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Crypto Daily Topic

What Really Is Selfish Mining: Will Bitcoin Survive This?

Mining is the process through which new Bitcoin blocks are generated. Individual nodes on the Bitcoin network race against time in a series of guesses for the right block. Due to the large size of the network and transaction load, this process is resource-intensive – it requires sophisticated computing equipment and consumes massive amounts of power. 

Selfish mining is when a miner withholds newly generated blocks then releases them to the public ledger when they have formed the longest chain. Other legitimate miners may join the selfish miner on their private network due to the possibility of higher returns. The practice is neither illegal nor disallowed, but selfish mining undermines Satoshi’s vision of decentralized production and distribution of money. 

How Selfish Mining Works

Mining involves solving complex cryptographic puzzles, which are guesses. Depending on the difficulty of the puzzle being solved, and the associated power costs, the reward you can earn from this process can vary greatly. As such, even if miners combine effort, the overall output for each miner is proportional to the individual effort invested. 

This was the case until researchers Ittay Eyal and Emin Gun Sirer discovered that miners could actually cheat the system by hiding the newly-generated blocks from the public blockchain. Transactions will still be verified, and new BTC generated because the newly-generated blocks are made available on the selfish miners’ private networks. By withholding the new blocks from the public blockchain, such miners circumvent the infrastructure restrictions that make mining resource-intensive and speed up the discovery process. 

Whatever makes selfish mining possible is a vulnerability on the Bitcoin network that uses the longest chain rule to indicate which chain to follow. Usually, the correct chain to follow is the one with the highest number of new blocks – in other words, the one with the highest proof of work. Since it is possible to withhold a block and release it after accruing several of them, one can always wait until they have several blocks then release them to the public blockchain. This will result in other miners following that chain and surrendering their earnings to the owner of this chain. 

How It Impacts Bitcoin’s Integrity

Undoubtedly, selfish mining poses a threat to Bitcoin’s integrity. Cryptocurrencies sell on the premise that they are decentralized and tamper-proof. Thus, the idea that a group of people can collude to subvert the system’s mechanics raises concern. 

Of particular concern is how selfish mining increases the possibility of a 51% attack. Over time, selfish miners can create mining pools with an ever-growing hash rate. As more parties join the pools, their chances of acquiring majority power increases. Eventually, this may allow them to block other miners, reverse transactions, exclude transactions, and so on. However, considering how large the Bitcoin network is, there is only a low likelihood that a mining syndicate will gather enough resources to take most of the power. Additionally, Bitcoin enthusiasts believe that the motivation for selfish mining is lower than the rewards. If other parties decide to join selfish miners in their pools, they might eventually be unable to recover the investment they made in their mining operation.

The practice of selfish mining is also wasteful in that miners spend serious resources trying to find a block that another miner is withholding. Thus, it is only economical for all miners to just play by the rules. In short, this is neither a sustainable nor responsible way to generate earnings on the Bitcoin network. 

How Selfish Mining Undermines the Decentralization Philosophy 

Decentralization is at the heart of Bitcoin’s philosophy. Satoshi envisioned that no person or group of people would have the authority to control the production or distribution of coins on the network. 

When a selfish miner generates a new block, their chain will be shorter than the public blockchain. However, if they keep hoarding blocks, their chain might eventually become longer than the one on the public blockchain. Naturally, honest miners will be inclined to join the private chain to earn more because the private network has a better chance to realize new blocks faster. If the selfish miner keeps ‘recruiting’ rational miners to their pool, they could eventually control the majority of the public blockchain. In essence, they will have all the power to generate and distribute Bitcoin. 

Is It Anything New?

Selfish mining is not entirely new, and for that reason, it should be particularly worrying to Bitcoin users. At the moment, two-thirds of all Bitcoin generated is mined in China, which is not a result of selfish mining. It just happens that it is easier to access ASICs in the country, plus electricity is way cheaper there than in other mining locations. As such, concerns have been raised about whether China has had a mining monopoly of sorts. Whatever the case, there is no indication that Chinese miners are working as a single enterprise. 

Are There Consequences?

If only a few miners adopt selfish mining, the overall impact on the blockchain network will be negligible. On the other hand, if all miners, hypothetically, take up selfish mining, their efforts will cancel out. Renowned economists have reiterated that it seems to make sense, while theoretically, the practice is not economically viable. Paul Sztorc, a popular economist, thinks that selfish miners will lose motivation upon realizing they are only backstabbing each other. In conclusion, selfish mining does not have enough economic motivation to become a widespread practice. 

Also, this activity may adversely impact Bitcoin’s reputation, which may cause its price to drop. Consequently, selfish miners will earn more Bitcoins but ones that are devalued. 

What’s the Future of Selfish Mining?

Selfish mining is likely to remain in theory or limited practice due to the reasons we’ve mentioned earlier. As we have seen, the major challenge with this practice is that if it becomes widespread, it will turn into a dirty game as selfish miners will be competing in hoarding new blocks. While this decreases the economic motivation, it might not exactly protect the Bitcoin network from the inefficiencies created. 

So, what would be a better solution? A research paper has proposed a scheme for penalizing nodes that withhold new blocks. The proposal ensures that miners who generate new blocks and fail to publish them on the blockchain have their mining rewards reduced. This would be an ideal penalty for selfish miners, but it appears as if the practice is not a huge threat currently.

Final Thoughts 

Selfish mining can allow mining syndicates to increase their revenue by always creating the longest chain and attracting other miners to their pools. While the threat is realistic, the likelihood of widespread selfish mining is diminished. The practice is wasteful, and if it becomes widespread, all miners lose their rewards. As we wait to see if indeed the threat will ever become substantial, Bitcoin users can rest easy knowing that Satoshi’s vision of decentralized production and distribution of money lives on. 

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Crypto Guides

What Should You Know About Bitcoin Miner Capitulation?

Introduction

If you have dealt with cryptocurrencies like Bitcoin, you must know how uncertain they can be. While they can make you a millionaire within a day, they can also snatch away all your money in a short period. People who mine their money in Bitcoin have to keep a close eye on these fluctuations and ensure they take themselves out while there is still time. The same may be happening with Bitcoin.

You may have heard the experts talk about Bitcoin Miner Capitulation. Some of those also try to explain the concept in their own words. However, there is still a major confusion around the term “Miner Capitulation.” If you also want to learn more about the concept, you have come to the right place. We have collected all the crucial information on the topic to understand what exactly is happening with Bitcoin. So let’s begin.

What Is Bitcoin Miner Capitulation?

Bitcoin mining refers to the completion of verified transactions’ blocks that get appended to the blockchain. For these transactions, miners earn a reward in the form of cryptocurrency. If the miner isn’t able to manage to make out their operational costs from the Bitcoin mining process, they sell a significant amount of their mined Bitcoins. This leads to Bitcoin Miner Capitulation.

On the other hand, Miner Capitulation can also result from sudden drops in the Bitcoin market as this makes miners sell their coins. Hence, we can say that Bitcoin Miner Capitulation is when small miners can’t profit from their mining, and they back out. It creates selling stress in the market, leading to further drops in the price and a lack of buyers.

Is This First Bitcoin Miner Capitulation?

Many people dealing with Bitcoin assume this is the first time Bitcoin is experiencing a Miner Capitulation. But the facts state something different. Miner Capitulation has been seen twice in the history of Bitcoin:

  • 2016: When Bitcoin Halving took place this year, it was seen that miners began selling a significant amount of their Bitcoins.
  • 2018: Bitcoin again crashed by 50%, getting a value of $3,000 from $6,000. This led to low profits for small miners, and they again sold their Bitcoins in massive amounts.

