What is digital currency mining? What is the mechanism of its work?
Summary
Cryptocurrency mining verifies and audits transactions on the blockchain, and the process also involves creating new units of digital currencies.
The work performed by miners requires enormous computing resources, as it is the factor that keeps the blockchain network secure.
What is digital currency mining?
Cryptocurrency mining ensures the security and decentralization of digital currencies such as Bitcoin on which the Proof of Work (PoW) consensus mechanism is based. It is the process by which transactions between users are verified and added to the public records of the blockchain chain. Thus, mining is a key element that allows Bitcoin to be created without the need for a central authority.
Mining operations are also responsible for adding new currencies within the existing currencies available in the market. However, cryptocurrency mining follows rules that govern the mining process and prevent anyone from arbitrarily creating new coins. These rules are built into the underlying cryptocurrency protocols and implemented through an entire network of thousands of nodes.
To create new cryptocurrency units, miners use their computing power to solve complex cryptographic puzzles. The first miner to solve the puzzle has the right to add a new block of transactions to the blockchain and broadcast it on the network.
How digital currency mining works
When new transactions are made on the blockchain, they are sent to a pool called the memory pool. The miner's job is to verify the validity of these pending transactions and arrange them into blocks.
A block can be thought of as a page of a blockchain's records, in which several transactions (along with other data) are recorded. Specifically, the mining node is responsible for collecting unconfirmed transactions from the memory pool and assembling them into a candidate block.
The miner attempts to convert this candidate block into a valid and confirmed block. To do this, the miner must solve a complex mathematical problem that requires a lot of computational resources. However, with each successfully mined block, the miner receives a block reward consisting of new cryptocurrencies, plus transaction fees. Let's look at how it works:
The first step: hashing the transactions
The first step to mining a block is to take the pending transactions from the memory pool and send them, one by one, using a hash function. Every time a piece of data is run using a hash function, a fixed-sized output known as the hash value is generated.
The hash value of each transaction, in the context of mining, consists of a string of numbers and letters that acts as an identifier. The hash value of a transaction represents all the information contained in that transaction.
In addition to hashing and listing each transaction individually, the miner also adds a custom transaction with which to send itself the block reward. This transaction is referred to as a coinbase transaction, and is what creates entirely new coins. This transaction is in most cases the first transaction recorded in any new block, and is followed by all pending transactions waiting to be audited.
Step 2: Create a Merkle tree
After each transaction is hashed, the hash values are arranged in what is known as a Merkle tree (also known as a hash tree). A Merkle tree is created by arranging transaction hash values into pairs, then hashing them.
The new hash products are then arranged into pairs and hashed again, and the process is repeated until a single hash value is generated. The last hash value is also called the root hash value (or the root of the Merkle tree) and is in short the hash value that represents all previous hash values used to generate it.
Step 3: Find a valid block storage partition (block hash value)
The block storage partition acts as the identifier for each individual block, which means that each block has a unique hash value. When creating a new block, miners combine the hash value of the previous block with the root hash value of the candidate block to generate a new block hash value. They also need to add a random number known as a special code.
So, when a miner tries to audit their candidate block, they have to collect the root hash value, the hash value of the previous block, and the private token and put them all together using the hash function. Their goal is to do this repeatedly to create a correct hash value.
The root hash value and the hash value of the previous block cannot be changed, so miners must change the private token value several times until they find a correct hash value. The output (block hash value) must be less than a specific target value set by the protocol in order to be considered valid. In Bitcoin mining, the hash value of a block must start with a specific number of zeros — this is known as the mining difficulty.
Step 4: Broadcast the mined block
As we saw before, miners must repeatedly hash the block storage partition using different private token values. They do this until they find a valid block hash value, after which the miner who found it broadcasts this block to the network. All nodes check if the block and its hash value are correct, and if they are, they will add the new block to their copy of the block chain.
At this point the nominated block becomes a confirmed block, and all miners move on to mining the next block. All miners who do not find a correct hash value in time discard their candidate block and the mining race starts again.
What if two blocks are mined at the same time?
Sometimes two miners broadcast two valid blocks at the same time and the network ends up with two competing blocks. All miners then start mining the next block based on the block they obtained first, causing the network to temporarily split into two different versions of the blockchain.
The competition between these two blocks continues until the next block on either of them is mined. When a new block is mined, the previous block is considered the winner. The excluded block is known as a discarded block or invalid block, which causes all miners who chose that block to mine the chain of the winning block again.
What is the difficulty of mining?
The mining difficulty is regularly adjusted through a protocol that ensures a constant rate of new block creation which in turn results in new coins being issued in a consistent and predictable pattern. Difficulty scales in proportion to the amount of computing power (hash rate) devoted to the network.
