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Crypto

Overview of Cryptocurrency Mining and the Proof of Work (PoW)

Cryptocurrency mining is the process of solving a mathematical problem (for example a sum) using computer equipment. When a computer (or a group of computers) adequately solves the problem posed by the network it is rewarded with an incentive, in the case of cryptographic money the incentive is a series of cryptocurrency units that are being mined. Basically, what these computers do is launch a series of possible solutions, until the proposed solution matches the hash value of the block.

Mining cryptocurrencies, the simplest explanation:

Let’s say for example that the hash puzzle states that whoever first discovers the number from 0 to 10 gets the prize. The miners will be throwing numbers until the number matches the riddle. During the process, you will wonder if the number is correct or not. Whoever gets to the right number first wins the prize or whatever, gets the reward from the block.

“The algorithms that determine the difficulty of the problem and other variables today are taken as consensus systems since the agreement of the rules by all participants is needed.”

Currently, the consensus system used by Bitcoin, Ethereum, and many other cryptocurrencies is Proof-of-Work (PoW), although there are a large number of currencies, such as Lisk or Stratis that are purely Proof-of-Stake (PoS). The PoS is based on storing coins and the work is easier, which allows not to waste work as in the PoW and is more energy-efficient.

Different types of computer equipment can be used to mine Proof-of-Work:

Bitcoin requires ASIC, which are specialized equipment with many processors, which provide them with great power for mining.

Ethereum with mined RIG, which are systems based on many graphics cards. Bytecoin is mined with a processor only.

There are other options, such as ‘mining’ cryptocurrencies by browser, as is the case of Bitrad.io, sharing content and being voted for this content, as is the case of Steemit, or sharing a part of the capacity of our hard drive, as is the case of Storj. In the same way, mining allows us to control how many coins are in circulation.

“When a block is certified, the miner receives a reward and therefore new coins are introduced into the market. This means that more and more coins exist, up to a maximum limit, thus offering control of the network.”

The Proof of Work protocol, or Proof of Work, is the most well-known and oldest consensus protocol that consists of the parties of a network successfully performing computationally expensive work to access the resources of that network.

The Work Test protocol helps us to avoid certain unwanted behaviors in a network. Its name comes from the English Proof of Work (PoW). This protocol works under the concept of requiring work from the client, which is then verified by the network. Normally the requested work consists of performing complex computation operations.

These operations are then verified by the network. Once they are approved, the client is given access to use the network’s resources. This is intended to prevent malicious customers from consuming all resources in an uncontrolled manner. A situation that may end up denying the service provided to the rest of the network’s customers.

A very simple example to understand is the famous captcha that you put when you want to make a registration on a website. The website puts this challenge that the visitor has to solve. If you solve it you will have access to the service. This prevents an attacker from creating millions of records and collapsing the website. However, the challenge in computer-to-computer communication cannot be as complex. It must be solvable, albeit with relative complexity.

The main characteristic of this strategy is its asymmetry. The work of the client is moderately difficult to perform, but the verification by the network is simple. This means that the work test takes a long time to produce and is computationally expensive. But verifying it is simple, as testing designs patterns that facilitate verification.

This characteristic was, precisely what drew the attention of Satoshi Nakamoto when designing the Bitcoin. That is why he implemented the HashCash system (a PoW system) in his recognized cryptocurrency.

PoW algorithms – A bit of history…

In 1992, the penetration of the Internet was already quite important. With its arrival, the use of emails began to spread. But this positive situation brought with it new problems. Email systems suffered from recurring spam attacks. These attacks generally disabled servers and left many people without services. Then a solution had to be found for this problem.

In 1993, academics Cynthia Dwork and Moni Naor recognized the problem and tried to solve it. From there the trial “Pricing by processing or combating spam” originated. In which they presented ways to prevent spammers from sending mass messages. The idea presented was to include a computational cost to be able to use email services. 

To do this, Dwork and Naor designed a series of tests that required computational cost work. Among them; the calculation of some square roots or the intensive use of hash functions. Once this work was done, the user had to add the information to the email to be verified. If it was correct the mail was sent, otherwise, the mail was rejected. This simple system deterred spammers from continuing their attacks. But it still took some time before the system could be fully implemented.