Apart from these, the 2013 effect on Bitcoin’s price also brought in some Miner Capitulation. Therefore, this isn’t the first time Bitcoin is experiencing one such situation. It has happened whenever Bitcoin Halving takes place or the price drops down.

Is Bitcoin Miner Capitulation Something To Worry About?

It is usual for a big market like Bitcoin to host thousands or millions of transactions every day. So when some of the miners sell their coins, how does that make any difference? The answer to this question is simple, i.e., the tension of sale in the market.

With these small miners selling their coins, many other people also begin considering selling their coins. This stress rises with more sales. Moreover, it causes a lack of buyers in the market, and Bitcoin’s price falls further.

People are relating Bitcoin Miner Capitulation to more significant problems that may be seen in the upcoming times. That is why you must learn more about the current situation and take action while there is still time to save yourself from any bigger trouble.

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Crypto Videos

China Gets Wrecked! Who Will Take The Bitcoin Mining Throne?

China Destroys 10% of the Global Bitcoin Mining Hashrate

epa06062677 (06/26) Tibetan Bitcoin mine manager Kun walks in between aisles of mining machines in a Bitcoin mine in Sichuan Province, China, 26 September 2016. Kun is the mine’s manager as well as one of its investors. He learned about Bitcoin through a friend and started investing in 2015. China, the world’s leader in Bitcoin mining, is dominating both the currency’s generation and the global trade in the currency. Sichuan has become known as ‘the capital of bitcoin mining’ as entrepreneurial Chinese set up ‘mines’ there due to its abundance of hydropower, perfect for the high electricity needs of the large number of computers required for Bitcoin mining. Bitcoin mines are buildings with warehouse-like structures equipped with massive numbers of microprocessors with which ‘miners’ solve complex math problems and are rewarded in the digital currency. The industry exists in a legal gray zone in China, and the miners in this story, concerned about attention from the government, asked not to have their full names or the names of the villages where their mines are located mentioned in this story. EPA/LIU XINGZHE/CHINAFILE ATTENTION: For the full PHOTO ESSAY text, please see Advisory Notice epa06062671

The Chinese provincial government of Sichuan has stamped out 10% of the global Bitcoin hashrate due to, as they announced, illicit cryptocurrency-related activities.
According to Cambridge University estimates, the province of Sichuan is responsible for almost 10% of the global Bitcoin hashrate. As a comparison, this single Chinese province has more mining power than then the entire United States or Russia. However, it is unsure what will now happen to the miners in this province.

What can we expect?

It’s not clear whether the recent issues will effectively destroy mining in Sichuan, as China’s crypto community was always strong, even despite governmental constraints. With that being said, many believe that, even though Chinese miners were never felt “comfortable” and “safe” when mining, this event has made the situation the worst it has been.

The question we have to ask is: Who will mine if the Chinese government shuts down Sechuan miners?

Philip Salter, Genesis Mining head of operations, said that the main advantage of mining in China is cheap production costs, but that it doesn’t come without disadvantages. The main disadvantage of mining in China would be that they use coal to create energy, which makes operating costs not so good.

People started speculating on who will pick up the slack: The big Sechuan miners by moving to other provinces or some other mining power that will come from the western part of the world. We have seen mining giants such as Bitmain creating facilities in western countries, so it might not be too far-fetched to believe that the era of China-dominated mining market might come to an end.

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Cryptocurrencies

What is The Difference Between ASICs vs GPU Mining?

After Bitcoin entered the scene 11 years ago, the word mining took a new meaning altogether. Cryptocurrency mining is the mechanism through which new coins are introduced into circulation, and transactions are processed. The appeal of crypto mining is that miners are rewarded with crypto tokens, or transaction fees, depending on the network. While some miners do it for the thrill, others see it as a valid and even full-time investment.

What is Crypto Mining?

Crypto mining_Forex Academy

Crypto mining is the process through which specialized computers are used to discover new blocks on a crypto network by ‘guessing’ a random string of numbers until you find the right combination. (A block is a file of transactions plus the metadata of those transactions) This process is known as ‘proof-of-work.’ By discovering new blocks, miners get the right to verify the transactions and add them onto the blockchain. This process is crucial because it removes the possibility of double-spending coins.

Mining becomes harder as a cryptocurrency network becomes more popular, and the miners in a network increase.

In the early days of Bitcoin mining, anyone could mine Bitcoin as long as they had a computing component with sufficient processing power. But as more users trooped to the network, mining difficulty increased, and the average computer no longer cut it. This started a race into the manufacturing of more powerful and efficient hardware.

Graphic processing units (GPUs) were among the first machines that went into crypto mining. These virtually wiped out CPUs. While you can still mine using a CPU, it will largely be of no use since the cost of electricity that you will consume will far outweigh any meager profits you might (yes, might – since discovering new blocks is a game of chance) realize.

Over time, developers came up with mining equipment known as application-specific integrated circuits (ASICs). However, some cryptocurrencies are ‘ASIC-resistant’ (more on that later) and can only be mined with GPUs.

Let’s start with ASIC mining.

What is ASIC Mining? 

ASIC Miner_Forex Academy

Before we plunge full form into ASIC mining, let’s get a snapshot of what it’s about:

ASICs are algorithm-specific, meaning they are designed to mine just one type of coin. E.g., a Bitcoin ASIC cannot be used to mine Siacoin and vice versa.

  • They are highly efficient albeit very costly.
  • They consume less power.
  • They are easy to set up and start mining right away.
  • Their profitability declines fast as mining difficulty increases.
  • In the case of a hard fork, they are rendered obsolete to mine the new coin.

Now, let’s get into the intricacies of ASIC mining, starting with the definition. An integrated circuit is basically a microchip. An IC is one of the biggest technological advances today. Pretty much every electronic equipment uses one, from televisions to phones to GPS trackers to computers to ID cards.

The term application-specific implies that the microchip has been designed for a specific purpose. In this case, that means the IC has been designed to run an algorithm for mining a particular cryptocurrency. Seeing as the ASIC has been designed specifically for that particular coin, that means it’s highly customized, and hence efficient, for that end. Hence, any miner that possesses it has an edge in the business.

The thing with ASICs is that they can be risky. First, the cryptocurrency market is pretty unpredictable, with fortunes quite easily changing overnight. Cryptocurrencies are known to gain or lose up to 10% in just one day. Now let’s say a coin drops in value and stays there forever. Or a cryptocurrency developer decides to change the hashing algorithm. These events would render the ASIC machine useless.

Second, as with any technology, newer ways of doing things get discovered all the time.

Thirdly, as more miners join a network, the mining difficulty increases, and so does profitability.

ASICs and Centralization

Since ASIC miners are known to dominate the game for every cryptocurrency they touch, when the ASIC for a particular coin is made, it becomes almost the only viable way to mine it. Even if profitability drops, they remain the most profitable way to mine the crypto until a new and more powerful ASIC is developed. This results in centralization since it edges out the miners with less powerful mining equipment. This presents a problem since cryptocurrencies are supposed to promote decentralization and democratization in finance.

Cryptocurrency enthusiasts are, understandably, concerned with this state of affairs, and have taken steps to search for alternatives. One of the initiatives has been developing new hash algorithms that render cryptos ASIC-resistant. Another has been hard-forking, like in the case of Monero, in a bid to block ASICs. This doesn’t mean ASIC companies will not try and make equipment that’s compatible with the new algorithm. But that means they would need to change equipment every other time, which is not just expensive but also pointless.

