What is Cryptocurrency (i.e. Bitcoin) Mining and What do Miners Get?

The video above gave a great overview and summary of Bitcoin and a basic Mining Guide. Almost all alternative coins follow the path of Bitcoin mining, but there are several technological advancements. With those come more sophistication and more complexity to mining. Even though mining is an essential part of most digital coins, some coins can’t be mined at all! In this guide, we will cover a basic overview of mining and where digital coins stand (as of today) when it comes to this essential part of how they work.

Mining is the most fundamental aspect of digital coins. It’s what differentiates them from fiat cash, in that no central person or government can control them. Instead, people can participate in mining. Miners are the foundation for digital coins and yet mining remains one of the most misunderstood aspects.

Technical Review | Hashing

In the mining process, your computer or other hardware runs a cryptographic hashing function on what is called a block header. For every new hash, the mining software will use a different ordered number for the header in a random order. This number is called the nonce. A hash is a really long, complex number (hexadecimal). Hashes are essentially the backbone; the security of the mining network. 1 hash is generally very small for a

A hash is a really long, complex number (hexadecimal). Hashes are essentially the backbone; the security of the mining network. 1 hash is generally very small for a miner. On average, miners have rates that are based on megahashes per second (MH/s), or millions of hashes and on the other spectrum, some miners have hundreds of millions (GH/s and TH/s) per second.

Example of a hash: 93ef6f358fbb998c60802496863052290d4c63735b7fe5bdaac821de96a53a9a

What is Digital Currency Or Cryptocurrency? or What is Bitcoin mining?

Mining is the use of computers to solve complex math problems and, when solved, the miner gets awarded with digital coins to compensate them for their work. There are several different variations of mining. The most common terminology for mining is Proof of Work. Proof of Work essentially means you are physically mining with a computer. You processors or computer machines are “working” to compute math problems for the digital network. There are several algorithm variations of Proof of Work; each variation is brought in to keep the hashing power in check, secure the network, process transactions quick and handle a bunch of other different features that may be implemented.

What Do Miners Get?

The ultimate goal for miners is to mine a block. A block is an imaginary segment in the network that requires a correct math answer to solve. When miners mine, they are trying to solve the block’s math problem with their computers. When a miner’s computer solves the answer, he or she is then awarded the block reward into their wallet. A block reward is the distribution of digital coins. Each block contains a set amount of coins (plus any transaction fees that were paid by transaction senders for inclusion in the block) and the rewards from each block decrease over time to increase the value of the coin and will eventually lead to the coin’s hard cap in number.

The Block

The more miners there are solving blocks for coin rewards, the more secure a network becomes. When a miner solves a block for the reward, he or she is also confirming transactions that other users of the coins have sent to the network. With more miners, the network also becomes more secured due to the increased amount of hashing power. A lot of computing power trying to solve blocks essentially makes the coin then more valuable and harder to obtain.

Difficulty Targeting

Difficulty Targeting is about making mining more difficult. The reason mining would become more difficult is because more power from more sources is entered into the network. When a network increases in difficulty, it is essentially becoming more difficult for miners to mine. Only the highest and most technically advanced machines will be able to mine at the highest of difficulties.

To create a valid block, a miner has to find a number below the targeted block. For example: take the number 1,000,000. Any number below (and not) 1,000,000 would be considered a targeted value and the miner would be rewarded with the block. Generally, target numbers are much larger than this, including numbers like: 1 million, 1 billion, 1 trillion or even 1 quadrillion. Target numbers are enormous! Because the target is such an insane number with a whole lot of digits, people generally use a much more simple number to express the current target. This number is called the mining difficulty. Mining difficulty expresses how much harder the current block is to generate compared to the first block. When someone expresses, “The mining difficulty is 20,” that means it is 20 times harder to mine in the present than the first miner to mine the first block. Difficult targets change a lot; especially with new algorithms such as Kimoto’s Gravity Well (KGW). KGW basically changes the difficulty targets with each block. It is smart in the sense it knows how many miners are mining with hashes at any given moment.

Mining Hardware

CPUs: The most basic and least powerful ways to mine. A few years ago, mining with a CPU was a very common occurrence. Anyone and everyone was able to participate by mining with their computers. Times have changed, and now just a few types of digital coins are mined by CPUs. But there are a few coins that have changed the foundation and can only be mined with CPUs. This is to resurrect “the golden age” of mining.

GPUs: It was discovered that high-end graphics cards were much more efficient at mining; specifically Bitcoin mining. The power of GPUs allowed for a 50X to 100X increase in Bitcoin mining power, while using far less power per unit of work. But soon after, GPUs became outdated for Bitcoin mining and the world moved onto something bigger and better. With the emergence of the algorithm Scrypt, CPUs and GPUs were reused and once again had a viable place in Cryptocurrency mining. GPUs remain the most common and popular method to mine alternative coins today.

FPGAs: The beginning step between GPU and ASIC mining. FPGAs did not last long but they were used to mine mainly Bitcoin and ASIC-specific alternative coins. As you would think, FPGAs increased performance in mining just like GPUs did over CPUs.