 

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Crypto Daily Topic Cryptocurrencies

How to Take Advantage of Ethereum 2.0

Ethereum, the decentralized blockchain that features smart contracts, will be getting a series of upgrades that will see improved scalability, security, and sustainability. This massive upgrade will create new opportunities for investors. Apart from allowing Ethereum users to earn passively from staking, smart investors can take advantage of price changes during the launch of Ethereum 2.0 and multiply their investments. 

In this article, we will look at what is Ethereum 2.0, what investment opportunities it creates, and how you can be part of this development.

What is Etherum 2.0 All About?

Also known as Eth2, Ethereum 2.0 is fundamentally a shift from the current proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) model. In the PoW model, the generation of new blocks relies on the computing power of each node on the network that is taking part in transaction validation. On the other hand, PoS relies on virtual miners (also called validators) and Ether deposits to achieve consensus. 

Besides changing the consensus mechanism, Eth2 also introduces shard chains – a mechanism that ‘splits’ the Ethereum blockchain and shares the processing task among different nodes. This approach increases the network’s processing capability by allowing concurrent processing of transactions – a shift from the traditional sequential processing. 

While the upgrade is squarely technical, its economic and financial implications will be far-reaching. 

How Will Eth 2.0 Affect Prices?

Whenever a major event happens on certain crypto, its prices are bound to change due to increased speculation. In the wake of the anticipated Eth2 launch, upward price movements were observed. The launch was set to happen on 1st December, and a week to this launch, ETH prices had gone as high as $600. While this rally might have been due to other factors, such as the general positive sentiment on cryptocurrencies, the surge observed just a week before the event can’t be coincidental. 

Speculation aside, Eth2 is bringing improved transaction speeds and lower costs – factors likely to increase demand for the crypto. Already, exchanges are reporting declined sell pressure, which indicates that investors are not eager to sell ETH at the moment. The speed and transaction cost improvements will also automatically cascade to tokens that run on the Ethereum blockchain. This will trigger even more demand for the crypto and, thus, better prices. 

Staking in Eth 2.0

The introduction of staking in Eth2 creates a new opportunity for investors to earn by validating transactions, and this is the latest investment opportunity we would like to discuss. 

Simply put, staking in Eth2 implies depositing 32 ETH to activate validator software – the tool you will be using to process transactions. As a validator, you will have the power (and duty) to process transactions and add new blocks to the blockchain, and earn rewards while at it.

Rewards are given to validators for pushing transaction batches into new blocks and validating other validators’ work. While there are bountiful rewards in staking, you might lose ETH if you are unavailable to perform validations or if you use your stake against Eth2 validation specifications. 

How to Stake in Eth 2.0

Staking involves sending 32 ETH to the following address: 

0x00000000219ab540356cbb839cbe05303d7705fa

However, you will need to use the launchpad dedicated for this purpose. The address above is for verification purposes only. The process involves several distinct steps, summarized as follows:

  1. Review Eth2 staking agreement/ terms and conditions
    1. Sign up on the launchpad. This will involve depositing the 32 ETH.
    2. Agree that it is your responsibility to keep your validator online.
    3. Agree that you are liable to slashing (incurring a large penalty) if you act against validation specifications.
    4. Agree that you understand that your mnemonic (or seed) is the only way to access your funds and that you will keep it safe.
    5. Agree to safeguard your key stores, which will hold your keys, and provide the public keys to the launchpad site to activate your validator.
    6. Agree that you cannot transfer your staked ETH until Phase 1 and that you cannot withdraw until Phase 2.
    7. Agree that once you exit, you cannot rejoin as staking is a long-term commitment. (The completion of each phase depends on reaching a certain amount of staked ETH. Thus, withdrawals will keep extending timelines for this smart contract).
    8. Accept early adoption risks, i.e., software and design flaws that may result in the loss of your ETH.
    9. Agree that you are technically capable of configuring a validator.
  2. Select an Eth1 client that will run parallel to your Eth2 client. This is necessary to process deposit transactions coming from the Eth1 chain.
  3. Select an Eth2 client and set up a node. You can choose between Prysm, Nimbus, Lighthouse, and Teku. Nimbus is one of the most versatile as it can run even on older smartphones.
  4. Select the number of validators you would like to run and the operating system you will use. Remember, to operate each validator, you will need 64 ETH.
  5. Upload the validator which you downloaded/ built from the previous step.
  6. Finally, connect your wallet.

