Thursday, January 27, 2022

What Exactly Is Crypto Mining

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Diving Deep Into Cryptocurrencies

What is Bitcoin Mining & How to Mine Bitcoin: Mining Explained 2021

The first blockchain-based cryptocurrency was Bitcoin, which to this day is the most popular and most valuable crypto out of more than 8,000. On January 12th, 2009, the person or persons who invented Bitcoin, known under the pseudonym Satoshi Nakamoto, sent 10 Bitcoin to Hal Finney, a cryptographer who has since passed away, marking the first ever cryptocurrency exchange.

Since then, Bitcoin has ballooned. In 2010, someone bought two pizzas for 10,000 Bitcoin. At this articles publishing date, one Bitcoin is worth $53,000, so the 2010 exchange would have been worth $530,000,000. Now I hope those pizzas tasted good.

Bitcoin was essentially born from crisis, as a response to the 2008 banking sector crash. The original Satoshi Nakamoto white paper from 2008 mentioned that A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.

As the U.S. government and Federal Reserve were looking to tweak the system and strengthen financial regulations in the wake of the Lehman bankruptcy, others like the Satoshi gang were cooking up an entirely new financial system that would avoid dangerous banking dependencies by being completely decentralized. Bearing this in mind, its no wonder that the authoritarian communist regime of China banned the use of cryptocurrencies.

Nodes Verify Transactions Are Legitimate

Transactions are the foundation from which a blockchain with cryptocurrencies is created. So, to understand how this all comes together, lets consider the following example:

Lets presume youre a crypto miner and Andy, your mate, borrows $5,000 from Jake, your other friend, to buy a brand new high-end gaming rig. Its a top-of-the-line machine thats packed with the new software configuration software. Andy gives him a partial Bitcoin unit to pay him back . However, it needs to pass a review process for the transaction to close .

An Introduction To Crypto Mining

Have you ever wondered what it takes to mine Bitcoin and other cryptocurrencies, and how you may obtain crypto tokens without having to purchase them on an exchange? Many individuals were drawn to the crypto ecosystem by the fast rise in the values of cryptocurrencies such as Bitcoin, Ether, and Dogecoin in the first half of this year. While most individuals purchase and trade them on exchanges, it is also feasible to ‘mine’ these tokens using your computer.

The promise of getting paid with Bitcoin is a major lure for many miners. To be clear, you do not need to be a miner to possess bitcoin tokens. You can buy cryptocurrencies with fiat currency, trade them on an exchange like Bitstamp with another cryptocurrency , or earn them by shopping, writing blog posts on platforms that pay users in cryptocurrency, or even setting up interest-earning crypto accounts.

What is Crypto Mining?

Crypto mining refers to the process of gaining cryptocurrencies by solving cryptographic equations with the use of high-power computers. The solving process comprises verifying data blocks and adding transaction records to a public record known as a blockchain. That is secured by applying complex encryption techniques.

Cryptocurrencies use the decentralised method of distribution and for verification of transactions, it takes the help of cryptographic algorithms. Hence there is no central authority, nor is there a centralised ledger.

How Does It Work?

How Can You Start Mining?

Coin Mining in India

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Disadvantages Of Mining Pools

The shift from decentralized to concentrated mining pools has not occurred without controversy from the earliest days of bitcoin.

For example, a 2013 paper by Ittay Eyal and Emin Gün Sirer, two Cornell academics, argued that “Bitcoin Is Broken” because it enables selfish mining. That is, a group of miners can join forces and hide their generated blocks from the main blockchain. This enables nodes within their network to discover the blocks and quickly generate additional blocks. The hidden blocks are revealed only after the hidden chain of blocks has reached a length equal to that of the new blockchain. The profits generated as a result of this type of mining provide incentives for small mining groups to join large ones.

The launch of Bitcoin Cash, a cryptocurrency that was forked from bitcoins blockchain in August 2017, also generated discussion about the power of bitcoin miners.

How Does Crypto Mining Work

Mining 101: How exactly does crypto mining work?