GPU Mining 

Mining GPU_Forex Academy

Before we delve into the intricacies of GPU mining, let’s get a rough idea:

  • Can mine any cryptocurrency
  • Can be expensive
  • Setup may require special consideration for cooling, motherboards sizes, etc
  • More cryptocurrency developers are making ASIC-resistant coins
  • GPU mining proceeds are more stable
  • Can be utilized for non-crypto-mining tasks and, they have a higher resale value

While ASICs are still the most dominant crypto-mining equipment, the anti-ASIC sentiment is now becoming rife in parts of the crypto community. Cryptocurrencies, e.g Ethereum, are now using memory-hard functions or the X16R algorithm – which uses 16 different algorithms at random, making it hard to settle on one algorithm at any time. These initiatives make it possible for alternative mining methods, and GPUs fill in the gap.

However, there are a few downsides to GPU mining as well. First, they can be expensive and require a lot of cooling maintenance. Users also need to make sure that a GPU machine has enough RAM memory and a reliable motherboard. The electricity used is also high. Also, their scope is pretty limited since they can’t really compete with ASICs for some of the coins, such as Bitcoin.

As we’ve noted before, GPU mining is more flexible than ASICs since it can be used for any cryptocurrency. This flexibility can come in really handy, especially with the volatile cryptocurrency market when the fortunes for any cryptocurrency are pretty unpredictable. Also, since they are used for graphics processing, they can be channeled for multiple other uses were crypto mining to stop being viable.

Final Words

In terms of profitability, ASICs unquestionably take the lead over GPUs. Since ASICs are optimized for particular crypto, it means they are the only option that can conceivably mine that crypto with the most efficiency possible. Also, for cryptocurrencies that can be mined with ASICs, the machines completely dominate the space, rendering GPU mining profitability nearly impossible.

However, in terms of the decentralization philosophy of cryptocurrencies, ASICs don’t fit the bill. It’s very likely that ASICs might become obsolete in the coming years. Also, it’s not cheap to invest in ASICs, with a considerable investment but uncertain profitability, thanks to the volatile nature of crypto prices.

This, plus the fact that the crypto community continues to shift towards ASIC-resistant coins, makes the future of ASICs is uncertain. GPU mining, although not nearly as effective as ASICs, makes crypto mining attainable for everyone. It’s likely that GPUs are the future of the industry.

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Cryptocurrencies

Bitcoin Mining Pools: Here Is All You Need To Know About Bitcoin Mining Pools

Any new Bitcoin user will tell you they’ve heard words like “miners,” “mining pools,” and “ASICs” being thrown around. But it’s not immediately clear what these terms mean, or whatever role they play in the Bitcoin ecosystem.

On the other hand, we have aspiring Bitcoin miners who are usually torn between going solo and joining a mining pool and are yet unacquainted with the latter option.

In this guide, we delve into the intricacies of Bitcoin mining pools and answer some of the most burning questions surrounding the topic.

What is Bitcoin Mining? 

Bitcoin mining is the process of adding new blocks and transactions on the Bitcoin public blockchain. It involves miners guessing or playing with a random string of numbers and alphabets (known as a hash) until they arrive at the correct hash for the next block. A ‘block’ is a file that consists of transactions that have to be verified before being added to the blockchain.

Bitcoin miners utilize mining equipment known as “application-specific integrated circuits” (ASICs) that are designed to make a massive number of guesses per second. In the early days of Bitcoin, anyone could mine bitcoins on their PC from the comfort of their home. However, as the network became uber-popular and more miners joined the network, the mining difficulty (how hard it is to find new blocks) increased, rendering the average computer unsuitable for mining bitcoins.

What’s a Mining Pool?

What is Bitcoin Mining pool

A mining pool is a group of miners who come together and combine their computational power in a bid to find new blocks faster. With the combined hashing power, the odds of finding new blocks are multiplied. If a pool succeeds in finding a block, the block reward is shared among the pool participants according to how much processing power each contributed. The more processing power a miner contributed, the more block rewards they will receive.

What is Block Rewards? 

In Bitcoin mining, a block reward is what the bitcoins miners receive for discovering new blocks. This reward is halved after mining 210,000th block, which is roughly every four years.

In the beginning, mining a block got a miner rewarded with 50 BTC. That figure was halved into 25 BTC in 2012. It was then halved again in 2016 to 12.5 blocks. It was again halved a few days ago to 6.25. This was Satoshi Nakamoto’s idea of avoiding inflation.

Mining Pool Methods 

Bitcoin mining pools do not have a standard operating procedure. Each pool has a different approach to the sharing of block rewards, and so on. Still, many of the most popular pools have certain protocols in common. Let’s get a look at the most common below:

  • Proportional mining pools: In these pools, miners earn shares up until the pool finds a block, after which each miner receives block rewards in proportion to how much shares each has found.
  • Pay-per-share pools: These pools operate a lot like the proportional mining pools, only this time, a miner is guaranteed of a payout regardless of when the pool collectively finds a block. Miners are paid with the existing balance in the pool, and they can cash out at any time.
  • Pay On Target: In these pools, a miner is paid based on the difficulty of work that they plough back to the pool, rather than the difficulty served by the pool itself.
  • Capped Pay Per Share: This is a reward system through which miners receive as much as possible from discovering blocks while also ensuring the pool never goes bankrupt.
  • Bitcoin Pooled Mining: This system entails giving more weight to recent shares than to older shares. Each new round starts when a new block is discovered, and not before. This reduces the chance of miners switching pools during a round so as to maximize profits – which is considered cheating.

Why Mine Bitcoin in a Pool? 

As we’ve noted before, Bitcoin mining is a game of chance. Thus, it pretty much depends on luck. Hence, even if a miner controls a significant amount of computational power, it doesn’t mean they’ll find blocks proportional to that power. Instead, today they might find three blocks, tomorrow none, the next day one, and on and on.

Mining in a pool allows miners to combine their hash power, so they represent one large mining machine. With the combined hashing power, it’s easier to find the right hash sooner. This way, miners can get a more regular and consistent pay instead of a sporadic and less certain one.

What are the Disadvantages of a Mining Pool?

Mining pools represent a more sustainable income for miners since it multiplies the odds of them finding new blocks. At the same time, it has a downside for both miners and what cryptocurrency stands for.

When a miner participates in a pool, they relinquish some of their power and autonomy. They’ve got to adhere to the terms and conditions of the pool, even if unfavorable.

They also have to share block rewards, meaning they earn significantly less than if they received the entire block reward by themselves.

Another drawback of mining pools is that some mining pools have an enormous amount of combined hash power to the extent of dominating much of the Bitcoin mining process. In a way, this centralizes the Bitcoin mining protocol, which betrays one important tenet of cryptocurrency: decentralization.

How to Choose a Bitcoin Mining Pool

Before you sign up for a Bitcoin mining pool, do a background check, and see whether it works for you. These are some of the factors you need to look out for:

1. Infrastructure Compatibility

Every pool has its own requirements that miners must meet before being incorporated into the pool. Before getting started with any pool, check the following:

  • Whether your mining equipment is compatible with the pool requirements
  • Whether your mining software is supported by the pool
  • Whether your internet connection meets the minimum bandwidth required by the network

2. Task Assignment Mechanism

Any decent pool should have an algorithm that enables it to distribute tasks evenly to all participants without discriminating against the ones with less powerful devices.