While staking in Eth2 is quite technical, especially for the average user, a comprehensive step-by-step guide is provided on the Ethereum launchpad website. It is also worth acknowledging the thoroughness with which the documentation was put together by the Eth2 team to guide potential validators. If you use this guide, you are unlikely to get stuck simply due to technical difficulty. 

Is Eth 2.0 Staking a Good Idea?

Staking in Eth2 is a double-edged sword – it comes with both benefits and risks. When you commit your ETH to the staking contract, you are almost guaranteed returns just from staking. However, returns are highly variable. In fact, it is impossible to tell how much you can earn by staking a fixed amount of ETH until you actually receive the reward. Even so, if you stake and consistently participate in validation, you will get rewarded. 

Secondly, staking means locking your ETH to the network for some time, without the possibility of withdrawing it at least until Phase 1.5. This is akin to depositing with a fixed account, whose interest can be compared to the growth of ETH in the near future. 

While staking is a good way to earn from Eth2, you might want to consider the following risks:

  • Staking is a one-way deposit. ETH you send to the contract address cannot be withdrawn until an unknown future date (this is until Phase 1.5 of the upgrade is reached).
  • Profits you earn from staking also remain staked until this unknown future date.
  • Validation is a responsibility that all stakers must undertake. By being offline, you will lose as much as you would have earned if you were available for validation.

Final Thoughts

The coming of Eth2 brings with it exciting investment opportunities. Other than the traditional trading and HODLing, Eth2 allows you to commit some funds to the network and join other validators and earn exclusive rewards from it. Risks, including early-adoption software bugs and slashing due to being offline, exist. However, all considered, staking is a worthy venture that ETH investors should consider. 

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Cryptocurrencies

What’s Ethereum 2.0 and Why Does it Matter? 

After a years-long wait, Ethereum 2.0 is finally here. Well, almost. The major upgrade will see the Ethereum network fix various scalability and security issues. The most notable shift will perhaps be moving from a proof-of-work (PoW) consensus mechanism to a proof-of-stake (PoS) protocol. 

But this is just a scratch on the surface. With Ethereum being one of the most important cryptocurrencies in the world, Ethereum 2.0 is set to shake up not just the Ethereum ecosystem but cryptoverse in general. 

Understanding Ethereum 2.0

Ethereum 2.0 is an upgrade to the Ethereum protocol. Also known as Eth2 or Serenity, the update is meant to improve the scalability and security of Ethereum. The current Ethereum blockchain, with the scalability of 15 transactions per second (TPS), can simply not handle the volume that would be required to handle millions of transactions per second. Eth2 will not just power dramatically more than that; it will also remove bottlenecks for developers and users.

Ethereum founder Vitalik Buterin and the team have been working on Eth2 for years now. This is because scaling a blockchain without sacrificing security and decentralization is not an easy task. Eth2 will address these issues through several important features that will be starkly different from the Ethereum we have now. 

What’s the difference between Ethereum and Ethereum 2.0? 

What will mainly distinguish the two versions is that Ethereum 2.0 will feature a proof-of-stake consensus, implementing shard chains and the beacon chain. Let’s look at each of these features in more detail. 

#1. Proof-of-stake 

Ethereum currently implements a proof-of-work consensus model to secure the network and maintain and facilitate an incentive mechanism to reward miners who confirm and validate transactions on the network. Unfortunately, PoW requires huge amounts of energy – which is not sustainable in the long run. 

PoS is a far faster and sustainable alternative to PoW. PoS involves granting stakers in the network the right to become a validator and get paid to verify transactions. Other validators can confirm the “minting” of the block. If there are enough confirmations, the block can be added to the blockchain. Validators will then be rewarded with block rewards for the successful block. 

PoS is a lot of times better than PoW when it comes to energy-efficiency. This is because, unlike PoW, there isn’t an energy-intensive process required to validate blocks. This is also good news for individuals who want to help secure the network. 

Another feature that a PoS model will enable security on Ethereum 2.0 not previously possible with PoW. PoW is susceptible to a 51% attack. The PoS model will not only reward validators for being honest; it will penalize attempts at fraud. One such penalty will be ‘slashing,’ which will not only involve the validator in question being forced out, but all/part of their stake will be penalized. 