To put it simply, crypto miners verify the legitimacy of transactions in order to reap the rewards of their work in the form of cryptocurrencies. In order to fully comprehend it, it’s crucial to take a closer look at the process.

1. First, the nodes verify the legitimacy of transactions.

A cryptocurrency blockchain is constructed on the bedrock of transactions. Consider the following scenario.

Assume you’re a cryptocurrency miner, and your friend A borrows $10,000 from another friend B to purchase a product. To repay him, your friend A might send your friend B a fraction of a Bitcoin unit. The transaction, however, must go through a verification process before it can be completed.

2. Next, separate transactions are added to a list of other transactions to form a block.

After the verification process is completed, all transactions are bundled into a list, which is then appended to a new, unconfirmed block of data.

Let’s proceed with the example of A and B. A payment from A to B is essentially a transaction. By adding their transaction to the blockchain, “double spending” on the public record is prevented while maintaining a permanent, immutable record.

3. A hash plus other data are added to the unconfirmed block.

4. Then, miners verify the blocks hash to ensure the legitimacy of the block.

In this step, other miners in the network check the hash of the unconfirmed block to ensure its integrity.

Now, let us look at what cryptocurrency minting is.

Also Check: How To Make Millions In Crypto

Who Hosts Updates And Secures The Transaction Ledger

Cryptocurrencies like Bitcoin have ledgers too. Otherwise, how can we tell who owns what value at what time? These cryptocurrency ledgers are known as blockchains. And they are called so because transactions are recorded in batches known as blocks.

Unlike fiat-based digital payment methods, cryptocurrencies do not have central entities such as a bank or company to host the ledger update it to reflect new transactions, and protect it from possible hacking.

Nevertheless, the cryptocurrency ledger is hosted, updated, and adequately secured. Indeed, this is where the genius of blockchain technology is to be found.

The cryptocurrency ledger is hosted, maintained, and protected through consensus by a community of core supporters, who form a peer-to-peer network. Each of these core supporters keeps a copy of the ledger on their computer. And in the case of Bitcoin, all the core supporters synchronize their ledgers after every ten minutes to reflect new transactions.

The processes of adding new transactions to the shared ledger and synchronizing the copies all the core supporters keep is what is known as mining. Both the core supporters and their specialized computers, which participate in the process, are known as crypto miners.

Security : The Impact Of Cryptocurrency

    The Australian government has just recognized digital currency as a legal payment method. Since July 1, purchases done using digital currencies such as bitcoin are exempt from the country’s Goods and Services Tax to avoid double taxation. As such, traders and investors will not be levied taxes for buying and selling them through legal exchange platforms.

    Japan, which legitimized bitcoin as a form of payment last April, already expects more than 20,000 merchants to accept bitcoin payments. Other countries are joining the bandwagon, albeit partially: businesses and some of the public organizations in Switzerland, Norway, and the Netherlands. In a recent study, unique, active users of cryptocurrency wallets are pegged between 2.9 and 5.8 million, most of which are in North America and Europe.

    But what does the acceptance and adoption of digital currencies have to do with online threats? A lot, actually. As cryptocurrencies like bitcoin gain real-world traction, so will cybercriminal threats that abuse it. But how, exactly? What does this mean to businesses and everyday users?

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    Understanding The Terms: Centralized Decentralized And Distributed

    To help you better understand what Im talking about, lets consider the following graphic:

    In the left half of the graphic is an illustration of a centralized system. The traditional centralized currency system in the U.S. operates through the use of computers, networks and technologies that are owned, operated and maintained by financial institutions. So, whenever you send money to a family member or a friend, that transaction goes through your bank.

    A decentralized system, on the other hand , operates using a network of separately owned, operated and maintained devices. They lend their resources to create this decentralized network and share the responsibility of verifying transactions, updating and maintaining redundant versions of the ledger simultaneously.

    Here, theres no singular centralized authority that maintains a single ledger .

    So, when we talk about distribution, what do we mean? Distribution refers to a synchronized ledger thats shared across various locations by multiple participants who serve as observers and verifiers of the transactions.