3. Transparency

How transparent is the pool operator? For instance, is the hash rate declared by the pool the actual hash rate? Are the payouts being manipulated in some way? Some pools have a real-time dashboard that displays activity, eliminating any cause for doubt. You want to join such a pool.

4. Payment Threshold and Frequency

This has to do with the type of mining hardware you have. High-end mining devices mean more computational power and hence more and frequent earnings for you. Hence, if you have low-end devices, best to avoid pools that make payments based on the output threshold.

5. Pool Stability and Security

Before joining a pool, check out its commitment towards security. Does it offer a secure connection? Is it vulnerable to the all-common denial of service attacks? Is it sufficiently robust against potential attacks?

6. Pool Fee Structure

The pool fee is the amount you pay for utilizing a mining pool’s services. Some pools charge no fee at all while others charge a nominal fee. Others incorporate the fee in the payout. Others offer free entry, after which they’ll start charging after a given period. Finally, some pools will require you to run the software on your own device instead of on their servers – which is usually expensive for the miner.

What are some of the Best Mining Pools?

After Bitcoin exploded, the currency’s mining industry is proliferated by all manner of mining pools. Some have made a name for themselves for having a winning combo of certain features. Let’s take a look at a number of them:

  • F2Pool

Launched in 2013, Chinese-based F2Pool uses a stratum mining protocol – a Bitcoin mining protocol that facilitates improved mining and efficiency. F2Pool also supports Litecoin, Ethereum, and Zcash mining and features three languages (Traditional Chinese, Simplified Chinese, and English) to accommodate a more diverse background of miners.

  • com

Launched in 2015, BTC.com is a mining pool owned by Bitmain, which is a dominant player in the ASICs manufacturing industry. BTC.com also runs on a stratum mining protocol and supports its own wallet known as the BTC.com wallet. The site supports English and Chinese.

  • AntPool

Also owned by Bitmain, Antpool is one of the most dominant mining pools in the Bitcoin mining space. Alongside Bitcoin, the pool also supports Bitcoin Cash, Litecoin, Ethereum, Dash, Siacoin, ZCash, and Ethereum classic. Antpool supports tens of languages, including English, Amharic, Zulu, Welsh, Urdu, Thai, Bosnian, Arabic, and Turkish.

  • ViaBTC

Launched in 2016, ViaBTC is relatively new in the industry but has managed to claw its way to the top. The pool uses a stratum mining protocol and also supports merged mining. ViaBTC supports the mining of other cryptocurrencies such as Bitcoin Cash, Litecoin, Ethereum Classic, Dash, ZCash, and Monero.

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Cryptocurrencies

What Is The Impact Of Cryptocurrencies On The Environment?

Cryptocurrencies came, saw, and disrupted the financial space – despite many predictions about their impending doom. They were labeled as a fad and as tools for enabling criminal activities.  But in a rally led by Bitcoin, cryptocurrencies have established themselves as legitimate and a force to be reckoned with in the finance space. 

However, digital assets still face criticism. One withering take was by Agustin Carstens, General Manager of the Bank of International Settlements, who called Bitcoin a combination of a bubble, a Ponzi scheme, and an environmental disaster.  

While the first two indictments are flat-out untrue, the third one deserves a closer inspection. Serious questions have been raised about the impact cryptocurrencies wield on the environment. 

Are cryptocurrencies power-hogging monsters, or is it a hollow indictment?

Cryptomining and More

The vast majority of cryptocurrencies have taken the model of Bitcoin, the first and the most successful cryptocurrency.  Bitcoin is a decentralized token, meaning it is not controlled or regulated by any bank or government. Instead, new coins are generated via ‘mining,’ a process in which computers across the globe solve complicated mathematical puzzles and earn some coins or a fraction of the transaction fees as a reward. 

The Bitcoin network is supported by blockchain technology – which includes a publicly distributed ledger that maintains a record of all transactions.  Transactions are in the form of blocks, which in turn are linked together and secured using cryptography. All records on the blockchain are shared across all users on the network – no matter where they are.

Cryptocurrency proponents content that the asset provides a unique alternative to the current financial system due to its cryptographically secured and anonymized infrastructure.  However, alarm bells have been ringing over the massive amounts of energy that goes into maintaining and generating new crypto coins.  

In a research by Digiconomists – a cryptocurrencies analysis site, titled “Bitcoin Energy Consumption Index,” Bitcoin used 32 terawatts of energy annually.  This energy could support nearly 3 million US households. Bitcoin also consumed more energy than Visa uses to process billions of transactions in a year. According to the site, the energy that Visa uses can power just 50, 000 US households.

Another concern has been that as cryptocurrencies gain more popularity, and their value increases, they require even more energy. For example, as Bitcoin increases in value, the computational puzzles become more difficult to solve, hence requiring more energy.

Cryptocurrencies and Fossil Fuels

The conversation about cryptocurrencies and the environment has taken another turn.  Environmentalists are concerned that cryptocurrencies are slowing down the effort to extract ourselves from the fossil fuels rabbit hole.

The vast amount of Bitcoin mining happens in China, where mining companies have set up huge mining operations in rural areas that have low-cost land and electricity.  Researchers from the University of Cambridge have called attention to the fact that much of the electricity being consumed in the mining rigs comes from abandoned coal-based power plants. 

Digiconomist also noted that the energy used by one Bitcoin mine in Inner Mongolia is equivalent to the energy required to fly a Boeing 747.

If you have been paying attention to the news, you must have noticed that burning coal and other fossil fuels massively contributes to the global carbon dioxide footprint, intensifying climate change.

What Do Miners Say?

Crypto miners have taken a defensive stance in the whole debate. They argue that crypto mining’s impact on the environment is nothing compared to that of physically extracting oil and other natural resources. 

Other miners have taken up more environmental-friendly strategies for their mining operations. An example is Vienna-based Hydrominer, a mining company that uses renewable hydroelectric power. The company’s co-founder, Nadine Damblon, however, thinks that the conversation is overblown. “Basically, we see an old argument here. People used to say that the streets would no longer be usable because they would be covered in horse manure -not long ago they said Google search engine would use up all the world’s energy.” 

She opines that as cryptocurrency evolves and develops, so will more energy-efficient technology be discovered. For her part, she’s already taken a step to employ a more eco-friendly mining process.

What Is Our Current Environmental Impact?

It’s fair to say that the impact of cryptocurrencies on the environment have been grossly exaggerated, especially when you compare it to how the current banking system consumes energy. 

In a 2014 study, Hass McCook, a bitcoin enthusiast, argued strongly for Bitcoin, stating: “Widely available public information strongly refutes claims that bitcoin is unsustainable, and shows that the social, environmental and economic impacts are a minuscule fraction of the impact that the legacy wealth and monetary system have on our society and environment.”

Right now, these are some of the biggest energy consumers in the current banking system: 

  •         24/7 server operations
  •         24/7 office towers 
  •         Cost of running ATM machines 
  •         Card readers 
  •         Data centers 
  •         Cost of running banks such as computer costs, air conditioning, and so on 

It’s worth noting that this list is by no means exhaustive. The use of a much more efficient system, cryptocurrency, would eliminate most of these and other hidden costs.

Who is Right?

Between overly conscious environmentalists and defensive miners, who is right in this debate? First of all, it’s important to note that although crypto mining gobbles up massive energy, analysts have not really arrived at a conclusion on the exact figures. 

Also, some people argue that the benefits of cryptocurrencies, including operational efficiency and their deflationary nature, outweighs the environmental toll.

