Mining 101

Funnily enough, when I first came across mining, my thought automatically goes to a character holding a pickaxe extracting cubes upon cubes of materials in a cartoon world. Yeah, it’s like Minecraft. I played many video games based on the genres of resources-based, survival, and sandbox to know that the goals are usually to search and unearth raw materials, and ultimately to build the best survival tools. However, the same concept does not apply to the world of mining cryptocurrencies.

The only reason that the public names the activity as “mining” is the fact that the most prominent cryptocurrency, bitcoin, is a limited resource (the maximum amount in circulation lies at 21 million). Accordingly, people would perceive any newly received digital coin as a digital ore as if they were unearthing gold or diamond. Hence, the first mistake is to confuse mining with the video games that you have been playing, and you obviously do not need a pickaxe.

Yes! Even though your computer does all the mining work, the task is never to drill through the entire internet or even the dark web just to search for digital coins.

Instead, mining is the same as providing “competitive bookkeeping” services to the transaction system of a cryptocurrency, or cryptocurrencies when you are dealing with more than one brand of digital coins. Essentially, the service is to “build and maintain a gigantic public ledger” that consists of all the previous transactions. Regarding processing transfers, such service ensures that the sender is not transferring money that he/she does not have. Hence, the validation process tracks each bitcoin, involved in the transactions, to its origin. If the origin of the bitcoins is proved by the miners, the miners will include the transaction into the public ledger.

Sounds simple? Thinking of hiring an accountant or auditor to do the work?

There is a reason for cryptocurrencies constantly receiving an extensive amount of hype regarding its protection against fraud, and it largely consists of “cryptography”. Before a successful miner adds an approved transfer into the public ledger, all data and information of the transaction are translated into a “hash function”. Without sufficient computing power, it is impossible to get the correct solution.

Let’s look at the complexity of “cryptography”. Take the above example. The difference of an exclamation mark gives two totally different “hashes”. In fact, the public ledger solely stores all these codes, excluding any interpretable information. For instance, there are two cups of smoothie served for two consumers and one of the key ingredients is honey. However, it is near impossible to trace the amount of honey added to each cup. Thus, reverse engineering hash functions are out of the scope.

Miners receive digital coins as the reward for verifying transactions.

          In other words, mining prevents “double spending”. As the computers do all the dirty work, there are more and more people jumping into the trend and start mining. Although no trusted third party validate transfers, if a hacker tries to remove a historical transaction in the ledger in attempts to spend the same amount of digital coin on multiple transfers, he/she must compete with all the miners spread across the globe. So yeah, even the NSA and CIA combined cannot compete with the entire planet.

There is no free lunch.

The truth is that merely a fraction of miners gets to enjoy any financial reward. As mentioned earlier, it is a public ledger, and the entire planet gets to assess the same record. Hence, mining becomes a “pure capitalistic competition”. The more sophisticated the computer power is, the higher chance there is for the owner of such computer system to provide the correct verification and add the transaction to the ledger and eventually obtain the reward. In fact, all miners are trying to confirm the same transfer at the same time. Given such difficulty, most miners are just wasting money on electricity, since individuals could never compete with huge corporations that have continuously invested millions in computer hardware.

Then why do we care about mining?

          In case you haven’t read our previous blog posts, Bitcoin is not the only available crypto coin, and mining mostly favors early adopters. When there is a vast selection of digital currencies that anyone can start mining, newcomers are better off seeking other options except Bitcoin, being the first decentralized crypto coin, because one would require an initial investment of a supercomputer just to earn a fair chance in the mining race. Thus, it is never too late to research on other digital coins to mine!

Stay tuned for the upcoming blog post regarding:

Should you become a miner?

Author:

Cheuk Lap Yeung