Golden
LoginSign Up
Cryptocurrency mining

Cryptocurrency mining

Cryptocurrency mining is the process by which transactions are validated and new coins are minted in a decentralized cryptocurrency network.

The process of creating new coins in a cryptocurrency network is referred to as "mining" because it is analogous to a digital version of the process by which gold is extracted from the earth and added to circulation.

In a decentralized blockchain network, miners are needed to validate transactions and preserve the integrity of the distributed digital ledger. Mining rewards are used as economic incentives to encourage people to participate in mining and to help secure the decentralized network. These rewards come in the form of transaction fees paid by users when they transfer funds as well as block rewards, which are transactions that send newly created coins to the cryptocurrency wallet of the miner.

The process of cryptocurrency mining can vary greatly in how it's implemented from both a software and hardware perspective.

Cryptocurrency Mining Incentives

The different software implementations amount to different methods of incentivizing miners to be honest by making it profitable to mine according to the network consensus rules, and at the same time making it cost prohibitive to attempt an attack that breaks the network consensus rules. In other words, the goal is to ensure that the rational participants in the network act in their own best interest by only validating legitimate transactions and by casting out (i.e. ignoring and disconnecting from) dishonest miners. Legitimate transactions are those in which the sender in the transaction has enough funds in their cryptocurrency wallet to cover the amount they are sending.

Cryptographic hash functions and public key cryptography are critical technologies used in tandem in order to enforce the network rules and maintain the integrity of the blockchain without requiring users to trust the miners.

Types of Cryptocurrency Mining Consensus Mechanisms

Some examples of different types of mining implementations are:

The original cryptocurrency, Bitcoin, uses a proof-of-work consensus mechanism based on the SHA-256 hashing algorithm.

At present, Ethereum is also using PoW. However, there is a planned switch to proof-of-stake through an upcoming Casper implementation planned for 2019 or 2020.

Proof-of-activity is used by two prominent projects, Decred and Espers.

Types of Hardware Used to Mine Cryptocurrencies

The different types of hardware involved in cryptocurrency mining vary depending on the specific network architecture of the cryptocurrency in question.

Some networks, such as Bitcoin, are mined almost exclusively with specialized hardware called ASICs (Application Specific Integrated Circuit). Attempting to mine Bitcoin with any hardware that isn't specially designed for the task will most likely not be profitable.

Other networks, such as Vertcoin, are intended to be ASIC-resistant, meaning that they can be mined profitably without specialized hardware. However, full ASIC resistance is only theoretical. In reality, cryptocurrencies that intend to be ASIC-resistant may have to change their mining algorithm one or more times in order to make ASICs developed for it obsolete.

The other types of hardware that have been most commonly used to mine cryptocurrencies are CPUs and GPUs, with GPUs typically being more effective than CPUs. In fact, cryptocurrency mining at one point resulted in sharp increases in demand for GPU chips, which subsequently caused a short supply and increase in prices from major chip manufacturers such as AMD and Nvidia.

Timeline

People

Name
Role
Related Golden topics

Further reading

Title
Author
Link
Type

Bitcoin: A Peer-to-Peer Electronic Cash System

Satoshi Nakamoto

PDF

The Evolution of Bitcoin Hardware

Michael Bedford Taylor

PDF

Documentaries, videos and podcasts

Title
Date
Link

"How Bitcoin Mining Works?" - Andreas Antonopoulos

Princeton University Cryptocurrency Course - Bitcoin Mining

What is Bitcoin Mining?

Companies

Company
CEO
Location
Products/Services

Bitfury

Valery Vavilov

Amsterdam, Netherlands

Hardware Manufacturing and Software Development

Jihan Wu

Beijing, China

Hardware Manufacturing and Cryptocurrency Mining

Marco Streng

Virgin Islands

Cloud Mining

References