Cryptocurrencies and blockchains
What is crypto mining? That’s the process of validating blocks on the blockchain by solving mathematical problems by the computer of anyone on the planet, even you. The miner gets back a % of the mined cryptos to be rewarded.
Cryptocurrency is a combination of two words; “Crypt” and “Currency” Crypt means hidden, vault and currency is a medium of exchange or what is commonly known, money. Cryptocurrency, therefore, is a virtual or digital currency, also called crypto. Digital currencies are protected by what is known as cryptography which is a method where a code is used to protect information and allow access to authorized users only.
Cryptocurrencies do not just exist, they live on blockchains. A blockchain is a structure of data. This data includes transactional records and security protocol that protects the user from possible hacks. Blockchains do not have a central authority that commands their operations therefore they are decentralized. Unless specified most blockchains are transparent although there are some blockchains that are private, an example is Monero XMR.
Blockchain was invented by Satoshi Nakamoto, the mysterious person or group that invented Bitcoin. Nakamoto started the blockchain when they were starting Bitcoin making it the mother of all blockchains. Coins that were created after Bitcoin are called altcoins, they are an alternative to Bitcoin.
What is crypto mining? Two different kinds of mining
Crypto mining is validating transactions and putting new coins into the blockchain. It is worth noting that not all coins can be mined, for example Ripple XRP. Mining occurs in two different forms: Proof of Work and Proof of Stake.
- Proof of Work is where miners find and solve difficult mathematical problems. Miners then get rewarded for successfully solving the problem and bringing a new block into the blockchain. Proof of Work is a competition so however solves it first gets the rewarded for the work. This algorithm requires a lot of power and may require cost validators their coins to manage.
- Proof of Stake on the other hand is a consensus that allows a node to mine depending on the number of coins the nodes holds. Proof of Stake does not need too much power to run because it’s only a given number of users who have a certain number of coins. Although validation of transactions may seem easy with Proof of Stake, a node will need 51% of all the available coins of a given cryptocurrency to validate a fraud block. This is impractical with the market capitalization of most coins.
The target block is a hashed number, a numeric value that is less than or equal to the new block to be mined. Process of mining begins with a coin base transaction where the miner sends themselves a mining reward to initiate a new block. The first step of the hash then follows where every transaction is added to the hash.
What are the rewards for miners?
Rewards for miners vary depending on the blockchain they are mining on. The most common rewards are in cryptocurrencies such as Bitcoin, Ethereum, Litecoin, etc.
The amount of the reward depends on the number of transactions validated by the miners and the difficulty of the algorithm to solve. More miners there are on the blockchain, the more the difficulty of the algorithm increases, which means that the rewards are less important.
Studies also show that the total reward amount for miners can decrease over time. For example, the number of Bitcoins that can be mined is limited to 21 million. As the number of Bitcoins mined increases, the reward for miners decreases.
What is crypto mining? To hash transactions
When every transaction is hashed they are organized into a single tree and then they are organized in pairs with the previous transactions which also get hashed. Outcome is then organized into pairs and hashed with previous transactions. Process is repeated until a top of all transactions is achieved. The top of all the transactions is what is called the root of the hash which is a representation of all previous transactions.
The new hash next to the preceding block hash and with a random number called a Nonce is placed as the block’s header. Output is produced after hashing the new hash, the previous hash and the Nonce with a few other parameters producing an identity of the nominated block.
What is crypto mining? To create blocks
Miners have to repeat hashing the header using the Nonce until a new block is produced. The protocol keeps everything balanced, it ensures the value is lower than a certain target value. It secures the hashing difficulty level for mining a block at constant and that same power required for mining remains the same. It raises when new miners join the pool and lower when some of the miners leave keeping mining time constant.
When a successful hash is found, the initial miner launches the block into the blockchain. Other nodes examine the validity of the new block and add it to their copy in the blockchain. In the case of an orphan block; when a valid block is broadcasted by two miners at the same time. Miners will hash using the block they received first until they mine a new block. The hash used receives the reward.
Why do people mine cryptocurrencies?
People mine cryptocurrencies for various reasons. Some do it to help maintain the stability of the blockchain, while others do it for the purpose of earn money in exchange for their work.
You can also earn money by renting computers for cryptocurrency mining. People who cannot afford powerful computers can rent processing power for cryptocurrency mining.
How to get started in cryptocurrency mining?
There are several steps to get started in cryptocurrency mining:
- Choose a cryptocurrency to mine : There are many different cryptocurrencies that people can mine. It is important to choose a cryptocurrency that is popular and has a high demand in the market.
- Invest in a powerful computer : To mine effectively, people need to invest in a powerful computer with a dedicated graphics card.
- Join a mining pool : Mining pools are groups of miners who work together to validate transactions on the blockchain. Joining a mining pool can increase the chances of earning cryptocurrency rewards.
- Download mining software : There are many different mining software available online. People can download and install mining software to start mining.
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