ASICs: The launch of Application Specific Integrated Circuits (ASICs) launched a new era for Bitcoin. Generally, most alternative coins are resistant and completely work to avoid ASIC mining. But some coins accept ASICs with an open heart. An ASIC is a chip designed specifically to do one thing and one thing only, and that’s to calculate and solve math problems, increase hashing power. ASIC mining units offer a 100X increase in hashing power while reducing power consumption compared to all the previous technologies.

Summary of Hardware

CPUs and GPUs are mainly for mining alternative coins but have technically superior alternatives such as FPGA and ASIC. For bitcoin mining GPUs replaced CPUs, FPGAs replaced GPUs and ASICs replaced FPGAs. Now you may be thinking, I’ll just buy the next machine to replace ASICs. There is nothing to replace ASICs now or even in the immediate future. There will be a stepwise refinement of the ASIC products and increases in efficiency, but nothing will offer the 50X – 100X increase in hashing power that was seen in the past, nor will there be a major reduction in energy efficiency. No new technological advancements will ever replace an ASIC unit. The reason is that ASIC have one task only and that’s to compute and mine.

Mining Alone or in a Group?

There are two basic ways to mine: on your own or as part of a pool. Due to the difficulty and a large number of miners, it is almost impossible to mine a block without spending thousands or tens of thousands of dollars on hardware. A pool is a collection of miners that are mining a network together. A network of miners consists of several miners combining their machines and hashing power into a single powerhouse pool. This powerhouse is generally very successful in mining blocks and thus it becomes more profitable to mine in a pool. Miners then have the block rewards split amongst all miners who participated. The more power someone contributed towards solving a block, the greater the share of the block rewards they will receive when the pool solves one. This, in turn, gives all pool miners a steady and frequent payout for their mining efforts, without the massive amount of variability that would otherwise be present.

To mine solo is like being a lone ranger. Mining the network head-on generally gives more infrequent but larger payouts than mining as part of a pool.

Algorithms

An algorithm is a specific way in which a miner’s hardware mines. Advancements in restrictions, improvements, and security are happening at an alarming rate; mostly within alternative coins. Bitcoin’s founding algorithm was called SHA-256, which is a secured hashing function. With Bitcoin’s open-source code, several developers and entrepreneurs have modified the original algorithm to profit and restrict certain mining hardware. Algorithms such as Litecoin’s Scrypt or Peercoin’s Proof of Stake algorithm has significantly improved and have created mass variety in alternative coins.

Scrypt – This is another method of Proof of Work mining, much like Bitcoin’s SHA-256 algorithm. The majority of alternative coins use a Scrypt algorithm because it restricts the almighty powerful ASIC units. ASICs can’t mine Scrypt coins with the same efficiency as SHA-256, thus alternative coin network s are open to more casual miners. Several modifications have been made to the Scrypt algorithm to help improve efficiency and security, as well as increase profitability for miners.

Proof of Stake – This is one of the alternatives to the conventional mining Proof of Work scheme. Proof of Stake requires no mining from miners whatsoever. The network in Proof of Stake coins is secured by the users who have their wallets open, and those wallets help confirm network transactions. So essentially there is a hidden mining capability behind Proof of Stake, but it creates a position where it’s much simpler to the user and allows for the inclusion of many more people. Proof of Stake owners get awarded interest on all the coins they have earned. PoS is usually inflationary, while Proof of Work is generally deflationary.

Proof of Burn – Proof of Burn is a unique concept where you “burn” or send coins (generally bitcoins) back to the blocks in which they were mined from. Proof of Burn incorporates several new features that are built on top of the blockchain. 100% decentralized distribution is possible with Proof of Burn, because it’s up to the user to burn bitcoins; not the developers of the coin who pre-mine. Countparty (XCP) is one of the first and most successful digital coins to introduce this feature.

Human Mineable – This is what you would expect; people doing active work to mine coins digitally. Human mineable coins generally involve some type of game or task for the user and award coins based on that work. Huntercoin is one of the first to incorporate a human mining aspect, with an MMO-type gathering game.

Pre-mining – Pre-mining is when developers increase the block reward for the first block and mine the coin before they release it to the public. They gather a few percentage of the total supply by pre-mining. This helps developers promote and reward users for doing tasks for their coin.

Instant Mining – This is when developers claim there is no pre-mine (due to negative stigmas about pre-mining). The first few block rewards are generally on par with a pre-mined block, but the client is fully released to the public a few minutes after the developers have mined the coin. This gives them the advantage of mining and gathering their coin while users lag in setting up their miners.

No Trespassing Miners!

A lot of efforts have been put towards creating coins that require no Proof of Work mining. These types of coins are generally 100% Proof of Stake coins or are 100% pre-mined and distributed to the community. The advantage of not requiring mining is the eco-friendly aspect, because mining requires huge amounts of electricity.

Some coins have a 100% pre-mine but still require miners to secure the network with Proof of Work. Other coins have a 100% pre-mine with Proof of Stake features, where users are granted rewards for keeping their wallets or clients open. Lastly, some coins feed off of another coin’s network, such as Bitcoin’s network. These types of coins rely solely on Bitcoin’s miners to keep their coin secured and functioning.

Ultimately, Bitcoin ushered in a revolution of digital miners. The ideas that are stemming from the Satoshi Nakamoto’s Proof of Work idea are limitless.