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What is Mining?
What is Mining?

What is Mining?

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Mining is the process of verifying blockchain transactions. Miners contribute computing power, and miners earn a network fee along with newly minted coins.  Mining records and confirms new transactions on a blockchain, as well as hashes them to prevent nefarious activity. Miners are paid for their work but they aren’t necessarily employed by the blockchain.  In fact, they are commonly random individuals.  Miners are compensated via transaction fees and hard coded block rewards, which makes mining lucrative and in demand.  Blockchains are often designed such that people who volunteer their computer resources to complete the required validation are rewarded with new units of the crypto-asset.

The concept of mining goes against capitalistic tendencies and has been clouded by the mismanagement of the only parallel example, the banking industry.  Satoshi Nakamoto, disgruntled with the current system, incentivized miners to maintain Bitcoin’s blockchain by rewarding them with Bitcoin. Nakamoto’s incentivization created a permanent and transparent inflation strategy which motivates it’s miners to manage for a reward. 

Bitcoin is the most mature example of incentivized mining.  Mining requires a significant amount of computer power. In fact, some miners dedicate entire buildings to mining.  Miners who have less computer power typically join mining pools. Mining independently is possible, but is essentially a game of chance.  An independent miner that solves a block would receive the entire block reward of 6.25 bitcoin, while a mining pool would split the block reward.  Unlike paper currency, which can essentially be printed at the will of the government, Nakamoto set the upper limit for Bitcoin’s supply to 21 million — once the network reaches that number, no more BTC can ever exist.  Since 2016, the network has reimbursed miners for validating transactions with 12.5 BTC. This is meant to cover the costs associated with the computer equipment required to efficiently mine Bitcoin.  Within the next few days ,that number will reduce to just 6.25 BTC ($62,125), a change that will have two effects on the ecosystem: scarcity increases and earning potential for miners decreases. 

Proof of stake blockchains mine without intensive computing.  To be quite honest, proof of stake projects don’t really mine, proof of stake projects employ “validators” who stake money to earn more of the associated cryptocurrency or token. Validators lock up (Stake) money for the right to validate a chunk of blockchain interactions, and earn the network fees associated. These fees earn validators between 5-20% yearly yield on their staked value.

Mining competitively requires investing in powerful computer equipment like a GPU (graphics processing unit) or, an application-specific integrated circuit (ASIC). These range from $500 to the tens of thousands. Ethereum miners are known to buy individual graphics cards(GPUs) as a budget way to contrive mining operations.

The rise of ASICs (Application Specific Integrated Circuit), a mechanism designed to work within the PoW algorithm, has allowed for centralization.  ASICs allow implementation of digital signal processing algorithms in dedicated, fixed function logic to minimize power consumption and hardware size at ultimate levels.  Generally, each ASIC miner is constructed to mine a specific digital currency. So, a bitcoin ASIC miner can mine only bitcoin. ASICs typically consist of a fine tuned algorithm, which can be difficult to employ and will take time to perfect (what’s new).  ASICs are expensive because they apply a complicated and difficult to understand and implement service. 

Generally, mining allows a person or entity to earn cryptocurrency without paying for it with fiat or another cryptocurrency.  In terms of Bitcoin, miners receive Bitcoin as a reward verifying transactions, which generate blocks, which link to the blockchain.  Miners receive rewards and transaction fees for discovering a solution to a complex hashing puzzle; the probability of solving increases proportionally to amount of computer power attempting to solve the block.  A GPU or ASIC is required to mine crypto currency. 

Mining is one of many concepts within bitcoin that is hard to grasp.  The problems exists on a conceptual level because mining is commonly thought of in terms of gold or oil.  How can one mine something that is digital asked the baby boomer?  It is entirely unclear how mining of digital assets will evolve or what the industry will look like in say 2140, when the last Bitcoin is set to be mined.  This is especially true considering the difficulty of mining increases portionaly to the amount of bitcoin remaining and the amount of miners attempting to solve the problem.