Thus, every time new miners join the network and competition increases, the hashing difficulty increases — preventing the average block time from decreasing. Conversely, if many miners decide to leave the network, the hashing difficulty will decrease, making it easier to mine a new block. These adjustments keep the block time constant, regardless of the overall hashing power of the network.
Types of digital currency mining
There are many different ways to mine digital currencies. The equipment changes and the process changes as new devices and consensus algorithms emerge. Miners typically use specialized computer units to solve complex cryptographic equations. Let's take a look at how some of the most popular mining methods work.
Mining using CPUs
CPU mining involves using a computer's central processing unit to perform hash functions required from a proof-of-work model. In the early days of Bitcoin, the cost of mining was low, the barriers to entry were low, and a normal CPU could handle the difficulty of mining, so anyone could try to mine BTC and any other cryptocurrencies.
However, as more people started mining BTC and the network hash rate increased, profitable mining became more difficult. Furthermore, the emergence of specialized mining hardware with greater computing power has made mining with CPUs nearly impossible. Today, mining using CPUs is no longer a practical option because all miners use specialized hardware.
Mining using GPUs
Graphics processing units (GPUs) are designed to process a wide range of applications simultaneously. Although these modules are typically used for video games or graphics creation, they can also be used for mining.
GPUs are relatively inexpensive and more flexible than the ASIC circuit hardware commonly used for mining. Although they are used to mine some altcoins, their efficiency depends on the mining difficulty and algorithm.
Mining using the ISIC circuit
An application-specific integrated circuit (ISAC circuit) is designed to serve a specific purpose, which in cryptocurrency refers to a specialized device designed for mining. Mining using the Isaac circuit is known for being very efficient, but expensive at the same time. Since AIESEC miners are at the forefront of mining technology, the unit cost is much higher than CPUs or GPUs.
Furthermore, continuous advances in AIESEC circuit technology are quickly making older versions unprofitable and, therefore, needing to be replaced on a regular basis. Even excluding electricity costs, this makes ASIC mining one of the most expensive mining methods.
Mining complexes
Since the first successful miner receives the block reward, the probability of finding the correct hash value becomes very low. Miners with a small percentage of mining power have very little chance of discovering the next block on their own. Mining pools provide a solution to this problem.
Mining pools are groups of miners who pool their resources (hash power) together to increase the probability of winning block rewards. When the pool successfully finds a block, miners in the pool share the reward according to the amount of work each has contributed.
Mining pools may benefit individual miners in terms of hardware and electricity costs, but their control over mining raises fears of a 51% attack on the network.
What is Bitcoin mining? What is the mechanism of its work?
Bitcoin is the most famous and clear example of a mineable digital currency, and Bitcoin mining is based on the Proof of Work (PoW) consensus algorithm.
Proof of Work (PoW) is the original blockchain consensus mechanism created by Satoshi Nakamoto, and introduced by the Bitcoin Technical Manual in 2008. In brief, PoW specifies how a blockchain network reaches consensus among various distributed participants without external mediation, and it does so by requiring the power of Great computing to discourage those with bad intentions.
As we have seen, miners validate transactions on the network using proof of work and are verified by some miners competing to solve complex cryptographic puzzles using specialized mining hardware. The first miner to come up with a correct solution can broadcast their transaction block to the blockchain and receive a block reward.
The amount of cryptocurrencies in the block reward varies from one blockchain to another. For example, miners on the Bitcoin blockchain were receiving a block reward of 6.25 BTC until March 2023. In light of the Bitcoin halving mechanism, the amount of BTC in the block reward halves every 210,000 blocks (roughly every four years).
Is cryptocurrency mining profitable in 2023?
Although there is potential to make money by mining cryptocurrencies, it requires careful consideration, risk management, and research. This process also involves some investments and risks, such as hardware costs, cryptocurrency price fluctuations, and changing cryptocurrency protocols. To reduce these risks, miners engage in risk management activities and evaluate the potential costs, as well as the benefits of mining before starting the process.
The profitability of cryptocurrency mining depends on many factors. One of these factors is the changes in cryptocurrency prices. When cryptocurrency prices rise, the value of the local currency approved for mining rewards also increases. In contrast, profitability levels can decline as prices fall.
The efficiency of mining hardware is also an important factor in determining the profitability of a mining operation. Mining rigs can be expensive, so miners should balance the costs of the rig with the rewards that can be obtained. Another factor to consider is electricity costs. If these costs become too high, they may exceed profit levels, making mining unprofitable.
In addition, mining hardware may need relatively little improvement at times, as it tends to become outdated very quickly. New models may outperform older hardware If miners lack the budget to develop their own hardware, they will often struggle to remain competitive.
#Last but not least, there are some changes at the protocol level. For example, a Bitcoin halving may impact mining profitability as it halves the rewards for mining blocks. In addition, the entire Ethereum network switched from a Proof of Work (PoW) consensus mechanism to a Proof of Stake (PoS) during September 2022, making mining unnecessary.
