Cryptocurrency Mining Explained
Cryptocurrency mining is one of the most regularly used approaches
of validating transactions that have been executed over a blockchain
network. Not only does blockchain work to protect transaction data through encryption,
as well as store this data in a decentralized manner (i.e., on hard drives and
servers all over the world) so as to keep a single entity from gaining control
of a network, but also the primary goal is to ensure that the same crypto token
isn't spent twice. In effect, "mining" is one means of making sure
that cryptocurrency transactions are accurate and true, such that they can
never be compromised in the future.
Cryptocurrency mining itself refers to a type of
validation model known as "proof-of-work" (PoW). There are two common
validation types, and we'll look at the other, known as proof-of-stake, in a
moment.
In the PoW model -- which bitcoin, Ethereum, Bitcoin Cash, and
Litecoin use, to name a few -- individuals, groups, or businesses compete with
one another with high-powered computers to be the first to solve complex
mathematical equations that are essentially part of the encryption mechanism.
These equations correspond to a group of transactions, which is known as a
block. The first individual, group, or business that solves these transactions,
and in the process validates the accuracy of these transactions within a block,
receives a "block reward." A block reward is paid out as digital
tokens of the currency that's being validated.
As an example, the current block reward for
bitcoin is 12.5 tokens. That means whoever is the first to correctly solve
equations for a block is paid 12.5 tokens. With bitcoin near $9,500 per coin,
that works out to a nearly $119,000 haul.
There are two major concerns attached to the PoW model. First, it's
an extremely
electricity-intensive practice. To mine virtual currencies, massive mining centres
with graphics processing units and/or ASIC (application-specific integrated
circuit) chips are set up to handle this validation and processing. The
electricity costs, depending on where an operation is located, can be enormous.
It could also, in theory, be a drain on local or national electric grids,
depending on how large digital networks and mining farms become.
The other issue is that the PoW model has a
security vulnerability, at least for smaller digital currencies. Any individual
or group that can gain control of 51% of a network computing power could
essentially hold that network and digital currency hostage. Networks the size
of bitcoin, Ethereum, and Litecoin
have next to nothing to worry about. However, newly issued coins with fewer
participants could be susceptible.
Though cryptocurrency mining might often be
lumped in as one big free-for-all, there are differences in the equipment being
used to validate transactions. For bitcoin, miners need to use highly
specialized and expensive ASIC chips because of the difficulty in validating
bitcoin transactions. Meanwhile, most other virtual currencies allow miners to
use some variation of graphics processing units from the likes
of NVIDIA
or Advanced
Micro Devices to proof
transactions. However, the difficulty in this mining can still vary from one
cryptocurrency to the next.
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