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These days, one can’t open the newspaper without seeing a headline about cryptocurrency, its rising popularity, and its uses and regulations. However, No one explains the reasons why it is considered secure and how cryptocurrency is mined.
But what, exactly, is cryptocurrency? In this brief guide, I will offer an overview by explaining the concepts and why it is considered incorruptible. This note will also explain mining of cryptocurrencies and important factors to be considered to mine it commercially.
What is Cryptocurrency
In short, cryptocurrency is a virtual currency based on a distributed ledger, and enforced by a network of computers. It operates on a decentralized network based on blockchain technology.
What is a Blockchain?
Blockchain refers to an entire network of distributed ledgers, books, or other collections of financial accounts that rely on a particular type of technology. These digital ledgers are incorruptible. They can also be programmed to record and track not only financial transactions but virtually everything of value, creating a shared, distributed, and immutable record of the history of transactions.
Is Blockchain secure?
The beauty of blockchain is that It is almost impossible to interfere with it. Blockchain is secured through a process known as hashing, which serves as a digital fingerprint for a certain set of data. The same data will always produce the same hashed value. Trying to tamper with a block within a blockchain causes the hash of the block to change. That change makes the following blocks, which are linked to the first block’s hash, invalid.
The second method of securing blockchain is called proof-of-work (PoW), which serves to slow the creation of the blocks. In Bitcoin’s case, for example, it takes about ten minutes to calculate the required PoW and add a new block to the chain. This timeline makes tampering with a block super difficult because if one interferes with one block, they will need to interfere with all the following thousands of blocks, resulting in hundreds of hours of work, just to change one chain.
A third way blockchains secure themselves is by being distributed. Blockchains don’t use a central entity to manage the chain. Instead, they rely on a peer-to-peer (P2P) network. In public blockchains like Bitcoin, there are no barriers to entry, and everyone is allowed to join. Each member of the ever-growing network is called a validator or a node. When someone joins the network, they get a full copy of the blockchain, which is shared and accessible to all within the open network. In this way, the node can verify that everything is still in order, and all transactions remain transparent.
What are decentralized currencies?
Because cryptocurrencies don’t rely on a central entity to manage the currency network – such as a central bank, central database, or single, central authority – they can be considered to be decentralized.
Rather than management by a central authority, the currency is managed by the cryptocurrency community and, in particular, cryptocurrency miners and network nodes. For this reason, cryptocurrencies are often referred to as “trustless”, which means that no single party or entity controls how a cryptocurrency is issued, spent, or balanced; and so no single authority must be entrusted with that responsibility.
Yet even in the “trustless” cryptocurrency world, users can still trust that the blockchain contains an accurate, immutable, and unchangeable record of cryptocurrency transactions, because of the security safeguards previously discussed.
Cryptocurrencies have no central bank printing new money. Instead, new currency is generated when “miners” “dig up” new currency according to a preset coin-issue schedule, and release it into circulation in a process called mining.
Understanding the process of mining
To understand the process of crypto mining, it is helpful to use gold mining as an analogue. In gold mining, the miners put in the work of unearthing and discovering the gold, and are rewarded with an uncirculated asset. In gold mining, naturally occurring gold that was outside the economy is dug up and becomes part of the gold circulating within the economy.
In a similar fashion, in cryptocurrency mining, work is performed by a miner, and the process ends with a new cryptocurrency being created and added to the blockchain ledger. In both cases, miners, after receiving their reward — the mined gold or the newly created cryptocurrency — usually sell it to the public to recoup their operating costs and get their profit, placing the new currency into circulation.
Of course, a cryptocurrency miner’s work is different than that of a gold miner, but the end result is much the same: both of them make money.
Role of the crypto miner
For cryptocurrency mining, all of the work happens on a mining computer or “rig” connected to the cryptocurrency network.
The work performed by miners consists of:-
- Verifying and validating new transactions
- Collecting those transactions and ordering them into a new block
- Adding the block to the ledger’s chain of blocks (the blockchain)
- Broadcasting the new block to the cryptocurrency node network
Without mining, the blockchain won’t function.
But why would someone do this work? What incentives exist for the miner?
The bitcoin miner actually has a couple of incentives for miners (other cryptocurrencies may work differently):
Transaction fees: A small fee is paid by each person spending the cryptocurrency to have the transaction added to the new block; the miner adding the block gets to reap a portion of those transaction fees
Block subsidy: Newly created cryptocurrency, known as the block subsidy, is paid to the miner who successfully adds a block to the ledger.
Combined, the fees and subsidies are known as the miner’s block reward.
Mining software
In order to become a miner, one must first download mining software, which handles the actual mining process. The main job of the software is to deliver the mining hardware’s work to the rest of the network and to receive completed work from the other miners on the network.
How to become a miner?
The first step to become a crypto miner is to set up a mining rig (the computer equipment) and run that cryptocurrency’s associated mining software. Depending on how many resources the crypto miner is committing, he or she will have a proportional chance to be the lucky miner who gets to create and chain the latest block; the more resources employed, the higher the chance of winning the reward.
Each block has a predetermined amount of payment, which is rewarded to the victorious miner for their hard work to spend as they wish. So how is the winning miner chosen?
In the proof of stake system, the software chooses one of the cryptocurrency nodes to add the latest block, but in order to be in the running, nodes must have a stake, generally meaning that they must own a certain amount of the cryptocurrency. The cryptocurrency network chooses the miner who will add the next block to the chain based on a combination of random choice and amount of stake.
When Bitcoin first started, anyone with a simple desktop computer could mine. One simply needed to download the Bitcoin mining software and mine. With time, however, competition has increased.
For high-difficulty cryptocurrencies, such as Bitcoin, the ideal mining environment should have low hardware costs, low temperatures, low electricity costs, and fast internet.
Making mining profitable
Identify low hash rate alternate cryptocurrencies
Smaller cryptocurrencies have lower network hash rates, which means one can contribute a larger percentage of the hash rate and gain a larger percentage of the mining rewards. The coins you mine may be proportionately worth less, but you will likely be able to mine more of them.
Find cheap electricity for cryptocurrency mining
Inexpensive electricity is very important for cryptocurrency mining endeavours because electricity is often the largest operational expenditure involved in cryptocurrency mining. Reduce your electricity cost, and you increase your profit, in turn.
Cool the mining equipment efficiently
Mining equipment creates a lot of heat, but you can mitigate this heat exhaust or even use it to your advantage, to increase overall ROI. Some miners spend a lot of money running expensive air-conditioning systems to cool cryptocurrency mining hardware to data center temperature levels (especially in hot climates, like India’s). However, cryptocurrency mining hardware is equipped with large heat sinks and powerful fans, typically rated for higher temperatures than sensitive data servers.
Mapping Cryptocurrency in the real world
Since there is no centralised authority or any Government who can control or influence these currencies, this can create an alternative economic world outside the purview of any Authority, not just for these currencies but also for its users.
Surely some more regulations are likely to come in from Government agencies but there will always be a limit on how much control they can eventually exercise over them. Though there is a risk involved in investment in some of the new cryptocurrencies, the scope for returns are huge if some of the economic potential is finally realised.
Disclaimer
Views expressed above are the author’s own.
END OF ARTICLE
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