What is Blockchain Mining?

Ever since the dawn of man, businesses and transactions have been in existence. This means exchanging goods for goods or other services. As time progressed, people created a form of currency. This was mostly to create a standard means of exchange for all. These currencies have been in terms of silver coins, gold coins, and copper coins and in more recent history, paper currency.

Image Source

However, another type of currency was created eight years ago to be the replacement of all these other currencies; the future of money; Bitcoin.

What is Bitcoin?

In a nutshell, Bitcoin is a form of decentralized online payment currency developed in 2009. This form of currency is open source meaning anyone can make changes to the code of the software, but the changes have to be reviewed first by Gavin Andresen who is the currency’s lead developer. One of the most attractive things about this currency is that it is completely anonymous and doesn’t need one party to go out of their way to trust each other. That means that someone can receive payments and send them without having to reveal their identity. As such, many have called it the most secure currency to date.

The currency is 100% digital and cannot be printed like the euros and the dollars. What’s more, no one person or organization controls the Bitcoins. Due to the decentralized nature, the control goes to everyone in the system. As previously stated, this form of currency cannot be printed. As such, the creation of more coins requires a process called “mining” to take place.

What is Blockchain mining?

Before we get into the meat of things, there are a few terms that will frequently be used in this article, and it would be prudent if we all knew exactly what is being referred to.

Hash Rate:

in simple terms, a hash is a mathematical problem that needs to be solved. Therefore, a hash rate can be described as the rate at which these problems can be solved. However, the game that is Bitcoin mining has changed over the years. Back in 2010, you could use your home computer to mine coins and get a few of them per day. However, as more people have joined, mining the coins is much harder now so more powerful computers are needed. The performance of these computers is measured by hash rates either in Mega hash per second (MH/s), Giga hash per second (GH/s), Terra hash per second (TH/s) or finally Peta hash per second (PH/s).

Bitcoins per block:

every time a math problem is solved, a constant amount of Bitcoin is generated. This means that generated Bitcoins per block starts at 50 and is lowered by half every four years (210,000 blocks). Today, the number of Bitcoins awarded per block is 12.5. The last time the block was halved was in July 2016, and the next one is set to be in 2020.

Difficulty:

since the whole Bitcoin network is set to release a constant amount of Bitcoins every 10 minutes, the difficulty of solving the math problems has to go up to balance the equations and also balance with the hash rate on the network. In a nutshell what this means is that the more miners there are, the harder it will be to mine Bitcoins.

Electricity rate and power consumption:

mining of Bitcoins is an energy-intensive activity. Every miner consumes a different level of power. For you to calculate profitability, you need both of these values. The electricity rate is usually found on your monthly bill. Power consumption is different per rig, but it should be indicated on the device or on this list.

How does the mining take place?

Even though the Bitcoin network is decentralized, it does have some similarities to other traditional forms of currency. For the system to work, there has to be a record of all the transactions performed. Otherwise, no one would know who paid what to who. To handle this, the Bitcoin network collects all transactions performed during a specific period and calls this a block. It is then the miner’s job to confirm that these transactions are indeed accurate and then note them on a general ledger.

This general ledger is then joined to other general ledgers like itself and this is what has come to be known as the “blockchain.” The blockchain can be described as the master ledger where all the records of any and all Bitcoin transactions are held. Whenever there is a newly generated block, it is automatically added to the blockchain, and then this updated copy of the block is distributed to everyone on the network so that everyone knows what’s going on. Since the general ledger has to be trusted and the integrity of the blockchain maintained, miners must then step in and do a bit of checking to ensure this.

The information in the general ledger is taken and a mathematical formula applied to it. Once the formula is applied, the information is transformed into something far shorter, comprised of seemingly random numbers and letters known as a hash. This hash is then stored together with the block at the end of the blockchain. Hashes are quite unique in that producing a hash from certain data is simple. But trying to reverse engineer the hash to discover the data is practically impossible. Each hash is unique from the next. As such, changing any character on a Bitcoin block will change the whole hash completely.

To create a hash, you need both the transactions data and the hash of the last block added to the blockchain. The hash from the previous block acts as a seal since it affirms that the block is true and it has not been tampered with. If someone tried to fake a transaction by modifying an already stored block, the hash would immediately change. When put through an authenticity check, the block would instantly be spotted as a fake or corrupted.

