WRITING ABOUT CRYPTOCURRENCY MINNING, DIFICULTY AND CHALLENGES AS WELL.
I will start this home work by defining certain terminologies which will give us a better understanding when we start explaining how cryptocurrency mining works.
A) Nodes. These are the individuals and devices that exist within the blockchain (such as your computer and the computers of other cryptocurrency miners).
B) Miners are the specific nodes whose jobs are to verify (“solve”) unconfirmed blocks in the blockchain by verifying the hashes.
C) Transactions. A transaction is an exchange of cryptocurrencies between two parties.
D) Hashes. These one-way cryptographic functions are what make it possible for nodes to verify the legitimacy of cryptocurrency mining transactions.
E) Nonces. A nonce is crypto-speak to describe a number that’s used only once. In crypto mining, the nonce gets added to the hash in each block of the blockchain and is the number that the miners are solving for.
F) Consensus algorithm. This is a protocol within blockchain that helps different notes within a distributed network come to an agreement to verify data. The first type of consensus algorithm is thought to be “proof of work,” or PoW.
G) Blocks. These are the individual sections that compromise each overall blockchain. Each block contains a list of completed transactions. Blocks, once confirmed, can’t be modified. Making changes to old blocks means that the modified block’s hash — and those of every block that’s been added to the blockchain since that original block was published — would then have to be recognized by all of the other nodes in the peer-to-peer network. Simply put, it’s virtually impossible to modify old blocks.
H) Blockchain. The blockchain itself is a series of blocks that are listed in chronological order. Because previously published blocks can’t be modified or altered after they’ve been added to the blockchain, this provides a level of transparency. After all, everyone can see the transactions.
There is no way we talk about how cryptocurrency mining works without first discussing what cryptocurrency, and Daps (Decentralized apps/ system) and blockchain are. We can only get a better picture if we know exactly what these words are, so I will take my time to explain them one after the other without making it to complex.
Cryptocurrency is a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography, rather than by a centralized authority. Going further, I will explain what a centralized and a decentralized system are and I will use our traditional bank to explain the centralized system first.
CENTRALISED STYSTEM. In our traditional banking system, there is a central authority that controls, maintains, and updates a centralized record (ledger). This implies that every transaction has to go through the central banking system, where it is recorded and verified. It is also a restricted system, where only smaller banks are allowed to connet to the centralized banking directly.
DECENTRALISED SYSTEM. Now cryptocurrency is an example of a decentralized system. In this type of system, there’s no centralized authority, or a centralized ledger like we have in the centralized system. In addition to this, cryptocurrency is also a distributed system. This means that the record (ledger) of all transactions is publicly available and stored on lots of different computers. We can rightly say that the ledger for this kind of system is known as the blockchain like I talked about previously. You can send and receive payments without going through a central bank. This is why it’s called a decentralized digital currency.
Having said that, a pertinent question arises. How can a transaction be verified before it’s added to the ledger without a central bank? Now instead of using a central bank for verification here, the decentralized system uses cryptographic algorithms to verify transactions. This makes transactions go through like the speed of lightning without hassles. Now this is where miners come in. They perform the cryptographic calculations for each transaction adds up to a lot of computing work. They use their computers to perform these cryptographic work that is required to add new transactions to the ledger. For doing this, they will be compensated with a small amount of cryptocurrency to make them happy.
So when you send money to a friend, family member or a costumer, that transaction goes through your bank.
A decentralized system on the other hand, as seen on the diagram above operates using a network of separately owned, operated and maintained devices. They lend their resources to create this decentralized network and share the responsibility of verifying transactions, updating and maintaining redundant versions of the ledger simultaneously.
In here, there’s no singular centralized that maintains a single ledger (like we have in the centralized system).
So, when we talk about distribution, we mean a synchronized ledger that’s shared across various locations by multiple participants (known as nodes) who serves as observers and verifiers of the transactions.
To understand how cryptocurrency mining works in a more technical sense, we must first understand the technologies and processes behind it. This includes understanding what blockchain is. This was briefly explained in my introduction above, so we can move on with the explanation of how crypto mining works.
Permit me to work you through the process of how mining crypto works, step by step using Bitcoin as an example.
- NODES VERIFIED TRANSACTIONS ARE LEGITIMATE.
Transactions are basis that a cryptocurrency blockchain is build upon like I explained earlier. An example is given below just to illustrate this.
Let’s say I am a crypto miner, and I have a friend called Eze who borrows N 20,000 from another of our friend Okon to buy a high teck new gaming set up. It’s a top-of-the-line computer that’s packed with the latest gaming setup accoutrements. ( Now I know everything from display and killer combo headset with mic.) To pay him back, Eze will now send Okon a partial Bitcoin unit. However, for the transaction to be complete, it needs to undergo a verification process ( I will discuss this next).
