Mining for beginners

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What is mining

The process of the emergence of new bitcoins is one of the most important aspects of the cryptocurrency industry. Why is it called mining?

Many people are used to the fact that “digital” and “virtual” are worthless. After all, files can simply be copied and used. It was Bitcoin that became the first technology that can break this stereotype not only for ordinary people, but also for the most staunch supporters of the free distribution of software and content.

In Bitcoin, “copy protection” is conceptually integrated and getting around it is much more difficult than cracking the program’s protection. No matter how much you copy a wallet or block database, you will receive a copy of the same bitcoins that can be spent only once.
Despite the fact that the client code and the Bitcoin protocol are completely open, creating new coins is a complex and expensive process. You cannot generate more bitcoins than planned by the creator of the technology. And in order to get new coins, significant investments are needed in equipment, facilities, cooling and electricity. That is why Bitcoin is called “digital gold” and is depicted in the form of gold coins.

The word ‘mining’ comes from the English ‘mining’, which means ‘mining’ and came into use precisely from the analogy with gold mining. The more devices in the network that are engaged in mining, the better the Bitcoin network is protected from attacks. The owners or operators of such devices are called miners. Also often called a “miner’ is the computing device itself, which is necessary for computing on the Bitcoin network.

Each new block includes a cryptographic signature formed on the basis of the previous one. So the blocks interlock with each other, forming a ‘chain of blocks’, ‘blockchain’ (blockchain). A chain of blocks can branch, but in the end, the blockchain branch that most miners work on receives confirmation. This is how network self-regulation is implemented.

Mining is the process of computing the cryptographic signature of a block. A block in a Bitcoin network is an array of data that contains information about transactions that entered the network after the previous block was created (in about the last 10 minutes). Bitcoin uses SHA256, a widely used Internet hash algorithm. The network member who provided the calculation of the cryptographic signature of the block receives a reward in Bitcoin. At the same time, in order to receive a “gold bar” in the form of a precious “generating transaction”, he needs to shovel tons of waste rock – not suitable for blocking hashes.

Thanks to a mathematical theorem in the field of cryptography called Proof-of-Work (PoW), the calculation of a block depends on a programmed parameter such as difficulty. The complexity of calculations in the Bitcoin network changes every 2016 blocks (about 2 weeks at 10 minutes per block) and is set depending on the average time for which all blocks were found after the previous recount.

But complexity is not the most important obstacle to wealth. Every four years, block reward is halved. At the start of the system in 2009, miners received 50 BTC for each block created, and now the reward is 25 BTC. The next reward reduction is expected in the first half of 2017. The exact date cannot be calculated, as it depends on the dynamics of changes in mining complexity.

 Why Bitcoin needs miners

Mining is the basis of the integrity and reliability of the Bitcoin system or any other cryptocurrency. The work of miners provides all the main functions of the network:

  • Confirmation of transactions (transactions);
  • Protecting the network from false information (fake transactions and blocks);
  • Protection of the Bitcoin network from various types of attacks;
  • Support for decentralization of the Bitcoin network.

A transaction between two participants in the Bitcoin network must be confirmed by participation in the block. If the miner who created the block accepted it and included it in the block, the coins contained in the transaction become available for further use. An attacker who tries to feed the network a fake transaction will be discarded at the stage of block formation.

Shove the network a whole block? To do this, you need to have a signature formed on the basis of the previous block. If there is no signature, then it must be calculated – which means that the whole series of calculations that were needed for the previous previous block should be repeated, and so on, right up to the very first block created on January 3, 2009. That is, in order to roughly crack the network and establish its own orders in it, you need to re-recount the entire blockchain.

It is absurdly a lot of work – in fact, it is easier for an attacker not to recount the entire amount of calculations in the Bitcoin network for the sake of just one block – but to integrate his computing power into an honest work.

Branch a block chain? It is possible, but such a branch is doomed to remain alone, orphaned, if not supported by its ever-increasing computing power, greater than the total capacity of all “honest” miners, which also requires huge costs and is devoid of practical sense.

Having invested only a few hundred million dollars in equipment, you can get a capacity of 51% or more of the computing capabilities of the Bitcoin network. This attack is called “51% attack”. But in this case, the triumph will be, rather, a Pyrrhic victory. An attacker can only “freeze” transactions on the network or arbitrarily change payments from his own wallet, which will not bring much wealth.

Decentralization, that is, independence from a single management center, is one of the key advantages of Bitcoin over traditional currencies, and it is provided by miners who are dispersed around the world. Disabling part of the computing power will not stop transactions on the network – for this you need to disable all miners to a single one.

The concentration of capacities in the hands of large pools and data centers poses a certain threat to decentralization. But mining is spreading wider and now there is no longer one pool that could receive more than 50% of the network. And data centers are scattered across several continents – from Norway and Greenland to Australia.

Mining Blitz History

The first signatures of the blocks in the presence of free time and lack of competition could be counted even by hand, with a standard pencil on paper. In 2009, a programmable calculator was quite enough for block calculations.

