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Blockchain Mining

When you hear about blockchain “mining”, you envisage coins being dug out of the ground. But the cryptocurrency isn’t physical, so why do we call it mining?

Similar to gold mining, cryptocurrencies exist in the protocol’s design just as the gold exists underground, but they haven’t been brought out into the light yet, just as the gold hasn’t yet been dug up.

Money! Yes, you can make money by mining blockchain. But how much? That depends on your mining capacity. Mining requires some resources such as Computational Hardware, Cooling System, Electricity, and Maintenance. The more powerful your mining setup is the more your mining capacity will be, and the more money you can make.

Since currency prices can fluctuate widely and investment costs for a mining business can easily be in the tens of thousands of dollars. If you can operate efficiently, you may want to attempt to mine for profit but be sure to do your homework before making any big purchases.

The primary purpose of mining is to set the history of transactions in a way that is computationally impractical to modify by any one entity. By downloading and verifying the blockchain, currency nodes are able to reach consensus about the ordering of the events.

Mining is also the mechanism used to introduce more cryptocurrencies into the system: Miners are paid any transaction fees as well as a “subsidy” of newly created coins. This both serves the purpose of disseminating new coins in a decentralized manner as well as motivating people to provide security for the system.

Blockchain Mining is the process in which transactions between users are verified and added to the blockchain public ledger. The process of mining is also responsible for introducing new coins into the existing circulating supply and is one of the key elements that allow cryptocurrencies to work as a peer-to-peer decentralized network, without the need for a third party central authority.

Bitcoin is the most popular and well-established example of a mineable cryptocurrency, but it is worth noting that not all cryptocurrencies are mineable. Bitcoin mining is based on a consensus algorithm called Proof of Work.

Mining is defined in the protocol, implemented in software, and is an essential function in managing the Bitcoin network. It verifies transactions, prevents double-spending, collects transaction fees and creates the money supply. It also protects the network by piling tons of processing power on top of past transactions. Mining verifies transactions by evaluating them against the transactions that happened before. Transactions cannot spend bitcoins that do not exist or that were spent before. They must send bitcoins to valid addresses and adhere to every rule defined by the protocol. Miners also verify blocks produced by other miners to allow the entire network to continue building on the blockchain.

Once miners have verified 1 MB (megabyte) worth of bitcoin transactions, known as a “block”, those miners are eligible to be rewarded with a quantity of bitcoin. The 1 MB limit was set by Satoshi Nakamoto, and is a matter of controversy, as some miners believe the block size should be increased to accommodate more data, which would effectively mean that the bitcoin network could process and verify transactions more quickly. Note that verifying 1 MB worth of transactions makes a coin miner eligible to earn bitcoin — not everyone who verifies transactions will get paid out.

To earn bitcoins, you need to meet two conditions. One is a matter of effort; and the other is luck.

To find a valid block, the miner builds a list of recent transactions and calculates some summary information about the proposed block. This summary is combined with a number called a nonce to create a block header. The hash of the block header is then calculated and to see if it is small enough to win at the current difficulty. If not, the nonce is changed and the new hash is calculated and tested.

There is no way to create a valid block except by a brute force search. Brute force means the miner tries one nonce, then another, and another, repeating the process until it gets lucky. During that search, the miner cannot predict if the next nonce will give a smaller hash than the last. Since it is a brute force process, the only way to increase your chances of winning is to increase the speed with which you can try nonces. The more processing power you have at your disposal, the faster you can search and the more likely you will be to find a “winning block”.

Once a valid block has been generated, it is broadcast to the network and quickly verified by the other nodes in the network. The difficulty of finding a winning block is generated on average, every 10 minutes as of May, 2020.

When a miner finds a new block, it includes a new address to which new bitcoins and any transaction fees are to be awarded. This reward is the monetary incentive for people like you and me to run miners. If the conditions are right, you can put mining hardware to work, paying for your time and electricity and make a profit by selling the resulting bitcoins that you were awarded.

