The subject of this article will be mining. Considering the fact that the philosophy of the blockchain is based on the decentralization of data, you will understand that there is no central bank to create money. But then, how is cryptocurrencies created and on what basis is it based on trust? This is where the miners come into play, they are the biggest contributors on the proper functioning of the blockchain.
Mining, a rather strange choice to name such activity. You probably think of the men digging the ground with pickaxes to find Bitcoins. The reality is quite different. Indeed, in a mining farm, you will only find thousands of computers connected to servers that are constantly performing complex calculations in order to find the famous and coveted Bitcoins. As you know, Bitcoin is a digital coin considered a precious material, as it is the case with Gold. It is not for nothing that we call Bitcoin “digital gold” limited to 21 million units. In addition, the number of bitcoins in circulation is less than 17 million and their creation rate continues to decrease over time as the difficulty of extracting bitcoin increases.
How does mining work?
Mining is the use of computing power to validate Bitcoin network transactions around the world. Mining is an integral and inseparable part of blockchain technology because it would not work without miners. Miners are those who agree to provide the power necessary to validate and secure peer-to-peer transactions. When transactions are validated, they are recorded in a distributed register, I mean the blockchain. In return, miners are rewarded with bitcoins to cover transaction costs. Where it becomes interesting is that it is also possible to realize added value depending on the value of the bitcoin. A block is represented by a sequence of transactions taking place within a given time period. By putting them in a sequence, the blockchain is created. When a block is created, miners review it and convert it into what is called an H. It is a series of numbers and letters that will be attached to the block and thus integrated into the blockchain. The H is calculated using the H of the previous block, thus linking the block chain. There is strong competition between miners since they have to solve a complex cryptographic problem and if there are many of them, it will then be more difficult to win the reward, namely Bitcoin. In addition, only one miner at a time can add a block to the blockchain. This ensures that there is only one valid version of the blockchain that everyone agrees with.
What is the verification process?
What is the verification process It is simple, when a miner thinks he has found the solution to the cryptographic problem, all the other miners will check a second time if it is correct. They accept the winner, forget the block they were working on, and will devote themselves to resolving the next blocks in a frantic race. It is this process that promises blockchain technology its immutability, making it impossible to go back in time to change previous blocks, unless you hack into more than 51% of the network. Each cryptocurrencie has a blockchain and a process for adding new blocks. Of course, for each of these systems, all the cryptocurrencies will be redistributed to miners.
How is a miner paid?
The miner will be paid according to the number of H produced thanks to his equipment. The reasoning is as follow: the more power you have, the more hash you will produce by validating transactions, and the more money you will earn in the form of cryptocurrencies. This is roughly how it works but the rules work as previously explained.
Can we make money with mining?
Mining is an exciting activity, but miners do not risk creating cryptocurrencies just for fun. Without them, the blockchain would never have survived. Indeed, the provision of the equipment required to mine bitcoin has a real cost, but the reward encourages miners to continue to check transactions, thus ensuring the durability of the bitcoin and blockchain. You probably know it, but YES! it is possible to earn money and even a lot of money thanks to mining.
But not so fast! In reality, the system is more complex than that and is based on many factors to be taken into consideration.
As is the case with all businesses, it is not possible to go in one direction and easy money does not exist. This observation is the most radical in the world of cryptocurrencies. Indeed, the volatility is such that cryptocurrencies can see their value increase by 30% over the course of a day, as they can lose as much, to the detriment of the most vulnerable investors. Investing in cryptocurrencies is clearly a bet on time and their future. That’s why, if you believe in digital currencies, you will need to be patient and adopt a long-term investment strategy.
The creation of cryptocurrencies being controlled and fixed upstream, as is the case with Bitcoin with its twenty-one million units. Its speed of creation is halved every 4 years. Several years ago, 50 bitcoins were distributed to each validated block every 10 minutes. Then we switched to a distribution of 25 bitcoins. I let you imagine the astronomical amount of money that could be won by miners by storing the bitcoins so hard earned after all these years. From now on and until 2020, the current reward is 12.5 bitcoins.
The difficulty of mining
Now the story is very different. Indeed, as the Bitcoin network is saturated with miners, they simply share 12.5 bitcoins among themselves. Today, the network is becoming more complex and calculations are increasing, increasing the energy resources needed to solve cryptographic problems. As you have understood, we are talking about difficulty here. The more miners and bitcoins in circulation, the more difficult it will be to earn money by mining cryptocurrencies.