A thorny issue in this debate has been the difficulty involved in trying to measure the exact environmental impact. This is partly because most currencies are either anonymous or have a degree of anonymity – making it difficult to generate a reasonable estimate of the energy they actually use.

But one analyst believes that the figures bode ill. Alex de Fries, a Bitcoin analyst, suggested in January 2018 that even the most energy-efficient mining Rings would still consume about 13 terawatts in total.  He said that that is the amount of energy that Slovenia uses. He painted a possible scenario where the machines in use are not as efficient as possible – in which case the energy used would be much higher – and even multiply as more miners jump into the bandwagon. 

De Vries’ view on the issue is largely uncompromising, suggesting that we don’t even need Bitcoin in the first place. “We are basically consuming thousands of times more energy for something we can already do at the moment. We can already do transactions, we don’t have to use Bitcoin if we trust our current system. I don’t see how Bitcoin justifies its energy use at the moment, given that most people do have a certain level of confidence in the current system.”

Closing Thoughts

Do cryptocurrencies pose a threat to the environment, or is the issue greatly exaggerated? As we have seen, the legacy banking system is not exactly as pure as snow. Cryptocurrencies present a safer, more trusted, and a faster way to conduct transactions.  They are disruptive, no doubt, but that does not mean that they are evil. And as the technology continues to evolve, more energy-efficient means will most certainly be adopted.

As for now, it can be said that the whole fuss about how cryptocurrencies are harming the environment is a lot of ado about little. This doesn’t mean that the crypto industry is exempt from environmental responsibility; it will have to come up with more environmentally conscious mining processes.

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Cryptocurrencies

Bitcoin will never be the same: Taproot Upgrade Proposal ‘Nearing Completion’ 

It has been a while since the Bitcoin platform received a major upgrade. There is, however, a major upgrade proposal in the works that is nearing public launch. The proposed bitcoin soft-fork designed to improve the platform security and boost user privacy is already moving through the developer feedback phase and maybe getting ready for public launch soon.

The Bitcoin Taproot/Schnoor upgrade proposal, originally revealed in 2018 by Greg Maxwell, one of the core developers of Bitcoin, is a long-anticipated technical upgrade. It is touted to improve not only the security of the network and the privacy of the users but also the scalability, fungibility, and script innovation in the blockchain platform.

What is the Bitcoin Taproot proposal?

Taproot and Schnorr updates, or simply Taproot, is Bitcoin’s next greatest technological breakthrough that promises ‘a new world of possibilities’ for the digital asset. The proposal remains highly sensational and has been subject to extensive deliberation in the Bitcoin community because it is a major platform upgrade with great implications on transaction architecture and performance.

It is designed to improve Bitcoin’s privacy and boosts platform scalability by making all the transactions on the platform appear the same to an outside observer, regardless of the complexity of the transaction details. The Schnoor update, on the other hand, is a code modification that aggregates transaction signatures to make it possible to implement Taproot.

Here is how Taproot works; in the Bitcoin network, transactions are validated using public-key cryptography. Currently, transactions are validated using an Elliptic Curve Digital Signature Algorithm. This algorithm has a number of glaring shortcomings, especially when it comes to transaction privacy and platform fungibility. Taproot is designed to fix these shortcomings by concealing specific types of transaction details from outside observers, in a way, standardizing and simplifying the details that are visible to outsiders.

For instance, when a transaction has a hot wallet, a cold wallet, and details of a trusted third party wallet key, all these are aggregated into a single Schnoor signature rather than being bundled as separate codes into a transaction. The single Schnoor signature can then singly be used to validate a Taproot output key.

The Taproot output key will be a single code that represents all the complex codes that would otherwise present a transaction as a collection of different keys. An outside observer will only see the single output and would not need to bother with finding out which two keys were used to generate it.

Aside from improving the privacy of the platform, this upgrade would also significantly reduce the size of the transaction file. This goes a long way to reduce the Bitcoin transaction fees as well as making the Bitcoin network more scalable. If you are familiar with the limitations of the Bitcoin platform, you will appreciate that any upgrades implemented to make it more scalable are crucial, especially if it does not involve hard-forking the platform.

Will the Taproot upgrade bring forth a BTC revolution?

When it was first proposed two years ago, the Taproot proposal triggered heated discussions among Bitcoin developers and in the general Bitcoin community. Throughout the time the upgrade was in development, the proposal moved through the Bitcoin ecosystem feedback phase as developers made their recommendations and reviewed possible changes to the proposal draft.

On December 17th, during the final scheduled meeting of the Taproot review group, an update on the project was made public. Bitcoin Core developer Pieter Wuille revealed that the upgrade proposal was ‘nearing completion’ and that developers were already putting the final touches that addressed all the comments and suggestions collected by the review group.

This upgrade could be a major turning point for Bitcoin – despite it not requiring a hard fork – because of the improvements, it makes to the system. When implemented, the Taproot/Schnoor upgrade could accelerate the process of block validation by as much as 250% and cut transaction fees by as much as 30% to 75%, according to Square Crypto product manager Steve Lee. Lee made this prediction in a presentation in the summer of 2019, and it is consistent with what other experts have had to say about the subject.

There is a good chance that the Taproot update could be the upgrade that revolutionizes the Bitcoin platform considering the limitations that are currently holding it back. On top of the list of problems plaguing BTC is scalability, which can be attributed to the Proof-of-Work (PoW) consensus it uses. PoW is so power-hungry and so slow that it limits BTC to between 3.3 and 7 transactions per second (TPS).

Visa, for comparison, processes around 1,700 transactions per second and may be capable of processing as many as 24,000 transactions per second. If Bitcoin is to ever scale globally and match this transaction processing speed, then a major change has to be made. However, there is little that can be done to improve from the current TPS without hard-forking the platform. The Taproot upgrade goes a long way to boost the platform TPS without the need to switch to a different consensus such as Proof-of-Stake (PoS).

How Taproot improves Bitcoin fungibility

Fungibility is an economics term that refers to the property of an asset whose individual units are standardized or essentially interchangeable. It means that each part that makes the whole is indistinguishable from another. In this case, Taproot improves Bitcoin’s fungibility by making all the outputs for spending look identical.

According to Kento U of Coinmonks, Taproot is Bitcoin’s next big update largely for the fungibility benefits it brings to the platform. Being a scheme for signing transaction scripts, Taproot’s most functional role is to homogenize the transaction output from a content perspective. When Bitcoin transactions are made to look exactly similar from the blockchain explorer, it guarantees that the Bitcoin network will be more secure since it will not be easy to tell one transaction from another at a glance.

There is also another great benefit to rolling out the Taproot update on the Bitcoin network; it opens up the possibilities for inscription innovation by allowing for complicated arrangements of keys and signatures in a transaction. This will effectively eliminate the limitation of the number of scripts that can be used to spend Bitcoins.

Why is Taproot update a big deal to the community?

A very small percentage of Bitcoin users pay close attention to system updates on the Bitcoin network, yet they often turn out to be the most bullish indicators for the Bitcoin currency. Most people still mistakenly look at institutional investors, Bakkt futures, and bankster instruments for indicators, yet all these and many other common events rarely ever affect the platform on which Bitcoin runs. The Taproot upgrade has a direct impact on the scalability, decentralization features, and fungibility of Bitcoin, which influence its long-term value.

It is commendable, however, that the interest the community has on this latest update proposal is gaining momentum and attracting wide interest. Developers working on the update and members of the Taproot review group have expressed optimism that the new development has generated impressive interest in the network as it moves to the next step of development.

