Peter Kent - Cryptocurrency Mining For Dummies

We imagine that several divisions of the Byzantine army are camped outside an enemy city, each division commanded by its own general. The generals can communicate with one another only by messenger. After observing the enemy, they must decide upon a common plan of action. However, some of the generals may be traitors, trying to prevent the loyal generals from reaching agreement. The generals must have an algorithm to guarantee that

A. All loyal generals decide upon the same plan of action… .

B. A small number of traitors cannot cause the loyal generals to adopt a bad plan.

Search online for “The Byzantine Generals Problem” if you’re interested in seeing the original paper.

That’s the problem that cryptocurrency consensus algorithms, as they’re known, are trying to solve: how the generals (the computer nodes) come up with consensus (all agree on the same plan of action — or transaction ledger), and avoid being led astray by a small number of traitors (faulty equipment and hackers).

To have a chance at the mining reward, miners must set up their mining rigs (the computer equipment) and run that cryptocurrency’s associated mining software. Depending on how many resources the miner is committing, they will have a proportional chance of being the lucky miner who gets to create and chain the latest block; the more resources employed, the higher the chance of winning the reward. Each block has a predetermined amount of payment, which is rewarded to the victorious miner for their hard work to spend as they wish.

So how is the winning miner chosen? That depends. In most cases, one of two basic methods is used:

Proof of work: Under this method, the miner has to carry out a task, and the first miner to complete the task adds the latest block to the blockchain and wins the block reward, the block subsidy, and transaction fees. Bitcoin and other cryptocurrencies, such as ether (for now; it plans to switch to proof of stake at some point), Bitcoin Cash, Litecoin, and Dogecoin, use proof of work.

Proof of stake: In this system, the software is going to choose one of the cryptocurrency nodes to add the latest block; to be in the running, nodes must have a stake, generally meaning that they must own a certain amount of the cryptocurrency. The cryptocurrency network chooses the miner who will add the next block to the chain based on a combination of random choice and amount of stake — for example, with some cryptocurrencies, the more cryptocurrency owned and the longer it has been owned, the more likely the miner is to be chosen. (It’s like owning lottery tickets: the more you own, the more likely you are to win.) With other cryptocurrencies, the choice is made sequentially, one by one, from a queue of preselected miners.

When Bitcoin first started, anyone with a simple desktop computer was able to mine. The would-be miner simply downloaded the Bitcoin mining software, installed it, and let the BTC roll in! As time went on, though, competition increased. Faster and more powerful computers were built and used for mining. Eventually, specialized processing chips called Application Specific Integrated Circuits (ASICs) were developed. An ASIC, as the name implies, is a computer chip designed for a specific purpose, such as displaying high-resolution graphics quickly, running a smartphone, or carrying out a particular form of computation. Specific ASICs have been designed to be highly efficient at the forms of computation required for cryptocurrency mining — for example, for Bitcoin mining. Such a chip can be 1,000 times more efficient at Bitcoin mining than the chip in your PC, so in today’s Bitcoin mining environment, it’s go ASIC or go home!

For high-difficulty cryptocurrencies, such as Bitcoin, the ideal mining environment requires the following conditions.

Low hardware costs: Those mining rigs aren’t free.

Low temperatures: Lower temperatures make cooling your mining rigs easier.

Low electricity costs: Mining rigs can use a lot of power.

Fast, reliable Internet connections: You need to be communicating with the cryptocurrency network rapidly with minimal downtime because you’re in competition with other miners.

Fear not, though! With many different copies and mimicry of Bitcoin running rampant, Bitcoin is no longer the only game in town, and you can find lots of alternative mining choices, with varying levels of required computing power. Today, some of the most profitable cryptocurrencies to mine are lesser known and can be mined using off-the-shelf computer hardware due to less stringent difficulty levels that are associated with lower popularity and adoption.

An ASIC is, technically speaking, an application specific integrated circuit : an incredibly specialized computer chip that is good at doing one operation very efficiently. However, you’ll likely hear cryptocurrency people refer to the specialized mining box they’ve purchased as an ASIC, or an ASIC box . An ASIC is only good for a specific mining algorithm. For example, if you’ve got an ASIC built to mine Bitcoin, which uses the SHA-256 algorithm, you’re not going to be mining Litecoin with it because that would require an ASIC built for the Scrypt algorithm.

Historically, during the years 2013 to 2020, a large portion of global cryptocurrency mining was claimed to take place in China, at perhaps three times the rate of the next-closest nation (the United States). A combination of cheap electricity and easy access to cheap computer components for building mining rigs gave China an edge that Chinese miners have leveraged and maintained, even with their government’s apparent disapproval of cryptocurrencies. Recently, China has gone as far as to outright ban the trading and mining of Bitcoin and other cryptocurrencies, but the fact that the network hardly noticed a disruption during this debacle is a testament to how resilient and difficult to shut down distributed cryptocurrency systems such as Bitcoin are.

A cryptocurrency has value because a large number of people collectively believe that it does. But why do they believe cryptocurrency has value? The answer is trust. (For more on trust, see the earlier section, “ Making Cryptocurrency Trustworthy.”) A holder of Bitcoin can trust that their Bitcoin will be in their wallet a day from now or 10 years from now. If they want to research how the system works, they can audit the code base to understand the system on a deeper level to see how trust is maintained. However, if they do not have the skillset or the computer science knowledge to audit code, they can choose to trust that other people, more knowledgeable than them, understand and monitor the system; they can trust the overall blockchain community that is managing the particular cryptocurrency.

Without the mining functionality underpinning the distributed peer-to-peer cryptocurrency system, this collective trust (based on the proof of collective work towards the chain) would not exist. (How the pre-mined cryptocurrencies or other weak-consensus mechanisms manage to exist is another story that we’re not discussing in this book; we’re focusing on mined cryptocurrencies, of course.)

Mining makes sure that your balances won’t change without your authorization. It incentivizes everyone to behave correctly and punishes those who don’t. It creates a digital form of value transfer that can be trusted by each individual user as an equal peer in the network because every part of the system is aligned for one purpose: to provide a secure way to create, verify, and transfer ownership of digitally scarce cryptographic units.