Setting up a Bitcoin miner

Since we have already established that its computers doing the computation that results in Bitcoin, there are a few hardware concerns a Bitcoin miner must address. The first order of business in this respect is deciding on the hardware aspect.

Mining hardware

In Bitcoin mining, we have three main hardware categories. They are; FPGAs, GPUs and ASICs. Let’s look at each one.

GPU/CPU mining

In Bitcoin mining, this is the least powerful mining hardware there is. In a nutshell, this involves mining for Bitcoins using your computer or mobile device. As previously stated, during the first days of Bitcoin, this would have been possible without a problem. However, in today’s standards, this type of mining is relatively slow. To increase your Bitcoin hash rate in this instance, adding graphics cards can significantly improve the performance. Graphics cards have GPUs (graphical processing units) that are designed to work out complex math on high-end video games that are graphics intensive. That makes it a good mining piece of hardware since the GPUs are good at solving SHA hashing math problems. GPUs are better at mining than CPUs since an ATI 5970 graphics card can clock well over 800 MH/sec compared to a CPU which will give you a maximum of 10 MH/sec.

FPGA Mining

FPGA (Field Programmable Gate Array) is a sort of integrated circuit made to be configured after being assembled. It gives freedom to the mining hardware manufacturer to buy chips in bulk. The miner can then use these chips to create a powerful mining rig. Since they have been specially designed for mining, they are more powerful than the GPUs. A single chip FPGA can operate at about 750 Mega hashes/sec. What makes this hardware so enthralling is the possibility of mounting more than one chip on it.

ASIC Miners

Technologically, this is what any serious miner should consider. Application Specific Integrated Circuits (ASICs) is hardware specifically built to mine Bitcoins fast without using as much energy as other mining hardware. However, since these chips are made to perform at their best, they are the most expensive of the three. Currently, we are seeing units being sold with speeds from 5-500 Gigahashes/sec. Although these chips are incredibly powerful, they are just as costly. However, scaling them is quite straightforward.

Mining Software

Once you have decided on the hardware, you now have to look at the software end of things. Every piece of hardware has a corresponding software to make it work. When you are dealing with FPGAs and GPUs, you must have a host computer which will be running two services; the mining software and the standard Bitcoin client.

Standard Bitcoin client

This piece of software is responsible for connecting your computer to the network, helping it communicate with the other Bitcoin clients available, forwarding transactions completed and maintaining the blockchain. Due to the processing power of these chips, getting the whole Bitcoin block will take a while, but once it’s done, operations will begin as usual.

The Mining software

The mining software is what directs the hardware to do the hard work by giving it transaction blocks for processing. Depending on the operating system in use, there are a variety of software solutions. For your ASIC miner, you will also need software to run the rig. However, most ASIC manufacturers have promised to start rolling out preconfigured chips with Bitcoin addresses so that all you only connect it to a power source.

Cloud Mining Bitcoin

For those interested in mining Bitcoins but don’t have the hardware or skills to manage their own hardware, they can use the cloud mining. Simply put, cloud mining means using the distributed processing power from remote data centers to mine for coins. Here, all you need is a computer at home for communication purposes and a wallet for the generated Bitcoins. There are basically three types of cloud mining. These are;

  • Hosted mining: this involves leasing a mining machine which has been hosted by the provider.
  • Virtual hosted mining: here, the owner creates a general-purpose VPS (virtual private server) and installs the required mining software.
  • Leased hashing power: here, a specific amount of hashing power is leased for the purpose of mining Bitcoins. This is by far the most popular form of cloud mining since you do not have to be in possession of a dedicated physical or virtual computer.

However, there are some risks associated with this type of mining interested parties should know. Let’s consider advantages and disadvantages of cloud mining.

Advantages

  • You enjoy a quiet, cooler working environment since you are not dealing with the constant humming of fans.
  • There are no additional electricity costs.
  • There is no hardware to sell in case mining stops being a profitable venture.
  • No additional renovations required to deal with hot air ventilation and air circulation.

Disadvantages

In as much as cloud mining can be hassle-free, it does have its cons. These are;

  • Lower profits: since you have removed nearly all the hardware from the equation, those who supply the power must also cover their costs.
  • There is always the risk of fraud when dealing with remote processes.
  • It’s not as much fun since you do not get the experience of building and maintaining your own rig.
  • There is also lack of flexibility and control since you are not directly in control of the situation.