Chapter 4: How the hell can a currency be mined?

The mining of a currency is a very important part of the functioning of a cryptocurrency. Mining has two functions: on the one hand, it makes it possible to check a new transaction and add it to the blockchain; on the other hand, it makes it possible to put new coins into circulation

Proof of Work (POW)

When Bitcoin was first introduced, it was possible to mine it using a simple ordinary PC. Miners then received 50 Bitcoins as a reward for checking and downloading a block on the public ledger. However, this process is no longer possible, as the computing power required to mine the cryptocurrency has increased considerably. Today, it is necessary to use special computers called “mining rigs”, capable of running certain specialized computer programs. They have to solve highly complex mathematical problems.

In the early days of cryptocurrency, only cryptography enthusiasts used their systems to mine for entertainment purposes. However, due to the enormous financial value of some cryptocurrency coins, mining has become a highly lucrative activity. Some companies have warehouses filled with computer equipment dedicated to mining. Mining consortia or pools have also become very popular: they distribute the cost of the equipment, software and huge amounts of electricity needed, as well as the rewards.

The extraction of a block requires miners to solve very complex mathematical calculations. It is intentionally difficult to achieve this. This maintains the rate at which transactions are added and prevents the system from being overwhelmed.

As an increasing number of miners with more complex mining technology join the networks, the number of blocks increases, which also increases the complexity of the mathematical algorithms that miners are required to solve. This maintains the balance of the system.

When a miner succeeds in correctly calculating the algorithm, he is rewarded with the introduction of new coins. It also receives the transaction fees paid by the persons who carry out the transactions in this block.

Since all minors receive information on new transactions simultaneously, they find themselves in competition. The first to solve the mathematical algorithms is the one who receives the reward. As blocks are created, the rewards offered to him are reduced. In May 2018, one validated block of Bitcoin represented 12.5 Bitcoin (approximately $100,000). This award will be divided by 2 in 2020, then by 2 again in 2024 and then again. Every 10 minutes or so, a Bitcoin block is created. The financial stakes are therefore high.

Mining is no longer a hobby because of the expenses involved. Mining rigs must operate continuously and this requires huge amounts of energy. Bitcoin energy consumption is becoming a problem: in May 2018, Bitcoin’s energy consumption represents that of a country like Ireland. It is not conceivable to continue this way and solutions will have to be taken by the Bitcoin community.

Proof of Stake (POS)

However, there is a less energy-intensive alternative to traditional mining. Some currencies have chosen to issue new coins in this “proof of stake” mode. Its operation is quite simple:

Each currency holder can decide to activate this proof of stake: the currency algorithm will use a node (a computer) on the network to validate a block. This node is randomly selected using a weighting based on the number of pieces you have. The more coins you have, the more likely you are to validate a node and therefore receive the reward.

Each currency has its own way of operating, some offer a more or less high annual percentage. In the coming months, Ethereum will change the way it creates parts to use a hybrid system: both proof of work and proof of stake.