ELI5: What is Mining? What is Blockchain? What are Pools?

The video card.

Oddly absent from many computers just a decade ago, these marvelous cards stand poised to usher in a new dawn in the field of cryptocurrency.

GPU mining. Proof of work. The blockchain itself.... all certainly among the many buzz words you've encountered. But what do they all mean?

If you're reading this, you're either a beginner raring to go with a video card, a grizzled miner, or somewhere in between. Either way, you've been bitten by the mining bug and are raring to go! But before we embark, a quick sidebar:

What exactly does it mean to "mine cryptocurrency?"

In order to delve deep into these industrial mines, we first need to talk about cryptocurrencies themselves and a fascinating concept known as the blockchain. The vocabulary explained here will empower us with the tools necessary to sift through potentially confusing mining concepts.

A blockchain is an ever growing record of a series of events. For comparison, think of a list you might make. One item leads to the next, and then after that item comes the next one, and so on. Unlike your list, limited as it is by the amount of space on your paper, blockchains tend to keep growing indefinitely. Notice though, the definition I gave of a blockchain didn't mention cryptocurrency at all. It's kept very general, opting to simply say a series of "events."

Blockchains have their uses beyond cryptocurrency, and you'll no doubt see more and more of that word as businesses adopt them for logistics, etc. For the purposes of this article, we can concisely define a blockchain's purpose for cryptocurrencies:

The "some events" of cryptocurrency blockchains are the record of transactions taking place.

Think about it as your bank record, only on a global and publicly available scale. Whenever a transaction takes place, information pertaining to that transaction is recorded. This blockchain consists of "blocks," and each recorded transaction will be placed in a certain block depending on the time it was processed. The series (or chain) of blocks, computed and recorded one after another, is known as a blockchain. The size of the blocks, and how many transactions can fit into a block before the next block is started, are arbitrarily determined by each individual cryptocurrency.

Don't worry if that's a lot to take in right now. Let's do a quick recap:

Cryptocurrency: Your favorite coins, from Bitcoin all the way down to lesser known ones!

Blockchains: Public, expanding lists of any arbitrary event. In the context of cryptocurrency, those events are the transactions.

Blocks: Individual units that are "chained" together to make up a blockchain. These house the transactions.

Record Keeping: Blockchains provide a "back-end" that allow the transactions of coins to take place. It does this by mimicking the function of a bank. Records are created, stored, and verified. Senders and receivers are noted, the transactions occur, and timestamps are collected.

End recap.

The above about record keeping begs a question purposefully omitted until now. That grand question is:

"BY WHO???????????"

Records are created, stored and verified ....... by who!?
The functionality of a bank is mimicked ....... by who!?

Drum roll please.

Enter cryptocurrency miners. Stage Left.

The miners! The glorious miners! Thousands of them all coming together to make the blockchain gears turn! These miners work toward "solving" a block. Every block has a unique id known as a hash. Think of these hashes as a really long password that makes each block unique.

When a video card is mining, it makes rapid guesses at these ids much as a hacker might try a lot of combinations to crack a password. When a block is found, great! The transactions on that given block are recorded and there's even a block reward that compensates the miners for the effort involved in putting their video cards to work.

Why are video cards front and center when it comes to mining? More so than CPUs, video cards specialize in these sort of highly repetitive but otherwise low intensity tasks because of the way they are constructed. Side note: If you've ever heard of Asic miners, know that those are like video cards, but built specifically to be even more specialized for mining. They trade the ability to do normal things video cards can do (render games for example) for extra hashing power.

Why set up such a scenario under which people from all over the world use their own hardware to enable these transactions? Isn't it a whole lot of effort to make blockchains dependent on potentially random people? What's the upside?

Welcome to decentralization.

A central tenet of many cryptocurrencies is the idea of "decentralization." Moving away from relying on central entities like banks to power transactions was not just a side effect, it was a goal from the start. With decentralization, the hope is to make independently functioning currencies that transcend natural barriers of the real world. Spanning across entities and borders alike, currency built in this way favors self sustainability.

So now you know what miners do and how they facilitate decentralization. They lend the computing power of their video cards or asic miners from all over the world in order to "find" blocks. It is directly because these miners are all independent entities that decentralization can take place. No one entity has control or can stop a blockchain, because where one entity may stop mining, another will take its place.

There's a potential problem though. What if an entity amasses a huge amount of hardware? How can small miners continue to make an impact? Furthermore, on a personal level, how can that small miner keep their motivation to continue mining?

Even given the fast speeds at which video cards can make guesses, small miners with only a few video cards may not be able to find a block. This is because when large miners enter the space, blockchains must adapt by increasing the difficulty to ensure large miners don't gobble up all the block rewards. Consequently, it may take weeks, months, or years for small miners to find even one block.

In order to avoid only being paid after years (if at all), small to medium sized miners often come together to form pools.

In a pool system, many miners connect to a group to form a "pool" of miners. When anyone in a pool finds a block, the pool receives the reward for the block and (oftentimes minus a fee) distributes that reward to all participants. But how do pools allocate these rewards? After all, it makes sense that a miner with six video cards would have more of a chance at finding a block than a person with one. How is this accounted for?

Though each pool's payment scheme is different, I will outline one of the more common ones.

Every miner on a pool sends what are known as shares while their hardware is mining. These shares comprise what is known as a "proof of work" style of mining. The shares represent a guarantee to the pool that a person is indeed mining, and they also let a pool know how much hashing power a miner is contributing. Though each pool is different, a very popular payment scheme involves distributing rewards in proportion to each person's hashing power whenever a block is found.

So now you know what mining is, how mining is used to solve blockchains and keep them decentralized, and the usefulness of pools to ensure a somewhat consistent payout schedule.

Where do you go from here?

If you're interested in mining a certain coin, use a search engine to find the most popular pools for that coin. Follow the instructions listed on that specific pool's website to download a mining program and connect to the pool. You'll then be all set to make your mark on the blockchain world.

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