We spoke about cryptocurrency and blockchain in the previous articles but how the whole network is maintained secured?
The major consensus algorithms used are Proof-of-Work (PoW) and Proof-of-Stake (PoS); they are the pillars of the blockchain security and through a series of rewards they keep the network safe from hacks.
The way blockchain reaches the distributed consensus on the transactions made is a mechanism called “mining for PoW and minting/forging for PoS”, and it’s performed by the peers in the network.
Let’s explain how do they work and how can you be a miner of cryptocurrency
The Proof-of-Work algorithm is the one used in Bitcoin and other “minable” cryptocurrencies. Explained very simply, the “miners” provide with their hardware computational power to the network to compact the blocks (Blocks in the Blockchain) where the transactions are located.
The hardware we’re talking about can be a CPU or GPU, but nowadays it’s not profitable at all do mining with such hardware. Now the widely used are the ASIC miners (Application Specific Integrated Circuit), which is a specific kind of hardware used for mining cryptocurrencies like Bitcoin.
How does mining with PoW works? – Technical Side of Things: Miners keep the blockchain consistent, complete, and unalterable by repeatedly grouping newly broadcast transactions into a block, which is then broadcast to the network and verified by recipient nodes.
To be accepted by the rest of the network, a new block must contain a proof-of-work (PoW). The PoW requires miners to find a number called a “nonce”, such that when the block content is hashed along with the nonce, the result is numerically smaller than the network’s difficulty target.
This proof is easy for any node in the network to verify, but extremely time-consuming to generate, as for a secure cryptographic hash, miners must try many different nonce values before meeting the difficulty target.
The successful miner finding the new block is rewarded with newly created bitcoins and transaction fees. As of 9 July 2016, the reward amounted to 12.5 newly created bitcoins per block added to the blockchain. The bitcoin protocol specifies that the reward for adding a block will be halved every 210,000 blocks (approximately every four years).
Eventually, the reward will decrease to zero, and the limit of 21 million bitcoins will be reached in 2140; the record keeping will then be rewarded solely by transaction fees.
Put Simply: The miners are everyone who possesses a laptop, PC or ASIC Miner and mine, through the software installed on the terminal, on the specified blockchain. When you mine, you guess with your computational power (from PC, ASIC, etc.) a “nonce” that has to fit in order to compact the block and proceed with the next one.
If you guess it right, you get the reward, if not, you have to hope in the next block and that happens roughly every 10 minutes for the Bitcoin Blockchain (every blockchain has its own timing).
In this case, the more computational power you have, the more chances you have to find the correct “nonce” and therefore compact a block, that’s why is hard mine Bitcoins nowadays if you don’t have a lot of computational power (Hashing Power).
How the Network can be compromised – 51% attack: It refers to an attack on a blockchain from a group of miners controlling more than 51% of the network’s mining hashrate, or computing power.
The attackers would be able to prevent new transactions from gaining confirmations, allowing them to halt payments between some or all users. They would also be able to reverse transactions that were completed while they were in control of the network, meaning they could double-spend coins.
Did you know? The 51% Attack concept derives from the mathematical problem formulated in 1982, the Byzantine Fault Tolerance, which can be read Here
Hashrate Distribution: An estimation of hashrate distribution amongst the largest mining pools – Updated December 2018.
Pros & Cons of the Proof-of-Work consensus: The Proof-of-Work mechanism is much more secure than the others since there is a need of actual work (Electricity + Equipment costs) behind it and therefore it’s very expensive to make a 51% Attack. On the other side, it consumes a lot of electricity and we’ve noticed, as the image above, that a 51% Attack can be done if 2-3 of the major mining pools colludes together.
How can you be a PoW miner?
Cryptocurrency mining was designed by Satoshi in a way that everyone could be a miner and contribute to keep the network secure, you just needed a laptop to mine Bitcoin with its CPU.
Now it became much harder profit from it, especially when we talk about Bitcoin mining. Even though you can find some cryptocurrency that is still profitable, or you can just be part of a mining pool where the block rewards are shared between the participants.
The mining pools have more chances to guess the right “nonce” since they have more computational power than a single miner could have.
As we said there are different hardware to mine cryptocurrency, the main ones are:
– CPU Mining – The base standard designed by Satoshi. Mining with your CPU is currently non-profitable so we don’t advise doing that.
– GPU Mining – A single GPU today is roughly equal to 30 CPUs. You can mine with the ones installed in your PC or laptop, or you can build your own “mining rig” and delegate it just for mining purposes.
Here’s an image of a mining rig with 10 GPUs:
The cost for a mining rig can vary from $1000 USD to $5000 USD and more. The biggest expenses for a mining rig are the GPUs, that’s why Nvidia and AMD had massive profits in the last couple of years due to an exponential demand for Graphic Cards.
The best coins to mine with GPUs at the moment could be:
– ASIC Mining – A single ASIC miner today is roughly equal to 400 GPUs (12,000 CPUs). These types of hardware are the most used for mining Bitcoin since many other coins tend to be ASIC resistant and avoid mining centralization.
This is due to the fact that ASIC hardware is very expensive and the high price obstacles the decentralization making mining less accessible for everyone.
An ASIC miner can cost up to $2000 USD and it’s a risky investment since it’s an Application Specific hardware, it can be used just for the designed scope, mining. The GPUs can be used as Graphic Cards or re-sold but ASICs can just do mining and nothing else.
The most relevant ASIC sellers are:
This guide gives you the basics about what PoW is and how it covers a fundamental role in the blockchain security. We gave you also some information about how you can be a miner and which choices consider in that.
In the second part, we will talk about the Proof-of-Stake (PoS) as consensus mechanism and how to be a miner or, to better say, hold a “Masternode” in a PoS-based blockchain. Stay tuned on tokeninvestoronline.com for the Part 2!
By Marco Di Maio