When the draft is formally proposed as a Bitcoin Improvement Proposal, and a pull request to the Bitcoin Core pulled, the Taproot implementation is expected to undergo another round of reviews and suggestions before it is finally merged with the main branch if all goes well.

Members of the Bitcoin community still have the opportunity to analyze and suggest improvements to the upgrade while the proposal is still in the review phase.

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Crypto Daily Topic

Can Photonic Chips Save Bitcoin?

Bitcoin mining was Satoshi Nakamoto’s idea to release new Bitcoins into circulation only after solving some complex puzzles. The mining system, which verifies transactions after ten minutes, was so designed in order to secure the network. And as Bitcoin has become more popular, so has mining increased. 

But if Bitcoin’s future depends on mining, that future becomes harder to picture every day. This is because mining presents various challenges that make the Bitcoin network less safe and not decentralized as Satoshi envisaged. Also, mining is incredibly expensive and not good for the environment.

Is there an alternative? This is the question nagging many Bitcoin fans.

As it turns out, photonic chips could be the answer.

Let’s take a more in-depth look into Bitcoin mining, what photonic chips are, and if the technology is enough to replace Bitcoin mining as we know it.

A Bit about Bitcoin Mining

Bitcoin mining has a bit of fascinating history. After Bitcoin took a dramatic dip from $17,000 to less than $7,000 at the end of 2017, the overall sentiment was Bitcoin was done. But the cryptocurrency’s mining appeared to be unshaken by what was happening with the price. This meant the value of Bitcoin trumped the costs associated with mining it. In other words, Bitcoin was still profitable.

In the next year, miners continued scoring big. But in November 2018, Bitcoin plummeted from around $6500 to less than $3500. This plunge was what did it for many miners. Bitcoin simply wasn’t profitable enough now. Because many miners checked out, the crypto’s hash rate took a plunge too – going from 60 exa-hashes/sec to 35 exa-hashes/sec.

The drop in Bitcoin’s price and the consequent decline in hash rate had certain ramifications for Bitcoin. For one, this meant mining would almost be confined to regions where electricity was cheap – mainly Western China. Consider too that around this time, China was cracking the whip against cryptocurrencies, a fact that drove cryptocurrency-based businesses to set up in other countries.

What did this mean for Bitcoin? First off, the “centralized” mining, as opposed to mining being geographically diverse, was a threat to the very core tenet of Bitcoin – decentralization. And the cold legal reception in the very region where Bitcoin could be mined posed a threat to its very existence.

Since then, looking for alternatives to Bitcoin mining has become the vocation for some Bitcoin enthusiasts.

The Problem with Bitcoin Mining

Apart from the existential threat to Bitcoin, there was always another persistent problem with Bitcoin mining. While Satoshi Nakamoto devised the computations to increase security for the network, what he may not have envisioned was the massive power bills. And when more people learn about Bitcoin, the more they seek it out, and the more the energy used goes up.

Bitcoin mining is so power-hungry that it gobbles up over 75 terawatt-hours a year. The enormity of this might not register until you learn that this is above the annual power consumption of entire countries such as Austria. For the mere expense and the impact this has on the environment, mining is simply not sustainable.

Photonic Chips – A New Proof-of-Work?

To solve the mining problem, a team of researchers comprising Michael Dubrovsky (co-founder of PoWx), Marshall Ball of Columbia University, and Bogdan Penkovsky of the University of Paris-Saclay have proposed better mining technology. Dubbed “optical proof of work,” oPoW is a laser technology that involves using a more energy-efficient approach to mining.

The idea is to “fix” Bitcoin mining as it is and return mining to “the people” as opposed to a small concentrate of individuals in one corner of the world. Another end goal is to make Bitcoin mining a more profitable venture. Current specialized computers go by the thousands in dollars – and they are not designed to be used for much else.

So what are these photonic chips?

Photonic chips are small optical computers made of integrated circuits and that rely on photons (using light beams to generate energy) rather than electrons.

Also known as lightwave technology, photonics is not nearly a new concept. The term “photonics” goes back to 1967 when the French physicist, Pierre Aigrain, coined it to describe the result of harnessing light to emit energy. There are countless applications of the technology today – in IT, healthcare (biophotonics), manufacturing, sensing, lighting, solar power, space technology, and so on.

Dubrovsky and the team want to introduce photonics to Bitcoin mining. Instead of the power-guzzling ASIC miners, they hope that optical computers will use way less energy.

Mining using photonics will mean changing Bitcoin’s mining algorithm. The team hopes to replace Bitcoin’s encryption protocol with one they call HeavyHash. HeavyHash is optimized for photonic computers and will replace the SHA256-based PoW (HashCash.)According to the team, this new algorithm will lower the barrier to entry to Bitcoin mining, democratize Bitcoin, and massively help the world save power.

Beyond these ambitions, oPoW would stabilize the cryptocurrency’s hash rate, so it’s not so vulnerable to price falls. In short, whether Bitcoin’s price declines or not, miners would still make profits.

The Challenges with oPoW

While the oPoW plan sounds ambitious, it has its share of challenges.

The energy-efficiency of photonic chips is not clear cut. Some photonic applications, for instance, optical switches and photonic circuits, use round-about applications to function. These applications increase the energy use of photonic chips. The researchers have not predicted how much energy the chips will save.  It’s hard to know what this means for oPoW at this stage, and if it will be a power-saving option after all.

The team is also yet to prove how oPoW will address the problem of different regions having different power costs. Hardware costs will rise in the future, not decrease. So finding cheaper sources of energy may be a better solution.

What Would Opow Mean For The Bitcoin Market?

Consider for a moment that oPoW proposes to change the fundamental mining algorithm of Bitcoin. That comes with drastic ramifications, both positive and negative.

If implemented, an oPoW system would, first of all, break China’s control of Bitcoin mining farms. In turn, mining would now be concentrated in technologically advanced countries. Countries that are ahead in photonic technology would benefit the most. As you can see, this would not be the democratization of Bitcoin mining that the researchers imagine.

Drops in Bitcoin’s price would not mean a reduction in hash rate. Whichever way the price goes, miners will continue to enjoy a payday.

There is a lot of chatter about current miners creating some sort of “price floor.” An oPoW implementation would sink this floor further in the event of a bearish market since mining costs would be lower. This would likely influence Bitcoin’s price to gravitate towards the bearish end.

Final Words

As it stands now, it’s hard to be enthusiastic about oPoW, especially with the many gaps in how it will improve the current system. Sentiments are rife within the Bitcoin community that the technology is likely to only be a temporary fix. The team itself has not specified how much power the chips would save. So while the concept looks good on paper, it’s probably not sufficiently innovative to solve one of Bitcoin’s long-running challenges. It’s up to the team to prove the Bitcoin community wrong on this one. 

Categories
Crypto Guides

Beginners Guide to Cryptocurrency Mining

Introduction

There is a significant difference in how cryptocurrencies and fiat currencies are generated and issued to the ecosystem. Fiat currencies are created and printed by the government bodies in response to orders by the state authority. At the same time, cryptocurrencies are issued to the public by going through the blockchain network according to a preset algorithm. There are different schemes assigned for mining, such as the Proof of Work, Proof of Stake, Proof of Authority, etc. These are referred to as consensus algorithms. The in-depth working of these processes is complicated. So, we shall stick on the basic working of it.

Definition

Cryptocurrency mining is the procedure to bring up new coins into the current flowing supply, by verifying the coins through a system. The ones that mine these coins are called miners.

