Cryptocurrencies Have Emerged as a Popular Form of Payment and Investment
Cryptocurrencies have emerged as a popular form of payment and investment, especially for online shopping. The reason for the growing popularity of cryptocurrency is centered around the unique advantages it has over the fiat currencies. Digital currencies are more secure since they are based on the blockchain technology, which is immutable. Transactions involving cryptocurrency are also faster, cheaper, and more secure.
There are two ways of owning a cryptocurrency. The first and the most popular way is buying the coins using fiat currency. You can exchange dollars for bitcoin. The second method is through cryptocurrency mining.
Cryptocurrency mining is the process of verifying the transaction between users and adding the transaction into the blockchain public ledger. This process is also responsible for introducing new coins into the existing circulating supply. Cryptocurrency mining allows blockchain to work as a peer-to-peer decentralized network. Not all cryptocurrencies are mineable. Bitcoin is one of the popular mineable cryptocurrency. Bitcoin mining is based on a consensus called proof of works.
How do cryptocurrencies differ from fiat currencies?
Many people in many economies tend to trust printed currencies, such as the U.S. dollar. The reason for this trust is that fiat currencies are backed by a central bank – Federal Reserve in the case of the U.S dollar. These central authorities regulate the production of new money. They also prosecute the use of counterfeit currency. The central authority also regulates digital payments that use fiat currencies. For example, when you make an online purchase using your debit or credit card, a payment processing company such as Visa, Pioneer, or Mastercard processes the transaction. These companies verify that the transaction is legitimate and record the transaction history.
Bitcoin, on the other hand, is not backed by any central authority. Instead, it is backed by millions of computers across the world (“nodes”). Nodes perform the same function as the Federal reserve or Mastercard, but with slight differences. This network of computers store information about prior transactions and help in verifying authenticity. Unlike central authorities, bitcoin nodes are spread across the world and record transaction data in the public list for anyone to access.
What is Cryptocurrency Mining?
When you send or receive bitcoin, we call that a “transaction.” In-store or online store’s transactions are documented by point-of-sale systems, banks, and physical receipts. Bitcoin miners achieve the same thing but not through these transactions. These miners clump transactions together in “blocks” and add them to a public record – “blockchain.” These nodes maintain records of the blocks for future verification.
When any transaction occurs, miners add blocks to the existing blockchain. When a new block of a transaction is added to the blockchain, part of the miners’ task is to ensure the accuracy of the transactions. This happens in seconds. These miners ensure that bitcoin is not duplicated. Counterfeiting is a common issue when dealing with printed currency. However, once you spend say $50 at a store, that bill is in the hands of the clerk. With digital currency, however, it is a different story.
It is easy to duplicate digital information, so with bitcoin and other altcoins, there is a possibility that a spender can make a copy of their cryptocurrencies and send it to another party while retaining the original. On the analogy of the printed currency, let us say someone tried to duplicate their $50 bill to spend both the original and the counterfeit in a clothing store. If the clerk suspects that the customer could be having duplicated money, all they would have to do is look at the bill’s serial number. If the numbers were identical, then they would know that the money is duplicated. This analogy is similar to what bitcoin miners do. They verify new transactions to ensure there is no double-spending. Since there are many nodes, someone will have to take over 51% of the mining power in the network to successfully double-spend. As the bitcoin grows, the possibility of double-spending continues to diminish and the cost to achieve such an act becomes practically impossible.
Once a miner manages to verify 1MB (megabyte) worth of bitcoin transactions – a “block,” the miner qualifies for a reward worth a given quantity of bitcoin. In case more than one miner verifies the transaction, only the first person to verify will be awarded the bitcoin. You might verify a transaction and still end up not getting the bitcoin for it. Therefore, for successful proof of work, you must meet two conditions:
- You must verify 1MB worth of transaction; this can be one transaction or hundreds of them, depending on the associated data.
- You must be the first miner to arrive at the right answer to a numeric problem.
Mining and Cryptocurrency circulation
Apart from supporting the ecosystem and earning the miners cryptocurrency, the mining process also serves an important purpose: it is the only way to introduce new cryptocurrency onto the circulation. It is as if miners are “minting” currencies. Their rewards are new cryptocurrencies, not the ones in circulation.
Satoshi Nakamoto mined the genesis block of bitcoin on January 3, 2009 bringing to existence the bitcoin network. This block had a reward of 50 bitcoin. Since then, the bitcoin reward has been cut to half after every four years, a process called bitcoin Halvening. By November 2009, 10 years after its inception, the number of bitcoin in circulation had grown to 18 million. According to the bitcoin protocol, there will eventually come a time when bitcoin mining ends. The total number of bitcoin at this point will be capped at 21 million. Since the number of bitcoin mined is continuously reducing overtime, the final bitcoin will be circulated in the year 2140.
Mining bitcoin can also give you a “voting” right when changes are proposed in the cryptocurrency network protocol. Successful miners influence the decision-making process for their cryptocurrency networks.
At the beginning of bitcoin’s history, individuals may use a regular at-home computer to compete for blocks. However, currently, the situation has changed. The difficulty of mining bitcoin changes over time, and today it is more difficult than before. To ensure the seamless functioning of the blockchain and the ability to process and verify transactions, the network is designed such that one block is produced every 10 minutes. However, if over a million miners are competing to solve the hash problem, they are likely to reach the solution faster than if only 10 miners were working on the same problem. To solve this problem, Bitcoin is designed to evaluate and adjust the difficulty of mining roughly every two weeks. When more computers are working to find the solution, the difficulty level of mining increases.
Therefore, for you to mine competitively today, you must invest heavily on powerful computer equipment such as GPU (graphic processing unit), or ASIC (an application-specific integrated circuit, which can cost up to tens of thousands of dollars.
Coin Mining Pools
Mining rewards are given to the miner who first gets the solution to the puzzle. Therefore, the probability of a single miner getting the price is equal to the portion of the total number of miners participating in the process. This probability will be very small if we consider over one million miners. To go about this challenge, miners with small chances of finding the next block forms a pool. Mining pools are run by third parties who coordinate groups of members. The participants work together and share the payout among themselves. Such miners can get a steady flow of bitcoin beginning the day they activate their membership with a mining pool.
Bitcoin mining is an essential activity in any cryptocurrency ecosystem. It helps in sustaining the cryptocurrency network by regulating the introduction of new coins onto the circulation. It also helps in verifying transactions hence transparency in cryptocurrency transactions. Additionally, it is a good source of digital coins. However, the mining process has become too competitive that you must invest appropriately in the mining equipment to stand a chance of getting a price.