#2. Sharding 

Individuals who wish to access the Ethereum network have to do that via a node. Nodes store a copy of the entire Ethereum network, meaning they have to download it. This takes up too much storage and slows things down. 

Shard chains act like the blockchain but only hold a specific subset of the blockchain in question. This means nodes only have to manage a ‘shard’ of the entire network. This goes a long way in increasing transaction throughput and enhancing scalability. 

#3. The beacon chain 

Shard chains will work in a parallel version. This necessitates a mechanism of sorts to keep them in sync with one another. Enter the beacon chain, which will facilitate consensus to shard chains. 

Beacon chain is a completely new, proof-of-stake blockchain rendering that will be the coordinator of the whole ecosystem. The chain will facilitate data sharing between the shard chains and facilitate scalability. The beacon chain will be the first roll-out feature of Eth2. 

How Ethereum 2.0 Will Be Rolled Out 

Ethereum 2.0 will not be released at once but rather in three phases. Each phase will feature a crucial feature to contribute to the success of the new blockchain. 

#1. Phase 0

Phase 0 constitutes the first rollout, and it will come down to the release of the beacon chain, which is central to the network’s functioning. The beacon chain will start accepting stakers’ deposits in preparation for the proof-of-stake consensus. All registered stakers will not be able to withdraw from the contract until shard chains are put in place. Afterward, staking deposits will be locked up until the next rollout. The Phase needed a minimum threshold of 524,288 ETH to launch. This target has already been met and even passed. 

#2. Phase 1/1.5

The next phase will be two phases combined: Phase 1 and Phase 1.5. Phase 1 will bring with it shard chains, which will allow validators to produce blocks via a PoS consensus. Phase 1.5 will officially now introduce shard chains and begin the transition from proof-of-work to proof-of-stake. This phase will be released in 2021. 

#3. Phase 2 

This will be the final phase, whereby the blockchain will fully support shard chains – which will have taken on new features and capabilities. The shards will have the ability to integrate with smart contracts, allowing decentralized applications (DApps) developers to mesh seamlessly with the network. This phase will be slowly rolled out in 2021 and beyond. 

When Will Ethereum 2.0 Be Released? 

The Ethereum 2.0 upgrade will start rolling out on December 1, according to a blog post by the Ethereum Foundation on November 4. The launch is conditional on at least 16,383 validators, each staking 32 ETH to make up 524,288 ETH. Vitalik Buterin led the way in depositing ETH, putting up 3,200 (worth more than $1 million), according to Etherscan, which tracks Ethereum transactions. See the launch pad where ETH is being deposited here

Ethereum enthusiasts are naturally excited about the launch and hope everything will fall in place. If the launch is successful, the Ethereum network as we know it will change a lot – and for the better. 

Closing Thoughts 

Ethereum 2.0 is a long-awaited update to the world’s second most popular crypto and blockchain network. Having been introduced to the world of smart contracts and DApps, the network has been the most popular go-to option for DApp developers worldwide. But in recent years, the network has been grappling with scalability issues that would have proven unsustainable in the long term.

The rollout of the new network will take a while, even longer than many expect. But as long as the train will soon leave the station – that’s good enough news for the community. 

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Crypto Guides

Is EOS A Better Investment Than Ethereum Right Now?

Introduction

EOS and Ethereum both are popular blockchain smart contract platforms. To know whether EOS is a better investment or Ethereum, we will need to compare the two technologies by exploring basic concepts and comparing their mechanisms to draw out the necessary conclusions. After Ethereum was introduced in the crypto industry, two years later, EOS was launched and claimed to fix the flaws in Ethereum. EOS is a strong, scalable contender and might outperform Ethereum. The battle of EOS vs. Ethereum is the most interesting and happening space in the crypto industry. 

What is Ethereum?

Ethereum is a blockchain platform launched in 2015 by Vitalik Buterin. It allows users to send and receive funds independently without the assistance of any third party. It was the first blockchain project to install the smart technology contract. In this technology, some predefined conditions are applied, and users are needed to justify the conditions to proceed with transactions without the need for an intermediate body. This decentralized blockchain has its own cryptocurrency called Ether (ETH), which is tradable in most of the crypto exchanges. 