Procedure to Mine Cryptocurrency

  • When a transaction is performed over the blockchain network, i.e., when a user sends coins to another address, the transaction information is recorded and put onto a block.
  • This block must be encrypted and made secure. This is where the miners come in.
  • To encrypt a blockchain, miners solve a complicated cryptographic puzzle to find the appropriate cryptographic hash for the code. For this, miners typically make use of large rigs of application-specific hardware to increase their chances of being the first one to verify and secure the block.
  • Once the block is successfully secured, it is then added to the blockchain, where other nodes on the blockchain network verify it. This verification process is known as consensus.
  • When the block successfully clears through the nodes in the network, the block is officially said to be verified and secured. And for securing a block, the miner is rewarded new-created coins. Hence, the complete above procedure of work is called Proof of Work.

Reward system in Cryptocurrency mining

Mining is a complicated process. Each day, miners commit a thousand watts of electricity towards mining cryptocurrencies. People mine coins though it is an expensive process because they receive a good number of Bitcoins for it, which has value in various markets.

As mentioned above, the reward is released to the miners when they successfully solve a block in the blockchain. The compensation received is pretty decent; in fact, it compensates a thousand watts of electricity. Having that said, the reward cannot be very high, as it could cause an oversupply in the market and depreciate the value of the currency.

Supply and Demand of a Cryptocurrency

Buying and selling cryptocurrencies is different from buying and selling of stocks, bonds, etc. Also, unlike investing in traditional currencies, cryptocurrencies are not issued by the central banks. Therefore, the monetary policy, inflation rates, and other economic factors do not apply to the cryptocurrencies. They are influenced majorly by factors such as the supply of the coins and the demand for it, the number of competing coins, and also the exchanges it trades on.

The supply of cryptocurrencies is impacted by the cryptocurrency protocol, which permits the creation of a new coin (same type) at a fixed rate. A number of coins are introduced into the market when miners verify the blocks of transactions. And the rate at which these new coins are introduced is designed such that it slows down over time. This is done to create a scenario in which the demand for coins increases faster than the supply, which hence causes the prices to shoot up.

Hence we can say that mining & miners have a crucial role in maintaining the supply & demand of any cryptocurrency!

Categories
Crypto Daily Topic

Bitcoin’s Thirst for Power: Why it Uses a Quarter Percent of the World’s Electricity?

If you thought the report by Nature.com a few days ago that it takes more energy to mine Bitcoin than mining gold of similar value was the most surprising thing you read about Bitcoin this week, you’re in for another surprise!

The amount of power Bitcoin mining consumes has been a growing concern over the years, but it has reached a point where it is plainly alarming. Today, it is estimated that Bitcoin consumes as much as a quarter percent of the world’s electricity supply, according to a tweet posted by James Todaro, the Managing Partner at Blocktown Capital and Columbia University Alumni.

James points out that humanity is justified to devote such a significant amount of resources to an asset because of how important it is to our future. If anything, he implies, Bitcoin as a technology asset is here to stay, and such assets as rat poison, tulips, beanie babies, and others that have already disappeared cannot be compared with Bitcoin.

Why Bitcoin is so power-hungry

You already know that Bitcoin runs on a blockchain network. You probably also know that at the core of its network is the Proof-of-Work consensus, a protocol that requires work in terms of data processing by a computer that takes time in order to validate blocks. Miners, a term that refers to the owners of computers that do the processing work, are rewarded with a certain amount of Bitcoins for every block validated.

Bitcoin’s Proof-of-Work consensus verifies the legitimacy of each block of blockchain transactions added to the chain using complex mathematical processes that uses the computer’s processing capabilities. In the early days of Bitcoin, mining was an easier process that required very little processing power. This is why anyone with a half-decent computer could use it to mine the coins back in the day.

With time, as the Bitcoin network scaled and grew in size, it demanded more processing power to validate blocks of transactions. This meant that the more powerful computers aptly known as ‘rigs’ had to enter the mining scene to meet the platform’s thirst for processing power. Mining Bitcoin became expensive because these powerful machines are not only expensive to acquire, but also use up a lot of electricity. It requires tremendous processing power to validate blocks of transactions in the shortest time possible.

How much power is 0.25% of the global supply?

Current statistics on the Digiconomist Bitcoin Energy Consumption Index show that Bitcoin mining uses as much as 79.79 terawatt-hours (TWh) of electricity annually, which is comparable to the amount of power consumed by Belgium estimated to be 82.1 TWh and higher than that of the Philippines which stands at 78.3 TWh annually.

Going by Digiconomist estimates, the amount of power the Bitcoin network gobbles up is in the upwards of $3.66 billion, but it generates revenue estimated to be $5.72 billion, a cost percentage of 63.9%. This is a lot of investment in a single asset, especially since the global adoption of the Bitcoin is still relatively low. While more people are appreciating and embracing cryptocurrency, and in particular Bitcoin, the uptake is generally gradual. It is estimated that it may take as long as 24 years for half of the global population to start using Bitcoin for regular payments.

While these figures may look scary, it is important to note that the Bitcoin technology platform has merit and is expected to ultimately grow to become the world’s primary form of payment. Considering that Television, the world’s most power-hungry electronic device now used in most households, uses as much as 8% of the total global electricity, Bitcoin’s 0.25% is not a figure to worry about at this point.

Effects on the environment

Bitcoin mining uses electricity that is not always harvested from renewable sources. If the figures on the Digiconomist’s Bitcoin Energy Consumption Index are anything to go by, the Bitcoin mining industry has a carbon footprint of 34.73 metric tonnes (MT) of carbon dioxide (CO2), a figure comparable to the carbon footprint of Denmark. It also produces as much as 10.62-kilo tonnes (KT) of electronic waste that is made up of discarded electronic devices that rarely ever make it back to recyclers.

In many ways, Bitcoin is like gold. It cannot be arbitrarily created, and its supply is limited. It was easy for the Nature magazine to compare Bitcoin mining to gold mining, not just because of the amount of resources it requires, but also because it takes increasingly greater effort as more of it is mined. Since the supply of Bitcoin is limited to 21 million, it will get to a point when miners will have unlocked all the available supply, unless its original protocol is altered to allow for more.

Presently, about 18 million Bitcoins have been mined, leaving just under 3 million left to be mined. It will cost more in terms of electricity consumption to mine the remaining quantity compared to what has already been mined. As such, it is expected that Bitcoin mining rigs will continue to demand more power until the last coin is mined sometime in the year 2140 if the bitcoin network protocol remains unchanged between now and then.

Conclusion

In 2015, Adam Hayes published a paper titled “A Cost of Production Model for Bitcoin,” in which he compares the production of Bitcoin to a competitive market where the miners “produce until their marginal costs equal their marginal product.” Since the marginal costs, in this case, is electricity costs (once the initial costs of equipment and infrastructure have been settled), he concludes that the costs of electricity will determine the future of Bitcoin mining.

It is expected that within a few months to years, Bitcoin will need as much as 1% or more of the total global electricity supply. However, all this will happen only if the energy does not become prohibitively expensive as to cost more than the miners will earn from the Bitcoins they mine.

Categories
Cryptocurrencies

The ultimate guide to cryptocurrency mining

So, can you still make enough money out of crypto mining in 2019? This simple guide tells you everything you need to know about cryptocurrency mining. And acts as the perfect launchpad to a successful crypto mining career.

The concept of cryptocurrency mining is often baffling to people outside cryptoverse and even to some inside it. Cryptocurrency mining, a.k.a crypto mining, is the process by which transactions between cryptocurrency users are verified and added on to the long list in the public blockchain ledger. The same process also introduces new coins into the circulating supply of a particular cryptocurrency.

