In this article we explain what miners are for and why you have to mine in a decentralized network. Many newcomers in the world of crypto currencies think that mining can be used to create or mine crypto currencies. However, this is only partially true. Mining was developed to ensure that there is a consensus in the block chain.
Mining – Definition and explanation
Miners control the network, keep it stable and verify new transactions in the network. In short, they check that the new transactions are in order and comply with the protocol. If everything is okay, they have the ability to attach a new block containing the confirmed transactions to the block chain for all eternity.
Since the overall state in a decentralized block chain is no longer managed by centralized units, miners are needed to do this for us. So the whole thing remains decentralized. The more miners there are, the more stable a block chain network is and the less susceptible it is to a 51% attack or takeover of the block chain.
The overall state in a block chain can be, for example, who sent how many crypto currencies, to whom.
Task of the Miner
As we already know, miners keep the block chain network in an identical “overall state”. Thanks to the Miner it can be guaranteed that blocks can be attached to the same decentralized open cash book anywhere in the world.
So-called Full Nodes first accept unconfirmed transactions, filter them and then forward them to the Miners. The miners check the transactions again and then start their “work”. This consists of combining new and confirmed transactions in a block and attaching them to the block chain as the last link in a chain. For this task, the miners receive a Block Reward, which we will discuss later in this article. The task of attaching can only be done by Miners.
In this way, a chain of blocks is created block by block, from confirmed transactions that are grouped together in blocks. Hence the term block chain (block chain).
Miners take on the role of the network policeman
Before creating a block chain, certain rules are always defined. The miners are responsible for ensuring that no one in the network violates them, for example by making a duplicate transaction. All transactions must always comply with the protocol that has been previously defined.
Miners must check that all transactions are correct and that nobody violates the protocol. As a reward there is the Block Reward.
Mining process explained in 13 steps
- Transactions are made by users like you and me.
- Transactions are unconfirmed & unverified, so are still a pending transfer.
- Correct transactions that comply with the protocol are summarized in one block.
- Factors like Previous Hash, Timestamp, Merkle Root etc. are combined.
- Now the miners search for a random number, the so-called Nonce.
- A Miner finds the random number.
- Thanks to the nonce a new hash is created, which starts with a few zeros at the beginning.
- All factors are now combined in one block, a single new hash with all important factors is created.
- The miner gives the new hash to the other miners.
- These check in a very short time whether the new hash and thus the new block is valid.
- If the block is approved, the new block is added to the block chain by everyone.
- The successful miner, who found the nonce and thus did the work, gets the blockreward and the transaction fees from the block.
The other miners are already looking for a new nonce for a new block. There is no point in still looking for the old nonce because there is no blockreward for it anymore.
This process is repeated every 10 minutes, so block by block a string of blocks is created – the birth of a block chain. Every 10 minutes its size grows.
Why are transactions with higher transaction fees faster?
Miners prefer transactions with higher transaction fees because they earn more. For this reason such transactions are processed faster.
Consensus Algorithm – Explanation
What are Consensus Algorithms? Consensus is needed to verify and synchronize the overall state of a block chain without a central third party, network-wide. Such algorithms can be considered as coordinators in a decentralized network. They keep the status of the entire network the same. Thus, the network participants in the block chain network can determine that the state of a block chain is identical everywhere in the world.
PoW – Proof of Work
With this algorithm, which is used for example in the Bitcoin block chain, miners in the network have to invest a lot of computing power to keep the block chain on an identical version.
Since the Proof of Work algorithm requires a lot of computing power, it is extremely difficult for a miner to prove that a block is correct and complies with the rules of the block chain network. However, once the proof is provided, other miners can easily confirm and verify it.
With this algorithm, miners must find a random number (nonce) as proof of work to obtain a valid hash value. This hash proves to the other network members of a block chain that the miner who found the nonce has actually done some work. With this effort, a miner can confirm that his created block complies with the rules of the block chain.
The block with the correct hash value is now taken over by all other participants in the network. The miner who has generated the correct hash value receives the block forward including transaction fees for the block (block remuneration).
The Proof of Work algorithm requires computing power. Strong computers, servers or mining rigs calculate complicated computational tasks.
PoS – Proof of Stake
With the Proof of Stake algorithm, miners no longer have to invest computing power in the network, as is the case with the PoW algorithm. Instead, with PoS it depends on how high the sum of crypto currencies or tokens that are staked is.
The probability of finding a block increases with the factor how many coins you have from the block chain network. The more coins or tokens you have, the more likely you are to find a block and receive the corresponding transaction fee.
To get stakes, you have to “lock away” a certain number of the respective coin. These are of course not lost and can be removed at any time. The staked coins or tokens have to be online all the time in an appropriate software so that you can receive block rewards or transaction fees.