    A Hash And Other Types Of Data Are Added To The Unconfirmed Block

    What Is Cryptocurrency Mining? |How Is Bitcoin Mined? |Simply Explained | Beginners Guide |Coinpedia

    Additional info is then applied after enough transactions are added to the block, including the header data and hash from the previous block in the chain and a new hash for the new block. What occurs here is that the most recent block header and a nonce are fused to create the current hash. This hash is applied to the unconfirmed block and a miner node would then need to validate it.

    Lets assume youre so fortunate enough in this situation to be the one to fix it. You give a shout-out to all the other miners on the network to say you did it and make them try it out as much as possible.

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    Proof Of Work Vs Proof Of Stake

    Proof of work and proof of stake are two different validation techniques used to verify transactions before theyre added to a blockchain that reward verifiers with more cryptocurrency. Cryptocurrencies typically use either proof of work or proof of stake to verify transactions.

    Proof of work. Proof of work is a method of verifying transactions on a blockchain in which an algorithm provides a mathematical problem that computers race to solve, says Simon Oxenham, social media manager at Xcoins.com.

    Each participating computer, often referred to as a miner, solves a mathematical puzzle that helps verify a group of transactionsreferred to as a blockthen adds them to the blockchain leger. The first computer to do so successfully is rewarded with a small amount of cryptocurrency for its efforts.

    This race to solve blockchain puzzles can require an intense amount of computer power and electricity. In practice, that means the miners might barely break even with the crypto they receive for validating transactions, after considering the costs of power and computing resources.

    Because proof of stake removes energy-intensive equation solving, its much more efficient than proof of work, allowing for faster verification/confirmation times for transactions, says Anton Altement, CEO of Osom Finance.

    How Does Cryptocurrency Mining Work

    During the cryptocurrency mining process, volunteer coders called cryptominers compete with each other to solve complicated mathematical problems using high-performance computers. Each problem uses cryptographic hash functions that are associated with a block containing a cryptocurrency transactions data.

    The first miner to crack each code is rewarded by being able to authorize the transaction, and in return for the service provided, cryptominers earn small amounts of cryptocurrency of their own. Once the cryptominer successfully completes the mathematical problem and verifies the transaction information, they add the data to the public blockchain ledger.

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    How Crypto Mining Hardware Works

    When it comes to mining hardware, the chipset you select to start mining with will ultimately determine which coins youre able to mine. So to avoid putting the cart before the horse, youll want to know what you want to mine first, and then you can choose the appropriate equipment youll need.

    Currently, there are four classes of mining hardware chipsets in which you can mine cryptocurrencies with, and each comes with its own set of pros and cons. These are the most important component when it comes to mining as these chips are responsible for solving the blocks, also known as hashing.

    CPU MINING

    A CPU, or central processing unit, is probably one of the most common chipsets available today as theyre in every computer from laptops to gaming PCs.

    It was this chipset that initially mined the first block of Bitcoins back in 2009.

    One of the main advantages of using a CPU in mining is its reasonably easy to obtain since most users already have a laptop or desktop computer to spare.

    However, its not efficient to mine Bitcoins with CPUs anymore. Nowadays theyre primarily utilized in mining Bitcoin alternatives called Altcoins, like Verus, BiblePay, and Koto, which you can learn more about in my CPU mining guide.

    GPU MINING

    GPUs, or graphical processing units , are the next big step up from CPUs and yet still primarily used in gaming computers today.

    GPUs can also require more troubleshooting at times when trying to set up and overclock new mining software.

    ASIC MINING

    What Are Coin Mining Pools

    What Exactly Is Crypto Mining 2021

    Mining rewards are paid to the miner who discovers a solution to the puzzle first, and the probability that a participant will be the one to discover the solution is equal to the portion of the total mining power on the network.

