The cryptocurrency mining process is covered in a misty cloud and sometimes even the people who are supposed to know how it works show deliberately limited knowledge. There is no mining and no gold to mine for – it is just a contest with quite predictable outcome.
The role of the miner
As mentioned in my previous post, cryptocurrencies rely on blockchain to store all their transactions in so-called blocks. These blocks are generated each X minutes, with X depending on the coin’s algorithms. When transactions are sent to the blockchain network, they are not confirmed until a “winning” block containing them is generated and accepted by all the participant nodes.
All the nodes participating in the blockchain are “miners”. Their purpose is to receive the pending transactions and to try to build a new “winning” block with them. What is a winning block? Well, each miner has X minutes (same X from previous paragraph) to play around with some values from the new block’s headers and calculate hashes on it. The hash with the most leading zeros in the entire network wins! So basically a Bitcoin miner keeps calculating SHA256(SHA256(block_header)) trying to variate some values from the header to get a hash with more winning chances. And once a winner for the round is decided, a new competition starts again for the next block.
And this is it. There is no advanced cryptography and no real life problem solving processing. Just a bunch of computers trying to generate as many hashes as they can in the race for the winning one. Whoever tells you that there is not enough computing power for mining all the coins is lying.
How Bitcoins are generated
I’ve heard many times that Bitcoins are decrypted by the miners during their advanced processing operations. That is a lie. When a new block is generated, a standard and predictable amount of Bitcoins is awarded to the winning miner (check here). This amount is lowering over time at a controlled rate, as the supply of bitcoin is meant to be limited. At the moment, the current winner miner reward is 12.5 BTC, but as times goes the reward lowers.
Mining for Bitcoin
When a miner wins the contest for the next block, it receives a nice 12.5 BTC reward, which equals around 37.000 EUR at today’s exchange rate. Of course such a potential earning looks very interesting. This is why there are many people who invest consistent resources in mining, hoping to be rewarded with valuable coins.
Now remember one thing – Bitcoin mining is a contest of hashes and every single hash has the same chance to win, no matter which device generated it (GPU, CPU or ASICs). This is why a hash generated on the cheapest CPU has the same chances as a hash generated by latest ASIC. However, specialised hardware units can generate many more hashes per second, thus increasing vastly the chances for winning. But remember that buying the latest hardware for mining does not guarantee you will become rich, it just increases your chances. Also keep in mind that more people buying advanced mining hardware means that more hashes will be generated thus lowering the overall winning chance of any hash. And this is something that hardware producers don’t want to tell you.
For more details, I recommend reading our community blog and some great online resources:
- Multichain’s Rational Take on Cryptocurrencies -https://www.multichain.com/blog/2017/07/rational-take-cryptocurrencies/
- Bitcoin.it – https://en.bitcoin.it/wiki/Block_hashing_algorithm
- Coindesk.com – https://www.coindesk.com/bitcoin-hash-functions-explained/
Article available on Linkedin.