As this guide is being written, 50 bitcoins are awarded to the miner who finds each block. This will continue until block 210,000 is found at which time the block reward will halve to 25 bitcoins. The reward will then halve again every 210,000 blocks thereafter and now as on 11 May 2020, 6.25 bitcoins are rewarded.

This means the number of Bitcoins ever created will top out at around 21 million (estimated to occur in near 2040).

CPU

The least powerful category for mining hardware is your computer itself. Since the testing of nonces is a very repetitive task, computer hardware with a powerful enough processor that does repetitive things quickly works best for mining. Nowadays, CPU mining has become obsolete.

GPU

GPU stands for Graphical Processing Unit, which is a feature of high-end graphics cards. These were designed specifically so that they can calculate all the complex polygons needed in high-end video games, which made them particularly great at hashing mathematics necessary to solve transaction blocks.

Despite costing several hundred dollars, GPUs gave miners a significant advantage over CPU hashing. For instance, a CPU will generally provide you with less than 10 MH/sec. On the other hand, an ATI 5970, one of the most popular graphics cards when it comes to mining, can give you over 800 MH/sec. However, much like CPU mining, GPU mining is largely dead these days.

FPGA

The next stage of Blockchain mining development was the introduction of FPGA (Field Programmable Gate Array) mining. FPGA is an integrated circuit designed to be configured after being built. This enabled a mining hardware manufacturer to buy the chips in volume and customize them, before putting them into their own equipment. This improvement allowed for the first large Bitcoin mining farms to be constructed.

ASIC

An Application-Specific Integrated Circuit (ASIC), is a microchip designed and manufactured for the sole purpose of mining at breakneck speed. It offers a 100x increase in hashing power, while reducing electricity consumption compared to all the previous technologies. Some experts consider ASIC to be the ‘end-of-the-line’ technology, as there is nothing to replace it in the immediate future.

If you’re mining with a GPU, you will need software to direct the hardware to mine Bitcoins. Software is available for Windows, Mac, and GNU/Linux. Much of this software is free and open source software that you can download and set up yourself or with a little help from someone online.

Once you have the software running, it will tell you how quickly it is mining. This is a number denoted in hashes per second with common speeds today in the mega-hashes or giga-hashes per second. A hash is a step toward testing a nonce and mega and giga mean million and billion respectively.

The goal is to get as many hashes completed by your hardware as possible per unit time. The best software for your hardware will help you do that. Good software gives a good hash rate but is also stable, meaning mining doesn’t stop because of a glitch in the software.

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 the cryptocurrency starting the day they activate their miners.

If you want to invest in Blockchain mining without purchasing and managing your own hardware, cloud mining could be a viable option for you. This is done through purchasing mining contracts, which enable miners to use shared processing power run from remote data centers. In a lot of ways, it makes mining easier. You don’t have to deal with hardware, software, added electricity costs, bandwidth and other offline issues. All you need is a computer for communications and an optional local wallet.

However, there are certain risks associated with cloud mining that investors need to be wary of before paying for contracts. There’s been a tremendous amount of cloud mining scams. Moreover, you won’t be able to control the actual physical hardware.

After all, when opting for cloud mining, you’re handing over the control to the operators. This means that mining operations may cease if the operators deem currency’s value to be too unstable at any given moment. Finally, you will be getting a lot less profit as the operators will charge you commission to cover their costs.

The risks of mining are that of financial risk and a regulatory one. As mentioned, mining in blockchain is a financial risk. One could go through all the effort of purchasing hundreds or thousands of dollars worth of mining equipment only to have no return on their investment. That said, this risk can be mitigated by joining mining pools. If you are considering mining and live in an area that it is prohibited you should reconsider. It may also be a good idea to research your country’s regulation and overall sentiment towards cryptocurrency before investing in mining equipment.

● Blockchain mining is the process of creating new cryptocurrencies by solving a computational puzzle.

● Bitcoin miners receive Bitcoin as a reward for completing “blocks” of verified transactions which are added to the blockchain.

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

● You need either a GPU (graphics processing unit) or an application-specific integrated circuit (ASIC) in order to set up a mining rig.

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