HOMEWORK TASK 4
INSTITUTION: STEEMIT CRYPTO ACADEMY
COURSE: Introduction to Cryptocurrency Mining
CRYPTO PROFESSOR: BESTICOFINDER
HOMEWORK TASK: You need to do your own research and create an article discussing following topics,
(1) How crypto currency mining works ?
(2) What is Mining Difficulty ?
(3) What are the challenges for cryptocurrency miners ?
Just like every other thing in existence, cryptocurrencies have to be created. They don't grow on the ground, they don't fall as rain or form under the earth's crust. These digital currencies are rather produced by intentional actions. One of the ways cryptocurrencies can be produced is called mining. This is not the only method of creating cryptocurrencies as Tether's treasury mints/prints USDT.
The importance of creating cryptocurrencies cannot be overemphasized. Without these currencies being created, they can't be in circulation. The creation of cryptocurrencies and their method of disbursement plays a vital role in keeping cryptocurrency projects decentralized. This post explains this in detail.
WHAT IS CRYPTOCURRENCY MINING
Cryptocurrency mining is one of the ways cryptocurrencies can be produced. It involves verifying transactions made on the blockchain, adding the verified transactions to a block, and adding a completed block to the blockchain.
For cryptocurrencies that employ the mining method for creating their currencies, when a block is completed, cryptocurrencies and produced as rewards for completing the block, and are given to the person (or people) who completed the block.
IMPORTANCE OF CRYPTOCURRENCY MINING
Mining activity serves a number of purposes, from running the blockchain to decentralizing it. Let's take a look at some of its importance.
RUNS THE BLOCKCHAIN
Mining keeps the blockchain active as without verifications and adding blocks to the chain, there can be no transactions and the blockchain becomes non-functional.
CREATION OF CRYPTOCURRENCY
Another purpose is to bring cryptocurrency into circulation. Mining is how such cryptocurrencies that employ the mining method are brought into circulation. Take, for instance, every bitcoin available today was first gotten by a miner who decided to sell/exchange it.
Also, the verification done by the miners keeps the blockchain secure from fraudulent transactions. Verification ensures that the transaction is genuine while the blocks are time-stamped during verification to prevent double-spending.
Another purpose served by mining is ensuring the decentralization of the cryptocurrency project. Since the miners verify the transactions, there is no need for a central authority to verify, confirm, and process transactions. This keeps the decentralization of the blockchain intact.
HOW CRYPTO MINING WORKS
Let's consider bitcoin mining as an example. Whenever a transaction is made, it is broadcasted to the nodes on the bitcoin network for verification. The miner nodes begins to collect these transactions and arrange them into a new block. Each miner node adds a transaction to the new block they're working on where bitcoins is sent to their address. Often times, this is the first transaction in the block.
Each of these transactions is hashed and the hashes are paired and hashed again. the pairing and hashing continue until it's just two hashes left. They are then paired and the final hash is gotten. This is called a hash tree or Merkle tree and the final has is referred to as the root hash. This root hash represents all the other hashes that was used to generate it.
The root hash, the hash of the last completed block, and the nonce is put into the block header which is then hashed. The hash produced is referred to as the block hash.
For the newly mined block to be valid, the block hash is checked with a target value. The block hash must be less than this target value. This target value is often adjusted by the blockchain's protocol to keep the number of blocks produced constant. This target value is what is known as hashing difficulty target.
Once the newly mined block is confirmed valid, it is added to the chain and the miner who hashed it is rewarded with the bitcoins created from the completion of that block.
WHAT IS MINING DIFFICULTY
In the last section, I mentioned that the root hash (which represents all the hashes of the transactions in the block), the hash of the previous block, and the nonce is added into the block header and hashed to get the has of the current block. This hash is only valid if it is less than a certain target value. This value is known as the hashing difficulty target.
The target value is adjusted from time to time by the blockchain's protocol to ensure that the time taken to mine a given block remains constant.
Mining difficulty is a measure of jow difficult it is to arrive at a block hash value below the hashing difficulty target value.
So if more miners get involved in mining, the target value is altered and the mining difficulty increases so that more blocks won't be produced in less time. The reverse is the case if miners leave the network, the target value is altered again and the mining difficulty is reduced so that it doesn't take so long to create a block.
Simply put, the mining difficulty is a measurement of how difficult it is to create a valid block (ie. a block whose hash is less than the current target value).
This explains why it took little computational resources to mine bitcoin in 2009 but lots of heavy-duty power-consuming expensive computation resources to mine bitcoin today.
CHALLENGES FACING CRYPTOCURRENCY MINERS
Mining doesn't come without challenges. From computing power to price volatility, miners have a lot to contend with. Below are some of the challenges.
Computer power required to create a block is extremely much. This is as a result of the heavy equipment that are now employed in mining. This can pose a significant challenge considering the fact that some regions of the world have limited electric power supply. Miners in these regions will have to look for alternatives which will most likely incur so much cost.
WINNER TAKES ALL
Not all the miner nodes are rewarded when the block is finally created but a lot of them put in their resources to try and create that block. So what if miners spend a lot of resources mining and for a long period of time are only nearly able to but never able to create a new block? What if a miner isn't always the first to finish solving the computation and getting the reward?
The answer is that they would have invest and labored for nothing. This is enough to discourage them from mining. Considering the number of people involved in cryptocurrency mining, mining without reward is possible and considering the resource mining demands, mining without rewards is simply discouraging.
This may not be the case for every cryptocurrency but some are still deflationary. A deflationary cryptocurrency is a cryptocurrency that has a fixed supply and the regular amount supplied reduces after some time till the total supply is reached. A good instance is bitcoin's halving where after ~4 years, the amount of BTC rewarded for each complete block reduces by half.
Now, for all the mining troubles, the reward gets to reduce at some point? And even reduces again and again and again? For bitcoin, when the total supply is reached, the block reward will then be only transaction fees. If only the price of BTC could get so high by then. But then, that's the next problem...
So the miner is not even sure what the price will be, they can only hope that it keeps rising. Well, what if it goes south? What if it doesn't turn out as we all anticipate, it means that the rewards gotten per block reduces in value. For all the troubles and cost of mining and for all the reduction in rewards, the issue of price instability is something that is still challenging for miners.
Let this be my contribution for now. Thanks for reading.