Mining: How are Cryptocurrency Coins Created?
You might have heard of the gaining popularity of cryptocurrency which has aroused your investor senses. In fact, at the time of this writing, a single Bitcoin is worth NZD $5,194! (18/12/2018). So, are people making this much money from “mining” coins (digital cash) out of thin air? How are Cryptocurrency Coins Created? Could you do it as well?
Well, let me explain.
What is a miner?
Miners are an essential part of the bitcoin world, and they play a role that “rewards” them for completing their tasks, also known as “Proof-Of-Work or Proof-Of-Stake”. Whenever there is a Bitcoin transaction, there needs to be a party to confirm that this took place. Some cryptocurrencies do not use mining, such as IOTA, where users validate previous transactions when they make a transaction themselves. (Learn more about IOTA's Tangle here)
How is Crypto Different to Fiat?
In the Fiat, or "normal" money, world, this task is undertaken by the banks. The fiat system works because you “trust” the banks to do it right. However, in the Cryptocurrency world, no trust is required as miners perform this task by having their hardware solve a complex puzzle (for Bitcoin, this is the SHA 256 Hash Algorithm) that requires a specific amount of time and power to complete.
Mining is costly as it takes a tremendous amount of energy to run the generators. Take a look at this mining calculator for more information.
Solving this algorithm is a critical part of the process, as it ensures that no one can just manipulate the procedure. Bitcoin transactions and miners must invest their hardware, time and electricity to solving these problems (to get a 64 digit number). Therefore, a mining fee exists and is paid when transacting in Bitcoin to pay these miners.
Once this puzzle is solved, a new “block” is added to the blockchain and spread out throughout the network (remember, it’s a decentralized network). In simple terms, it means that the transaction has now been confirmed and can no longer be changed or reversed. For completing this task, Bitcoin miners are rewarded some Bitcoin of their own (this is the only way to create Bitcoins, set at a hard cap of approximately 21 million total).
But here’s the catch – as more miners enter, the difficulty of solving this problem increases to push down the rate at which Bitcoin can be mined. The Bitcoin network is also set up in a way where it tries to keep mining at a rate of 2016 blocks per (roughly) two weeks.
Basically, the cryptographic problem gets harder and harder as more blocks are mined. Because of this, it is a lot more difficult today to mine Bitcoin, than it was in 2009 when Satoshi Nakamoto conceived Bitcoin. Currently, Bitcoin mining is in the state where you will need specialized, dedicated hardware called ASICs to make it profitable.
Creating Other Coins
Many other coins can be mined such as Litecoin, Ethereum, EOS, Monero, Dogecoins, Dash and many more. As mentioned, there are also coins that are not mined e.g. IOTA, which works on the users validating the previous transaction. IOTA utilized a newly designed trinary hash function called Curl, which is quantum immune (Winternitz signatures). Due to IOTA not being mined this means that there are no transaction fees unlike minable coins like Bitcoin.
So can Your Home Desktop Mine Bitcoin for You?
Unfortunately, an average run-of-the-mill desktop will not be powerful enough (anymore) to be able to solve these puzzles efficiently. It is getting more difficult to mine Bitcoin, so you will need dedicated hardware devoted solely to solving these puzzles. (ASICs, as previously mentioned)
But wait... There is still a way you can invest with Bitcoin, Ethereum, XRP and many other coins! There is no need to mess around with hardware and mining; with Bitprime we make it easy for you to buy cryptocurrencies in New Zealand. If you would like to get started with us you will need to apply for a verified account.
Disclaimer: The above references an opinion and is for informational purposes only. Do not take this as personalised financial or investment advice. The opinions expressed by the author do not represent the opinion of BitPrime.
Images courtesy of Shutterstock unless stated otherwise.
Last updated: 18/12/2018