- SEPARATE TRANSACTIONS ARE ADDED TO A LIST OF OTHER TRANSACTIONS TO FORM A BLOCK.
The next step in the crypto mining process is to bundle all transactions into a list that’s then added to a new, unconfirmed block of data. Continuing with the example of the gaming system, eze’s Bitcoin payment to Okon would be considered as onesuch transaction. By adding their transaction to the blockchain ( once the verification process is complete), ‘’it prevents double spending’’ of any cryptocurrencies by keeping a permanent, public record. The record can never be manipulated or altered.
3.A HASH AND OTHER TYPES OF DATA ARE ADDED TO THE UNCONFIRMED BLOCK.
Once enough transactions are added to the block, additional info is added as well, including the header data and hash from the previous block in the chain and a new hash for the new block. What happens here is that the header of the most recent block and a nonce are combined to generate the new hash. This hash gets added to the unconfirmed block and will the need to be verified by a miner node. In this case, let’s say I am just lucky enough to be the one to solve it. I will now send a message to all the other miners on the network letting them know I have done it and asked them to verify ASAP.
- MINNERS VERIFY THE BLOCKS HASH TO ENSURE THE BLOCK IS LEGITIMATE.
In this step, other minners in the network check the veracity of the unconfirmed block by checking the hash.
But just how complex is a hash> As an example, imagine you apply a SHA-2256 hash to the plain text phrase ‘’ I love cryptocurrency mining’’ using a SHA-256 hash calculator. This means that the phrase will generate something of this nature.
“6a0aa6e5058089f590f9562b3a299326ea54dfad1add8f0a141b731580f558a7.”
This is a cipher text that can be read or understood by laymen.
- ONCE THE BLOCK IS CONFIRMED AND THE BLOCK GETS PUBLISHED IN THE BLOCKCHAIN.
On the crypto minner’s side of things, this will be the time for celebration because the proof of work ( PoW) is now complete. The PoW is the time-consuming process of solving the hash and proving to others that you have legitimately done so in a way that they can be verified.
From the user’s side of things, it basically means that Eze’s transfer of partial Bitcoin to Okon is now confirmed and will be added to the blockchain as part of the block. Of course, as the most recently confirmed block, the new block gets inserted at the end of the blockchain. This is because blockchain ledgers are chronological in nature and build upon previously published entries like I explained earlier.
In conclusion, for the ledger to stay secure from manipulation and unauthorized modifications, all transactions are encrypted using public key cryptography. For the blocks to be accepted, they must utilize a hash that the miner nodes on the blockchain can use to verify each block is genuine and unaltered.
MINING DIFFICULTY.
I will use Bitcoin to explain this process. When Bitcoin becomes more popular, the number of computers participating in its peer-to-peer network increases. Miners compete against each other for limited block rewards. With more participants and more computing power, the so-called ‘’hashpower’’ of the entire network increases accordingly.
In conclusion, mining difficulty in the Bitcoin network is adjusted automatically after 2,016 blocks have been mined in the network. An adjustment of difficulty upwards or downwards depends on the number of participants in the mining network and their combined hashpower.
Mining difficulty in the Bitcoin network is adjusted automatically after 2,016 blocks have been mined in the network. An adjustment of difficulty upwards or downwards depends on the number of participants in the mining network and their combined hashpower.
CHALLENGES CRYPTO CURRENCY MINERS FACE.
CRYPTO MINING IS RESOURCE-INTENSIVE.
Nowadays, crypto currency mining requires a lot of resources both in terms of computing power and electricity. Why so? Because crypto mining needs a lot of computing power to generate new guesses continually. If you are successful, the not only do you generate new bitcoin, but you also get to update the blockchain by adding information to the end of the ledger.CRYPTO MINING IS EXPENSIVE.
Not only do you have to worry about having enough processing power and electricity to power your operation, but you also need to keep in mind the costs associated with such a massive initiative. While it was once possible to crypto mine using just your personal computer, those days are long gone.
If you want to have a slight chance of beating other cryptocurrency minners to the punch, then you need to have the tech and processing capacity to complete at their level. This means having more devices and access to less expensive power which is needed for operation.
- THE ROI IS NO LONGER WHAT IT USED TO BE.
While it is true that some people have been able to make money by mining cryptocurrencies, the same can’t be said for others. As time goes by and more people get involved, the decreasing return on investment that crypto miners could expect to receive.
Now let’s use Bitcoin as an example, approximately every four years or over 210,000 blocks mined, Bitcoin experiences an event known as a halving. What this means is that the number of Bitcoins that people would receive as reward for every blockchain block would reduce by half. So when people first started mining Bitcoin in 2009, they received 50BTCs per block. As at the last halving, which took place on May 11,2020, that rate since reduced to 6.25 BTC per block.
Thanks @besticofinder for giving me this opportunity
God bless All.