Who can become a miner?
They must invest a lot of money in powerful computers and especially electricity because mining is a relatively energy-intensive activity, the bill is very likely to discourage a large majority of people, but everyone can become a miner with some training. Indeed, it is necessary to have at least a knowledge of the fundamental basics of mining. However, I recommend that you learn as much as possible on the subject. In addition there are 2 types of currencies in mining. On the one hand there are the lousy “proof of work” cryptocurrencies and the pre-mined “proof of stake” cryptocurrencies. These mechanisms are completely separate. As a result, the investment conditions are not the same. That is why it is necessary to train yourself in order to understand the subtleties of each of the mechanisms.
What equipment is needed to mine?
To mine cryptocurrencies and participate in the PoW “Proof of Work” you will need to invest in powerful IT components. This does not mean that you should buy the most expensive ones, but that you should focus on certain computer parts depending on the type of cryptocurrencies you would like to mine. Indeed, the bitcoin will for example use the power of the processor while another cryptocurrencies such as the Ethereum will mainly use the graphics card. Not everyone’s desktop computer can make it, this is why many specialized companies sell machines designed only to mine specific cryptocurrencies that are ready to operate once connected. These machines are what we call, RIG or ASIC. The second machine being the most powerful, but unfortunately the most expensive. The RIG proves to be a good alternative. However, this type of equipment is expensive if you buy it assembled and ready to use. The price/quality ratio is often low and a commission is sometimes charged on profits. However, you will save a lot of money if you buy the parts and assemble the machine yourself. In addition, it is easy to find many tutorials to set up a rig on the web.
Depending on the type of mining you would like to do, it is not necessary to invest in the same things:
PoW: a mining software to ensure the correct configuration of your installation and to track your earnings. you will need to install a client software and join a mining pool. Finally, you will need to create a portfolio to store your cryptomoney.
PoS: To become a masternode and participate in the “proof of stake” consensus, the installation of a server is necessary. However, the costs remain reasonable compared to the installation of a miner.
Cloud mining is the virtual purchase of IT equipment from a service provider for a certain period of time, usually between one and several years. This service provider is often a mining farm, selling part of the power of their servers and computer. This allows the user to limit the risk while investing in equipment knowing that they quickly become obsolete with technological progress.
Beware of scams
Please be careful, however, because as in any business generating large profits, there are many fraudulent schemes such as Ponzi schemes from experienced scammers that are rampant to steal money from the most vulnerable investors, how do scammers proceed? In reality it is simple, first of all the mining farms in question do not exist but the companies make people believe that their activities consists in mining cryptocurrencies. In a second step, the scammers redistribute the profits from customers and mining activities to the largest investors. This inspires confidence and encourages more investment or sponsorship from newcomers. Finally, these crooks and the money disappear without leaving a trace.
The keys to detecting scams
I strongly recommend that you inquire about the web by asking yourself the following questions:
- Is the domain name of the site registered with the contact details of a real person?
- Are the company’s executives residing in countries sensitive to fraud?
- Does the company provide evidence of the existence of the minefarm when we request it?
- Is the company’s reputation good on the web?
- Are the company’s promotions regarding investment returns abusive and encourage too much investment or bring in new customers?
The CIA’s word
As you have understood, the profitability of the declining crypto industry does not encourage investors to try cloud mining and it is rather a wise decision because there are way too many scams and the reputation of the biggest references is also to be questioned. Concerning mining, the profitability too dependent on the price of cryptocurrencies makes the sustainability of individual miners too uncertain. This is why it is strongly advised for anyone hoping to embark on the mining adventure to train in order to choose the most profitable cryptocurrencies. In the world of cryptography, the risk of losing all your funds is always present. On the other hand, the progressive increase in difficulty may impact the profitability of mining. However, it should be noted that, when things are done correctly, the implementation of a masternode to participate in the consensus of the “proof of stake” remains the least risky method. It will provide an immediate return on investment which will allow you to earn money even if the currency rate falls, without the slightest initial investment cost to bear.
I hope that this article has been informative and that it has helped you to better understand what mining is and how it can be used in the crypto world. Feel free to share it with those around you if it can help them. Finally, please comment and share your experience with us. In the meantime, I’ll see you in a future article!
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