcoin blockchain is designed in such a way, as the competition in the market increases the mining complexity of the puzzle is also getting increases.
Hence earlier, it was easy to mine using CPU but later it shifted to GPU and now special ASIC hardware devices introduced to do that job.
Running of such mining hardware devices require huge consumption of energy and in the result, you will be charged around 30-40$ /Day as your electricity bill.
To mine bitcoin, people have already setup mining farms where thousands of hardware devices have been set up to do this job.
According to digital experts, Bitcoin mining consumes around 54 TWh /year which is enough to power country like New Zealand and hungry.
Hence the whole concept behind mining of Bitcoin is the generation of more hashing power. Now how can you and I participate in it?
Well in that case Mining pool came into pictures, here like you and I can join a mining pool where millions of other people have joined.
The process will be similar, you have to install or connect to their mining pool and run that software it will use hash power capacity of your system.
In result, millions of other computers also doing the same job and generating collective hash power and try to mine the block.
If your pool is able to mine block successfully the reward will be distributed among all the contributors based on the percentage of hash they have shared in the pool.
Hence in proof of work mechanism by generating hash power, you will be able to mine a block.
Once that block is mined it will be confirmed by all the other nodes on the same blockchain network.
If all are agreed, that block will be added to blockchain registry and transaction will be confirmed and the receiver will get all its payment sent by the sender.
Proof of works Name itself says, whatever work you have done you need to give proof to every other person on the network.
If they all approve that you have done your job correctly by verifying transactions means block will get confirmed and you will get the reward.
But this mining process has a few Cons.
Cons of Proof of Work
In Proof of work, you would need to generate hash power and only one with high hash power able to mine the block.
Generation of Hash require more money to invest in hardware and this means richer will become more reacher.
But Mining pool solves that problem and from the below graph taken from blockchain network, you can see how much a pool has mined a block by generating hashing power but what if all pools combine together.
That means. it will be easy to hack in the future if a few major pools come together and can generate more than 51% of hash power.
This proof of work mechanism has a very high consumption of electricity which somewhere increasing the problem of the current ecosystem.
So the new solution of mining has been adopted by new cryptocurrencies built on top of blockchain technology.
Bitcoin and Ethereum are the top two cryptocurrencies using Proof of Work mechanism but now every other has started using Proof of stack mining.
What is Proof of Stack?
Proof of stacks value to the stack holders, in this process to mine on a network first you have to stack a specific amount of that network token.
As it was the mechanism introduced in the very famous blockchain network like NEO Cryptocurrency.
Well in the Proof of stack mechanism you are not like a typical miner, hence here every block producer is known as Validator.
In this mechanism, first, you have to stack or hold or block your amount of tokens to the specified blockchain wallet.
Than network will randomly do the selection of block producer or in the second term Validator instead of miner based on the amount of token they have stacked in the network.
The higher you stack the more chances you may become a validator or block producer.
Here the advantage of Proof of stack over proof of work is you are not fighting with each other but few will be selected randomly based on what they have stacked.
Hence at a time after selection, only few will be the block producer who does all the job of validations and adding blocks to the registry.
As in Proof of work at a time only one is able to mine or validating the block but in proof of stack based on network, multiple block producer could be chosen.
While we discuss EOS Blockchain they have around 21 block producer chosen at a time. Which means more block at a time and more transaction per second.
To get confirmation of block you would need approval form only a few block producers instead of whole available on the network.
This in result maximizes transaction speed per seconds hence blocks are able to clear in max 3-5 seconds instead of the 10-minute block as in case of bitcoin.
Now talking about hacking, let say a network has total 100 billion tokens which overall price of around 1$ each.
To hack this network, will need to invest of 51 Billion dollars to get stacked 51% of total supply in the token, which I don’t think anyone going to invest just to hack any network for getting less profit.
The second point is, if anyone on network found to be validating wrong blocks, will result in his stacked coins will be burned and he will lose all.
So It seems, impossible for anyone to hack this network. But every system has cons to highlight and Proof of stacks has too.
Cons of Proof of Stacks
This system can support or randomly select one person again and again who have stacked more as compare to the one who has stacked less.
That means this also looks the same as the rich become richer and the poor become poorer.
So the community has suggested the addition of new protocol that age of the token stacked should be considered while selecting random block producer.
But Technology is evolving day by day and new Mechanism has been introduced call Delegate Proof of Stacks.
Cardano (ADA) a new big giant of peer to peer review cryptocurrency project has introduced a consensus mechanism of delegate proof of stacks.
In this mechanism, they have divided the whole world into Epoche and each Epoche has a slot leader which will be chosen based on coins he has stacked and vote he will get in the network.
In this, a voting system has been introduced where you and I who have coin Cardano(ADA) can vote for the block producer.
Who have received more votes will be selected as a slot leader and will become block validator.
Another Coin Like Tron (TRX) has also developed the same feature of staking mechanism where a voting system has been built to vote for Super representative in another term validator.
For voting, even you as a voter will get the reward, hence the whole community will be maintaining the ecosystem.
This newly built system will choose the block producer not based on the coins he stacked but also on the number of votes any interested validator has gained.
If any chosen block producer not doing his job will be auto kicked out from the network.
I could assume that you got an idea of what is cryptocurrencymining and how mining works and why you should do mining.
My View on What is Cryptocurrency Mining
This what is Cryptocurrency guide mainly focused to share how technology is evolving using blockchain based projects.
In this growing era of blockchain technology miner and their mining is the prime factor to balance this ecosystem.
A system calls decentralized only if it has been maintained by the community and not by any central authority.
Most of the blockchain projects are open source, anyone like you and me after community approval can work on that protocols improvement.
Mining is the only mechanism which makes secure or interesting this blockchain network and the best part is you will be paid for your contribution.
Mining is the only free way to gain free cryptocurrency and by the way, Cryptocurrency is the first use case of blockchain based decentralized system.
There are a lot more like decentralized entertainment media is been brought by Tron (TRX), to make decentralized election voting system ICON (ICX) is in process.
I myself found Mining in the decentralized platform as the key factor and it seems more enhancement even about to come. What do you think let me know in the comment?
I hope you got a good idea about what is cryptocurrency Mining and how proof of work and proof of stacks works.