Of course, in practice, no one did this, and mining was carried out by enthusiasts on CPUs – processors of ordinary home computers. The era of calculations on processors was quite long – almost two years. When the miners launched a program that uses a central processor to calculate the block signature, Bitcoin cost no more than a few cents and then no one thought about super-profits.

In 2011, a program was developed for mining on the GPU (graphics processor graphics card). He handles these calculations much better, since top-end video cards have at their disposal from tens to hundreds of small shader processors, each of which can calculate hashes separately. Thus, it became possible to “parallelize” the calculations and speed them up by several orders of magnitude.

There were computers with several video cards called rig (oil rig), and then whole farms with dozens and hundreds of cards that were exclusively engaged in computing for the Bitcoin network. It was then that the so-called ‘pools’ appeared – sites for collective mining, and single, or ‘solo-mining’, useful for decentralizing the network, became risky and impractical. This era lasted another two years. The next step was the use of FPGA modules, and then the development of specialized ASIC chips that can only deal with mining, but much faster and more economical than any video card.

With the advent of ASIC, mining has irreversibly changed and the ‘hash race’ has begun, which continues to this day. Since the beginning of 2013, manufacturers of mining equipment have accelerated the march all the way to the development of microelectronics – from 130 nm Avalon I to 16 nm chips from Bitmain and Bitfury, and even more advanced microcircuits are under development.

What and how to mine

Easy Money

Bitcoin mining profitability is falling in the same progression as the complexity of computing is growing. Therefore, mining income can now be obtained only by having very cheap electricity, plus a huge number of computing devices equipped with the most advanced chips and cooling systems. At the Bits.media forum, amateur miners offer a variety of industrial and home-made devices for those who want to do mining at home, and several manufacturers offer their latest developments. It is difficult to talk about the profitability of this lesson, since it has long been balanced around zero and depends on the slightest movements of the course and complexity.

Even more doubtful is the so-called ‘cloud mining’, which involves the rental of computing power for calculations in the ‘cloud’, or rather – in the data center of the service operator. In most cases, you pay for electricity and depreciation of equipment, in addition, all other risks fall on you. Cloud mining services that do not charge for electricity often turn out to be financial pyramids.

Nevertheless, having studied the market well, you can find quite advantageous offers for home mining that can bring in income comparable to the salary of the average office employee.

If you want to mine Bitcoin on an industrial scale, you will need a former military base or a tunnel in the Arctic, equipped with metal doors a meter thick and intelligent condensing cooling systems that serve hundreds of thousands of boards with millions of chips. This is how one of the leading manufacturers of miners and the owner of a large cloud service, KnCMiner, describes its data centers. So you can at least keep up with your competitors.

Earn Bitcoin mining without big investments? This time has passed several years ago. Now, it is possible to profit from mining using processors and video cards only on alternative cryptocurrencies, that is, forks or altcoins.

Alternatives

After the advent of ASIC miners, numerous forks began to use devices that Bitcoin no longer needed. One of the most common alternative hashing algorithms – Scrypt – has long remained a refuge for video card farm owners. But in 2014, ASIC chips appeared for him. By this time, a whole ‘zoo’ of new algorithms arrived – Scrypt-N, Scrypt-Jane, X11, X13, X15, Cryptonote, Groestl, Quark and others. Many altcoins are now quite profitable to mine on PC processors or video cards.

There are digital currencies that use another theorem, it is called “proof of storage”, (Proof-of-Stake, PoS). Unlike the Proof-of-Work, which uses the Bitcoin network, PoS-based currencies do not require ever-increasing computing power. For the functioning of the blockchain, they only need wallets programs that are constantly running on users’ computers, and mining occurs due to the duration of the coin storage. Some forks are various hybrids of PoW and PoS technologies.

There are more exotic options. For example, a new type of mining is gaining popularity, in which cryptocurrency (Burst and analogues) is accrued for using space on a hard disk or other medium. This technology is called Proof-of-Capacity (PoC). Storage media are now booming and this business also has prospects. Such decentralized storages can be useful, for example, for a cheap distributed hosting of sites or large arrays of not very valuable data – such as collections of images, photos, music or video.

 The future of mining

When creating new, faster chips, technologies such as optronics, photonics, superconductivity and quantum computing will be used. Economically, Bitcoin mining is most justified in Iceland, where you can get energy from geothermal sources, and nature itself provides cooling near the Arctic Circle. Maybe there will be mining farms in the Sahara and Tibet, where the utilization of solar energy will be used for calculations and cooling. In the long run, the coast of the Arctic Ocean and Antarctica will become a good region for mining. Energy for calculations there can be obtained at the expense of tidal power plants by cooling the chips with outside air.

And perhaps in a few years more economical types of mining, such as Proof-of-stake and Proof-of-Capacity, will prevail or new ones will be invented. Then huge farms devouring megawatts of electricity will be a thing of the past. But the very idea of ​​decentralized financial systems has already earned trust and will develop regardless of how their reliability is ensured.

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