What is EOS?

EOS is a new blockchain platform that can also manage smart contracts. The Block.one company launched this project in 2017. It has created history by raising the highest Initial Coin Offering(ICO), worth more than $2.5 billion. It has its own EOS coin, which can be transferred from wallet to wallet. EOS aims to become the most scalable, cheapest, and fastest blockchain platform. 

Scalability

Presently Ethereum can support 15 transactions per second, whereas EOS can serve up to at least 10,000 transactions/second. EOS using IoT provides for inter-blockchain communication, which creates blockchains to allow more transactions. Ethereum is working on two protocols called “Plasma” and “Sharding” to increase transaction numbers per second. 

Transaction Cost

On Ethereum, users need to pay gas for each transaction, but EOS works completely in a different way. EOS blockchain users deposit their token to cover the bandwidth required for the transaction. 

Consensus Mechanism

Ethereum is based upon the proof-of-work model, and EOS follows the proof-of-stake model. The transactions are verified without the support of any intermediate system. Ethereum generates random puzzles at every node before confirming the transactions. These puzzles are so difficult to solve that you need to take the help of experts called “Miners.” While EOS offers to stake your coins to verify transactions, the stakers have a chance to earn the rewards. 

EOS Vs. Ethereum: Who holds the future?

Ethereum, just after Bitcoin, is the most popular cryptocurrency across the world. EOS, right from its initial days, is performing exceptionally well. EOS is yet to achieve growth that Ethereum has already achieved, but EOS is significantly better than Ethereum. EOS is a more user-friendly cryptocurrency than ETH. It’s still too early to think about how far EOS will go because the blockchain ecosystem is highly unpredictable. 

Conclusion 

EOS is younger than Ethereum and has improved scalability and transaction fees as compared to Ethereum, but still, it’s under so much controversy because of its more centralized layout. If Ethereum successfully implements the proof-of-stake mechanism, then EOS might not be able to outperform it. On the other hand, if Ethereum doesn’t reduce it’s transaction costs, then EOS will easily overtake Ethereum soon is what crypto experts believe. Cheers! 

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Crypto Guides

What Should You Know About Cryptoeconomics?

Introduction

Cryptoeconomics is a gentle combination of both cryptography and economics, i.e. incentives, as the name suggests. Cryptoeconomics ensures the decentralized peer to peer (P2P) network is viable and dependable for the proposed transactions on a P2P network. A general misconception when people come across the word Cryptoeconomics is that it is a field in economics, but it isn’t true. The use of cryptography and economic incentives to run a decentralized network without malicious attacks as it isn’t governed by anyone is Cryptoeconomics.

Why Cryptoeconomics?

The P2P networks are not new with the invention of blockchain and cryptocurrencies in our lives. Torrents sites have been using decentralized P2P networks for decades to share files. The general principle is that whenever you download a file from torrents, you are supposed to seed a file which can be useful for anyone else to download. In general, that is how we are creating content in the torrents for others to download.

This is not hard and fast rule but depends on the honor code. Human Beings are, in general, not honorary; hence most of the people don’t even know that a file should be seeded in return for a download, and hence the system has been a big failure. Hence incentives have been introduced in the cryptocurrency platforms, including cryptographic has functions for security purposes.

How does it work?

Let us see how Cryptoeconomics work using the example of Bitcoin. In 2008 bitcoin white paper was released, showing a first-ever way to use Cryptoeconomics with a practical and live example by minting a bitcoin by January 2009. Not only does the incentive concept evolved, but Bitcoin successfully overcomes the concept of the Byzantine Generals problem to create a perfect consensus mechanism called Proof of Work. Let us see in detail how cryptography and economics play a role in the bitcoin platform.

Properties of Bitcoin that have come due to cryptographic hash functions

Bitcoin works on blockchain technology, which is a continuous chain of blocks linked together with cryptographic hash functions.

Each block contains a predefined number of transactions with a hash of all the transactions combined.

The platform is immutable, i.e., already added, and sealed blocks are not subject to any change, but new blocks can be added.

Only valid transactions are allowed and added to a block using a consensus mechanism; in the case of bitcoin, it is PoW.

