Peter Kent - Cryptocurrency Mining For Dummies

So where does cryptocurrency come from? Cryptocurrency can be mined – the least common form, though the one you’re evidently most interested in based on your interest in this book — or it can be pre-mined .

To say that a cryptocurrency has been pre-mined, or is nonmineable , simply means that the cryptocurrency already exists. The blockchain is a ledger containing information about transactions. When the blockchain was first created, the ledger already contained a record of all the cryptocurrency that the founders planned for. No more will be added; it’s all there in the blockchain already.

In fact, although we hear a lot about cryptocurrency mining, the majority of cryptocurrencies (at the time of writing, more than 2,000 different flavors) are pre - mined: 74 or so of the top 100 cryptocurrencies are nonmineable, and overall, around 70 percent of all cryptocurrencies cannot be mined.

An example of a pre-mined currency is XRP, often known as Ripple, which is currently the second biggest cryptocurrency (in terms of market capitalization — that is, the value of all the cryptocurrency in circulation). XRP is stored within the RippleNet blockchain.

When the Ripple blockchain was created, 100 billion XRP were already recorded in the blockchain, although most had not been distributed. The founders of Ripple held 20 percent, and even now almost 60 percent of the currency is not in circulation.

Another example is Stellar, a payment network originally funded by the Stripe payment service, which at the time of writing was the fourth largest cryptocurrency. Stellar has a total supply of more than 100 billion lumens, 2 percent of which were assigned to Stripe for its investment.

So, no, not all cryptocurrencies can be mined (in fact, most can’t). But that’s not why you’re reading this book, now, is it?

The good news, though, is that you can mine around 600 cryptocurrencies (though you’ll never want to mine the vast majority). To decide which ones to mine, see Chapter 8.

Chapter 2

IN THIS CHAPTER

Making money with mining: transaction fees and block subsidies

Understanding how mining builds trust

Discovering how mining ensures the six characteristics of cryptocurrency

Choosing the winning miner through proof of work and proof of stake

Although not all cryptocurrencies require mining, Bitcoin and other mineable cryptocurrencies rely on miners to maintain their network. By solving computationally difficult puzzles and providing consent on the validity of transactions, miners support the blockchain network, which would otherwise collapse. For their service to the network, miners are rewarded with newly created cryptocurrencies (such as Bitcoin) and transaction fees.

When a miner sends a transaction message across the cryptocurrency network, another miner’s computer picks it up and adds the transaction to the pool of transactions waiting to be placed into a block and the blockchain ledger. (You can find the details about cryptocurrency and blockchain ledgers in Chapter 1.) In this chapter, we explore how cryptocurrencies use mining to create trust and make the cryptocurrency usable, stable, and viable.

Cryptocurrencies are decentralized — that is, no central bank, no central database, and no single, central authority manages the currency network. Conversely, the United States has the Federal Reserve in Washington, D.C., the organization that manages the U.S. dollar, the European Central Bank in Frankfurt manages the euro, and all other fiat currencies also have centralized oversight bodies. (A fiat currency is legal tender supported by governments via a central bank.)

However, cryptocurrencies don’t have a central authority; rather, the cryptocurrency community and, in particular, cryptocurrency miners and network nodes manage them. For this reason, cryptocurrencies are often referred to as trustless . Because no single party or entity controls how a cryptocurrency is issued, spent, or balanced, you don’t have to put your trust in a single authority.

Trustless is a bit of a misnomer. Trust is baked into the system. You don’t have to trust a single authority, but your trust in the system and fully auditable codebase is still essential. In fact, no form of currency can work without some form of trust or belief. (If nobody trusts the currency, then nobody will accept it or work to maintain it!)

When you compare cryptocurrency mining to gold mining, why the process is referred to as mining becomes clear. In both forms of mining, the miners put in work and are rewarded with an uncirculated asset. In gold mining, naturally occurring gold that was outside the economy is dug up and becomes part of the gold circulating within the economy. In cryptocurrency mining, work is performed, and the process ends with new cryptocurrency being created and added to the blockchain ledger. In both cases, miners, after receiving their reward — the mined gold or the newly created cryptocurrency — usually sell it to the public to recoup their operating costs and get their profit, placing the new currency into circulation.

The cryptocurrency miner’s work is different from that of a gold miner, of course, but the result is much the same: Both bring a new money supply to the market. For cryptocurrency mining, all of the work happens on a mining computer or rig connected to the cryptocurrency network — no burro riding or gap-toothed gold panners required!

In the trustless cryptocurrency world, you can still trust the cryptocurrency community and its mechanisms to ensure that the blockchain contains an accurate and immutable — unchangeable — record of cryptocurrency transactions. Cryptocurrencies are established using a set of software rules that ensure that the system can be trusted, and the mining process is part of this system that allows everyone to trust the blockchain.

Cryptocurrencies have no central bank printing new money. Instead, miners dig up new currency according to a preset coin-issue schedule and release it into circulation in a process called mining.

Cryptocurrency miners add transactions to the blockchain, but different cryptocurrencies use different mining methods, if the cryptocurrency uses mining at all. (Some cryptocurrencies don’t use mining — see Chapter 1.) Different mining and consensus methods are used to determine who creates new blocks of data and how exactly the blocks are added to the blockchain.

How you mine a particular cryptocurrency varies slightly depending on the type of cryptocurrency being mined, but the basics are still the same: Mining creates a system to build trust between parties without needing a single authority and ensures that everyone’s cryptocurrency balances are up-to-date and correct in the blockchain ledger.