Crypto Academy Week 4 Homework Post for [@besticofinder] | Introduction to Cryptocurrency Mining

Its lovely to be a part of another lecture from @besticofinder. Here is an entry for the week 4 homework task:

(1) How crypto currency mining works ?
(2) What is Mining Difficulty ?
(3) What are the challenges for crypto currency miners ?

How Cryptocurrency Mining Works

Crypto-mining is a computational process of verifying transactions involving cryptocurrency and thereby earning units of the cryptocurrency as a reward. Cryptocurrency like bitcoin are added to the blockchain by mining and this keep the network active. The process of mining are done by Miners. These miners forms the nodes of the blockchain.

For cryptomining to occur miners are needed to decode the cryptographic encryption. This task involves sophisticated mathematical computation to solve the encryption.
An example of a cryptocurrency that is being mined is the bitcoin and any transaction that involves this cryptocurrency needs a miner to validate the transaction. The bitcoin was built on the blockchain technology.

The blockchain consists of chains of blocks that contains data of transactions being executed on the network. The blockchain act as a public ledger in which new transactions are entered in form of new blocks. In order to create a new block, the miner has to solve a mathematical problem which takes about 10 minutes. The solution (known as the Proof) is published to other nodes for confirmation and then the new block is added and transaction executed.

Jim Trades with John Using Bitcoin

Here is a simple illustration, Jim wish to trade bitcoin with John for goods. Jim log in into his wallet and sends a transaction request to John. This transaction is seen on the network as a pending transaction that needs to be validated. This transaction data is stacked into a new block. However, nodes (miners) on the network compete to solve a mathematical problem. The first node to solve the problem publishes an evidence known as proof to the network for validation by other nodes. This consequently gives room for the new block to be successfully added to the blockchain. The miner gets the reward for his work and John receives the bitcoins sent from Jim.

The above illustrated technique is known as Proof of Work. However there are other techniques such as Proof of Stake(POS), Delegated Proof of Stake (DPOS), Proof of Burn etc.

Mining Difficulty

Mining difficulty is the measure of how difficult it is to mine a bitcoin. That is how difficult it is to solve a cryptographic puzzle (the math problem). This measure of difficulty increases or decreases in order to maintain the time taken to create a block (in 10 mins). Moreover, with the heavy traffic of miners and the advancement in mining technology, the bitcoin network continually adjust the complexity of the problem in order to maintain the ten minutes creation time. In other words the high number of miners or the advanced mining software provides solution easily to the mathematical problem. In turn the bitcoin protocol adjust and makes the the problem more complex and sophisticated which would make mining takes more time.

Challenges of Cryptocurrency Miners

The following factors project challenges to miners:

• Computing Hardware:-

  During the early days of mining, anyone can be a miner as long as you have a computer connected to the internet. However, advanced hardwares (supercomputers) and newly developed mining softwares amplifies the computing power and thereby creating a competitive advantage in mining blocks. This shut out miners with less developed facilities as their chances in the competition is very low.

• Power cost:-

  the mining process consumes a large amount of power and in order to maintain profitability for miners, the cost of power has to be reduced. For example proof of stake is preferable to proof of work as it reduces power consumption. Thus the cryptosystem still look forward to frontiers in this aspect.

• Bitcoin Price:-

  The price of bitcoin is also another factor that poses challenge to miners. There is an amount of Cryptocurrency miners can earn per mining. However, this is only profitable to the miners if the unit of the currency is valuable enough otherwise they would be running at loss.

The crytomining has been a very significant part of the cryptosystem. Although the system is decentralized but yet the validation of transactions by miners has kept the system secured.

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Thank you
@besticofinder