Cryptomining is achieved via the use of specialized computers. Technically, anyone with a computer and internet can mine cryptocurrency. The only problem in actual success with crypto mining depends on several factors, such as which crypto you’re mining, how powerful your computer is, and the cost of electricity where you live. (More on that later). Depending on all these factors, crypto mining may be more expensive – both financially and time-wise – than anything you’re gaining from it.

Who Are Cryptocurrency Miners? 

Cryptominers are sometimes called the backbone of many cryptocurrency networks. And they’re worthy of this title because they are the ones responsible for issuing new crypto coins, validating transactions, and ensuring the security of blockchain networks.   

Bitcoin miners use specialized computers known as application-specific integrated circuits (ASICs), which are designed for the sole purpose of mining cryptocurrency. ASIC miners are usually designed to mine a specific cryptocurrency. This means a Bitcoin ASIC miner can only mine bitcoin. A Litecoin ASIC miner can only mine Litecoin, and so on. 

As cryptocurrency has increased in value, so have more cryptominers jumped into the bandwagon. As such, crypto mining has become so competitive that it’s no longer profitable to mine alone. Today, most cryptocurrency mining is done by “mining pools” in warehouses that have low-cost electric power. 

Mining pools are made of a group of miners who agree to share block rewards in proportion to the amount of work that each contributed to finding a new block (a block is essentially a collection of unconfirmed transactions plus a set of data about those transactions) 

What Is Hash Rate? 

Hash power, or hash rate, is the measure of the processing power of a mining computer. The higher the hash rate, the faster the next block on the blockchain network is found. The creator of the first cryptocurrency – Satoshi Nakamoto – intended for Bitcoin to be mined via computer CPUs. However, innovative programmers soon discovered they could derive more hashing power from graphic cards and wrote mining software to facilitate this. 

Graphic cards were then surpassed by Field Programmable Gate Arrays (FPGAs), which were soon phased out by ASICs, which packed inordinately more hashing and staying power. Nowadays, all serious crypto mining is done with ASICs, usually in low-cost electricity areas and in thermally-regulated areas. (Data mining centers are thermally regulated because the power ASICs consumes ends up as so much heat.)

What Is The Purpose Of Mining And How Does It Work? 

Cryptocurrency mining is actually another term to refer to a type of validation model known as proof of work (PoW). Different cryptocurrencies utilize different validation models to facilitate their release into circulation. Apart from proof of work, the other more common validation model is proof of stake, which uses a random selection of stakeholders (coin holders) as transaction validators. 

However, in PoW – which is used by cryptos such as Bitcoin, Bitcoin Cash, Litecoin, and others, miners compete with each other to solve computational puzzles to solve the next block. 

So, what is the point of mining at all? Mining is central to cryptocurrencies that rely on PoW TO keep the network functional. There are many intricacies involved with mining, but it has three most important functions which are as follows: 

It issues new coins into circulation.

Unlike fiat currency, which can be issued by the central bank at any time, mining is what facilitates the entry of new crypto coins into circulation. The issuance of new coins is set in the cryptocurrency code, so miners cannot manipulate the system or create new coins out of thin air. 

It validates transactions on the network 

When transactions are sent on the blockchain network, miners include these transactions in their blocks. A transaction is only considered secure and complete once it’s recorded on the blockchain – because that’s when it’s added on the public blockchain.

It secures the blockchain network 

Miners keep the blockchain network secure from attacks. The more miners are on the network, the more secure the network is. The only way to sabotage a blockchain network is for one miner to have more than 51% of the network’s hash power, which is near impossible with the many different miners working on the network across the globe.

How Miners Make Money and Block Rewards

Block rewards refer to the crypto coins that are awarded by a blockchain network to block miners each time they mine a block successfully. These rewards are issued by cryptocurrencies that use the proof of work consensus mechanism. Most miners channel these rewards back to the ecosystem to fuel their mining costs while keeping the rest.

Bitcoin – the first cryptocurrency and the pioneer of cryptocurrency, currently rewards miners with 12.5 BTC for each mined block. In the beginning, miners were rewarded with 50 BTC. Satoshi Nakamoto, the creator(s) of Bitcoin, embedded “halving” – or what’s colloquially referred to as “halvening” in cryptoverse, into the system so that the block reward is slashed into two after every 210,000 blocks have been mined. Bitcoin’s halvening happens after about every four years. 

Another example is Litecoin, which also halves its mining rewards. Litecoin’s halving occurs after every 840,000 blocks. As of November 2019, the block reward for the cryptocurrency is 12.5, having been halved from 25 in August.

The question that bugs many in cryptosphere is this: what happens after these cryptocurrencies’ coins, and others that rely on mining, are all mined? How will miners be rewarded? Well, besides block rewards, these crypto’s protocols have also provided transaction fees as a means of reward. The transaction fees will shoot up once the maximum supply is achieved – in response to increased demand. Thus, new coins may no longer enter into circulation, but miners will still have a payday. 

Cryptocurrency Mining Step By Step

When a transaction is made on the blockchain, e.g., a user sending bitcoin to another user’s address, the transaction must be recorded – that is, the information must be indicated on a new block

  • This block must be secured and encrypted so that it cannot be reversed or modified, and is up for grabs for all miners on the network 
  • To encrypt the block, miners must find the solution to a computational puzzle through trial and error method in a race to find the proper cryptographic hash for the block. 
  • Once a miner finds a new block, it’s verified by other computers in the network in a process known as consensus and then added on the blockchain.
  • If a miner has successfully mined, verified, and secured the block, they are awarded newly created coins.

The Downsides to Cryptomining

Though mining is the lifeblood of certain cryptocurrencies, it comes with its own share of challenges. Some of these are as below: 

Complexity: Cryptomining is not for the uninitiated. Even people with a pretty good grasp of cryptocurrencies and blockchains might find themselves befuddled in the first few days. What’s more, you’ll need to assemble a range of equipment such as a customized mining computer, an ASIC chip, cooling equipment, and so on. 

On top of that, you’ll need to read a lot, keep abreast of what’s happening in the crypto world, and be prepared to make mistakes once in a while.  

Electricity Costs – Mining can prove quite expensive, mainly because it consumes a lot of electricity. The ASIC computers and the massive servers involved usually rake up enormous power bills. Bitcoin mining is especially electricity-intensive – so much that it has raised questions from ecologists who argue that it’s becoming a threat to the environment. 

Current estimates show that the current global power consumption by Bitcoin mining is a minimum of 22 terawatt-hours per year – which is almost the same as the annual power consumption by Ireland. 

Hardware Costs – Mining farms need to spend a lot of money to purchase stronger equipment every other few months as the prior equipment becomes obsolete due to increased mining competition. The cooling systems further add up to the hardware costs. 

Vulnerability: The proof of work model is vulnerable to an individual or an entity gaining control of 51% of the network’s computing power. If this were to happen, it would essentially hold the network hostage. The more dominant mined cryptocurrencies like Bitcoin, Litecoin, Bitcoin, and Monero are safe from this nature of attacks. However, smaller cryptocurrencies that require longer block processing durations and have weaker daily volumes could fall prey easily. 

Conclusion

The concept of cryptocurrency mining is fun, as it can be confusing. This guide should lift part of the mystery surrounding the concept. It has been interesting to see the evolution of crypto mining – from being able to mine from the comfort of your home on your PC to dedicated warehouses solely for mining. The innovation of ideas that have gone into the space is also exciting, and we can only wait to see what more the enterprising mining community comes up with in the future.