    Participants with a small percentage of the mining power stand a very small chance of discovering the next block on their own. For instance, a mining card that one could purchase for a couple of thousand dollars would represent less than 0.001% of the network’s mining power. With such a small chance at finding the next block, it could be a long time before that miner finds a block, and the difficulty going up makes things even worse. The miner may never recoup their investment. The answer to this problem is mining pools.

    Mining pools are operated by third parties and coordinate groups of miners. By working together in a pool and sharing the payouts among all participants, miners can get a steady flow of bitcoin starting the day they activate their miners. Statistics on some of the mining pools can be seen on Blockchain.info.

    Read Also: What Is An Oracle In Blockchain

    Understanding How Miners Are Incentivized

    We now know how mining works and why it is important. But how do miners receive compensation for their work? Put simply, there are two ways in which a cryptocurrency network rewards miners, namely block rewards and transaction fees.

    In the case of Bitcoin, each block generates 6.25 BTC and is credited only to the miner with the winning hash. In 2009, that figure was 50 BTC, which is how we now have 19 million Bitcoin in circulation.

    Since the network dictates a self-imposed limit of 21 million Bitcoin, mining will continue yielding rewards until that threshold is reached. However, Bitcoins block rewards drop by half every four years. This means that the final 21-millionth token will not enter circulation until the year 2140.

    Block rewards work differently depending on the currency. Ethereum, for instance, has a fixed 2 ETH block reward with no hard cap.

    Transaction fees represent the second source of revenue for miners. As previously mentioned, transactions with the highest fees in the mempool are prioritized by miners. This leads to a bidding war when the network gets busy, as thousands of individuals pay higher and higher amounts to settle their transactions as quickly as possible.

    Notably, Ethereum began destroying transaction fees in August 2021 as part of the London network upgrade. This move was aimed at making the network deflationary, since Ethereums total supply has been on a steady climb for years now.

    What Is Crypto Mining A Guide For The Beginner

    The concept of mining is at the center of the existence of cryptocurrencies. In other words, without mining, cryptocurrencies cannot exist. To understand what mining is and the critical role it plays, one needs first to understand how a cryptocurrency functions.

    We need to pick one to use for the illustration. None is better for this purpose than Bitcoin. It is the first-ever cryptocurrency, it has the most significant market capitalization, and it is the most used around the globe.

    Bitcoin is a digital currency. Meaning, it only exists in computers and other electronic devices. And it can only be sent and received over the Internet.

    Now, cryptocurrencies are not the only digital currencies in existence. In fact, weve had some form of digital currencies since the 70s when banks and financial institutions began to embrace computers to manage their records.

    Today in Sweden, and most of the other Scandinavian countries, not more than 20% of all transactions are settled using physical cash . Meanwhile, China is turning out to be the biggest cashless economy as it embraces mobile payment methods on a massive scale.

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    Advantages Of Mining Pools

    In crypto mining, the question of centralized or decentralized is hard to untangle. A mining pool can include many individual crypto enthusiasts who invest in “mining rigs” but sign up with one of a number of mining pools to harness its far superior processing power.

    Still, the greatly increased complexity of crypto mining makes it a near-impossible mission for a single miner with a stack of equipment. Signing up with a big operator, and paying its fees, is the only alternative.

    The increasing centralization of mining pools presents its own set of advantages and disadvantages.

    Profitability Before And After Asic

    How much is the GPU Crypto Mining Farm Making??? Mining Farm Update – Jan 2021

    Old-timers mining bitcoins using just their personal computers were able to make a profit for several reasons. First, these miners already owned their systems, so equipment costs were effectively nil. They could change the settings on their computers to run more efficiently with less stress. Second, these were the days before professional Bitcoin mining centers with massive computing power entered the game. Early miners only had to compete with other individual miners on home computer systems. The competition was on even footing. Even when electricity costs varied based on geographic region, the difference was not enough to deter individuals from mining.

    After ASICs came into play, the game changed. Individuals were now competing against powerful mining rigs that had more computing power. Mining profits were getting chipped away by expenses like purchasing new computing equipment, paying higher energy costs for running the new equipment, and the continued difficulty of mining.

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