With the Proof of Stake algorithm, no more computing power is needed. All you have to do to “mine” is to lock away your crypto currencies in order to stake them.
Further Consensus Algorithms
DPOS – Delegated Proof of Stake
PoA – Proof of Activity
PoC – Proof of Capacity
PoB – Proof of Burn
PoET – Proof of Elapsed Time
What is the Mining Difficulty?
The Difficulty is the difficulty level in a block chain network to find a new block. It adapts to the overall computing power of a network and thus ensures that a block is always found in a constant time.
The more miners in a block chain network, the higher the total computing power. The Difficulty in the block chain protocol is regularly adjusted to ensure that more blocks cannot be found in a shorter time due to the increase in computing power. The time interval of the adjustment depends on the respective crypto currency.
For Bitcoin the Difficulty is adjusted after 2016 blocks (approx. two weeks) in such a way that it takes about 10 minutes to solve a block. If the total computing power of the Bitcoin network has increased after two weeks, the Difficulty is increased so that a block can still be found in 10 minutes. If the computing power decreases, the Mining Difficulty becomes easier so that the miners do not need too long to find a block.
What is a blockreward?
A blockreward (block payment) is a reward for the computing power provided. A miner receives it when he finds a valid block and attaches it to the existing block chain. With Bitcoin this would be 12.5 BTC every 10 minutes. In addition to the block rewards, a Miner also receives the transaction fees for the respective transactions that have been verified and confirmed in the new block. We need the miners to keep a block chain network decentralized. They do the work and are rewarded with a reward.
What happens when there are no more block rewards?
Many people ask themselves what exactly would happen if, for example, all the Bitcoins that exist have already been distributed by the block rewards. Then there would be no more block rewards, which would mean that the miners would have no incentive to mine. No one would want to give their computing power to the network anymore. Here we explain what happens when there are no more block rewards. Without blockmasters there is no reason to mine? You thought wrong!
If this were to happen, the newly verified blocks would still include all the transaction fees for that particular transaction. So miners would continue to earn money on the transaction fees.
Maybe some miners would then mine other crypto currencies by withdrawing their computing power from the Bitcoin network and providing it to another block chain network. This would reduce the overall processing power in the network and the difficulty would automatically adjust.
What does a block consist of?
A block consists of the following components: TX Root, Merkle Root, Time Stamp, Previous Hash etc.
- Complete Hash – Is searched by miners
- Previous Hash – Hash of the previous block
- Timestamp – Timestamp
- Merkle Root – All transactions combined in a single hash
- Nonce – Random Number
With this mining hardware you can mine Bitcoin and crypto currencies. Depending on the computing power and algorithm of a digital currency the blockreward can be different. You can also mine crypto currencies with your own computer. However, we know from our own experience that there is not much money to be made from this.
- CPU (processor)
- HDD (hard disk drive)
- Asic Miner
- GPU (graphics card)
CPU mining used to be standard, today it is hardly profitable.
Mining is also possible with a laptop, provided a good CPU or GPU is installed. With this mining hardware you can do mining. Of course you need a CPU or GPU. Even with hard disks you can mine. But this is not so effective. ASIC miners were only built to mine crypto currencies very profitably. Graphic cards can be very well suited for some crypto currencies.
You want to do mining? Then you should first of all do some research to get an overview of the costs you will have to face. These include, for example, the cost of electricity and the purchase price of the hardware.
Why do you do mining?
Many newcomers to the world of crypto currencies and block chain believe that you can make a lot of money with mining because it creates crypto currencies. But that is not true. Miners receive rewards in the form of a block rewards, but the income is regulated in such a way that you can usually only make a small profit.
Belief in the project
Most miners dig in a block chain network because they believe in either the crypto currency or the block chain project. They support them with their computing power for a decentralized future.
Imagine having your own Bitcoins in your wallet. To increase the value of the BTC, a stable block chain network would be a prerequisite. Because you believe in the technology and want its value and the stability of the network to increase, you put computing power into it.
The profit oriented
There are experts who understand the basics of mining and who hope to make a profit from the fluctuations of the Difficulty. Because the Difficulty is adjusted after a certain period of time, it is possible to achieve high profits in the short term.
Some unsuspecting newcomers are lured with the excuse of earning a lot of crypto currency every day by buying computing power. Of course, this sounds very tempting, which is why many inexperienced people invest in mining assets first, instead of building up a portfolio of stable and proven coins.
If you are new to the crypto world, you should preferably start with other topics than running after the best mining pools. Once you have mastered the basics, you will have a much better overview of the cryptoversum. With the basics you will get a better overview and in the end you will have more of it than making a measly amount of daily mining profit.