So, what’s all this fuzz about bitcoin mining?

Mining is actually one of the aspects why people feel like Bitcoin is a scam. You fire up your computer, download a computer program and let it run of hours on end for years and that will earn you bitcoins. So why isn’t everyone doing it as Bitcoin is worth $6700 ?

This is something we will discuss in this article and I will take you around how it all works, the phrases and make you understand. It actually isn’t that complicated.

What is Cryptomining and why is it called mining?

Satoshi Nakamoto (Real Identity Unknown) created the Bitcoin protocol in 2008 and launched the network in 2009. He did NOT invent the blockchain technology! His goal was to create a decentralized monetary system and Bitcoin was the outcome of the whole thing.

So, in this analogy I will equal Bitcoin to Gold to give you a better understanding as to how this all works and why it’s called Bitcoin mining.

So I have a question for you: How do you get Gold in the real world? Your answer will most probably be that you go into a mine and use a pick to extract gold. https://en.wikipedia.org/wiki/Gold_mining
Satoshi wanted to create something similar for his Bitcoin and therefore created a virtual goldmine.

He also created a pick to extract gold from the mine and that is the software you install on your computer to solve puzzles/algoritms, these puzzles are itterated by a computer and solved, when you solve Satoshi’s puzzles you are rewarded by getting pieces of bitcoin. Fairly simple, right?

When you first find a goldmine it is rather easy to find gold, yes? But as you break out the gold you will get less and less and it will increase in difficulty to find gold, correct?

Because Gold is limited, Satoshi also created a limited supply of Bitcoins.

This is exactly how Bitcoin works, there is a limited supply of Bitcoin, 21 million was created and as it is broken from it’s virtual goldmine it get’s increasingly harder to find new Bitcoin. Around 17 million Bitcoins have been mined already so there are about 4 million left, it is estimated that these will take until around 2045 for everything to be found. After that the mine is empty, no new Bitcoins can be created, this is how cryptocurrency mostly works and that is also why it has had such a influx in value. What will happen when no one can break any more Bitcoins

The system still needs to work and the miners will more or less be there to verify the transactions in the system.

This is why people call it virtual gold, it is limited in supply and it has to be mined to be found.

Decentralization vs Centralization and how does that comply with mining?

So, what is decentralization and why does people want it ?

When something is centralized like most structures in society everything is controlled from an entity, everyone connects to the same server or instance and everything can be tracked. For example if you connect to your internet banking account, your bank is the supplier and the centralized spot. If someone attacks your bank and takes it down you won’t be able to access your account. A decentralized system is spread out and you can take out any instance but everything continues to work anyhow.

Ripple is a centralized system and the reason many banks, western union, moneygram etc. are using their solution. They can print more coins/tokens whenever they want to supply the banks and institution they supply.

Decentralization is when something works outside a system and where value can be distributed directly without any inteference of any middlemen. You can call craigslist trading and selling of second hand goods or even flee markets as decentralization. No one sees or knows about the transaction it is peer to peer, as soon as it is reported into the tax offices that’s where it gets centralized. Bitcoin is Decentralized.

Understood?

So, how does all this comply with Bitcoin mining for example?

Satoshi had to think,

“How can I create a system that will live by itself, not be able to be tampered with and still have the server capacity necessary?!”

This is where he found blockchain, I will get into info about blockchain later on. For now it was his solution.

So basically what the miners are for, is the decentralization. People and companies get rewarded with Bitcoin when mining and their computers (the puzzlesolving) is actually a gateway to use their computers resources to also verify transaction within the system. As more people enter into Bitcoin and transactions increase in the system the more need for computing power. So you are both paid for finding blocks but also for verifying transactions

So it is a self fullfilling ecosystem that was created for it to be fully decentralized, it does not need any governments, no organisations to feed money into it. The blockchain is fed by the miners and because of people’s speculative nature, Bitcoin increases in value and because people user their servers for mining it will most probably continue to rise! This is the true value of Bitcoin, all the millions of computers out there who is feeding the network.

Technology around mining

ASIC SHA-256 VS GPU mining

There are different types of mining, most people know of ASIC mining which is the one used for Bitcoin, that is basically when a CPU mines for a cryptocurrency. These are usually called SHA-256 (Secure Hash Algorithm / 256 bit). This is used for Bitcoin and Litecoin.

There is also GPU mining which Ethereum is using for their mining and any other Altcoin that is mineable.

Any smart miner knows about both and utilizes both to hedge, at any given time the profitability could switch and that’s where it’s smart to have a system to adapt. Maybe turn some miners off and on and create a system to always try to maximize profits!

ASIC consumes a lot of energy because the CPU:s are working almost at full load at all times. You also get excessive heat production from this and this is the reason why environmentalists are flaming bitcoin as “bad” for the climate. There is also a necessity for massive cooling.

The Pro’s with ASIC mining is that it takes up very limited space, it basically only needs fans, power supply a motherboard and a CPU-chip. It has quite high return of investment and ginormous hashrates (necessary for mining). The Con’s are that they are noisy, they have really bad resale value, can’t be used for much more than mining.

The Pro’s with GPU mining is that it is relatively easy to set up, if you have a computer with a gaming graphic card you can just fire up a program and off you go. It is not as good as a ASIC miner when it comes to hashpower, thus it is slower, it needs all the components that a computer needs and a beefy powersupply.

Currently it’s hard to get profitability mining Bitcoin, the electric cost will most probably be higher than what you make but as technology evolves companies are finding better more energy efficient ways to mine Bitcoins and other cryptocurrencies.

The above statement about hard profitability is for regular people, when you are doing enterprise mining however there are still big possibilities, usually depending on what deal you get for bulk electricity and mining space you can make your money back in a year or so and then everything is basically profit. If you look at the chart below you can see where it is cheapest to mine a bitcoin. One of the better countries is Sweden because of infrastructure , electricity and the fact that Sweden almost only use sustainable energy from water, wind and solar plants to keep the rates low. Just because countries such as Bangladesh or Venezuela has low costs in the chart below does not mean that it will work well to mine in these countries, power shortages and other political problems and corruption will be a big obstacle.

Proof of Work (PoW) vs Proof of Stake (PoS) in mining

Proof of Work is the aspect of mining:

• Work is done to solve a algoritm / puzzle
• A reward is given for solving the puzzle
• Miners compete to be the first to solve the puzzle

Proof of Stake is more like a lottery:

• Is defined be the wealth you have in a random way based on wealth or age (the stake)
• There is no block reward, the miners take the transaction fee
• Receives the currency much more effectively as the system does not have to always “run”

While both Bitcoin and Ethereum uses Proof of Work we are seeing Ethereum looking at potentially hardforking moving over to PoS with the release of Casper, this will make the Ethereum blockchain less clogged as so many coins work inside the chain, more on this later with dApps and hardforks, it’s for another article. PoW takes up a lot of energy whereas PoS could lower that amount significantly, many state that it could be thousands of percent lower in energy consumption.

What will be leading in the future remains to be seen but this is all interesting how mining was created to use computers from anyone, from you, me, your friends, family even grandmother to distribute the new coins of the world.

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