The blockchain is accessible by anyone in the world, as this is a permissionless system.

If a high transaction fee is paid, the transaction can be verified and committed to the blockchain quickly. We had seen many examples in 2017 when the bitcoin price zoomed to be highest ever.

It should be easy to retrieve information on any transaction confirmed in the blockchain. This is possible using the concept of the Merkle tree.

Some of the main functions which run the bitcoin blockchain platform are

  • Hashing
  • Digital Signatures
  • Mining
  • Proof of Work

Economics

As we discussed before, the fundamental difference between blockchain P2P networks and other P2P networks is the incentive model. For getting any work done, the work should be rewarded using appropriate incentives as motivation. At the same time, the tone should be punished if the work is not adequately done or done in a malicious way to create a loss in the network.

How are the participants rewarded in the network?

  • The participants are paid in native cryptocurrency of the network for actively participating in running the network and confirming the transactions as required.
  • The most recent winner of the block is incentivized with local cryptocurrency. Some privileges like what transactions should be added in the block and charge transaction fees to add the transaction in the block kind of decision-making rights are also given.
  • Simultaneously, wrong participants are fined, or their decision-making rights are snatched away as required.

Now a question might be raised like how does cryptocurrency have a value? The answer is simple: how a fiat currency or gold has value, supply, and demand. A whole lot of other factors like the network integrity, number of coins in circulation, is the network affected by a hack recently, history and purpose of the coin in the first place, and a lot of stuff. To determine all these parameters and how the miners maintain their integrity without being malicious is based on the concept of Game Theory and Nash Equilibrium, which we will be delving into in our further articles.

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Cryptocurrencies

How Exactly Does Blockchain Work?

Anyone who’s heard of cryptocurrency has most probably heard of blockchain. If you ask most people, they’ll tell you blockchain is cool. But they probably won’t tell you much beyond that. That’s because not everyone understands how blockchain works.

Not that it’s a hopelessly complicated concept. On the contrary. It’s just a groundbreaking technology with many firsts that might take some getting used to. In this article, we break down what’s blockchain, its history, how it works, and the properties that make it so revolutionary.

What is Blockchain?

The concept of blockchain is credited to computer scientist Stuart Haber and physicist W.Scott Stornetta. In a 1991 white paper, the two wrote a white paper that proposed the idea of time stamping and using private key signatures (based on cryptography) on submitted data.

This idea inspired the work of many other computer scientists and cryptography enthusiasts – leading to the creation of the first blockchain application – Bitcoin.  

‘Blockchain’ can be defined in several ways. Some people may understand it as a literal chain of blocks – though not in the real sense of those words. Others would understand it as a decentralized digital diary or ledger. (Decentralized means everyone can have access, and no single authority makes the rules.)

Both are correct. In this context, ‘block’ is essentially transaction data stored on a ‘chain,’ which is the public database. Every block in the blockchain contains several digital pieces of information, which we’ll detail below:

☑️ Information about transactions including date, time, and the amount of cryptocurrency in the transaction

☑️ Information about the participants of transactions, i.e., a digital signature (not their real name)

☑️ Distinct information that distinguishes it from other blocks, known as a ‘hash.’ (a hash is a string of letters and numbers generated by a ‘hash function.’ A hash function is a mathematical function that converts random letters and letters into an encrypted text of fixed length.)

A single block on the blockchain can only store up to 1MB of data. Depending on the size of transactions, a block can hold a few thousand transactions.

How Blockchain Works

When a block is validated (that is, the transactions in a block are verified), it is recorded on the blockchain. But for a block to be added on the blockchain, four things must happen: 

A transaction must take place.  

That transaction must be verified. After you pay for goods in a store with crypto or you send cryptocurrency to your loved one, that transaction must be confirmed as accurate and legitimate. Unlike with other public records of information like Wikipedia or your local library where there’s someone in charge of verifying new data entries, the blockchain relies on a network of computers for that task.

Verifying means checking if the transaction is as you said it was, in regards to the details of the purchase, time, amount, and participants. 

The transaction must be stored in a block. After a transaction has been confirmed as legitimate, it gets the approval to join a block where there are many others like it.

The block is given a unique identifier called a hash. Once all transactions of a block have been verified, it’s given a distinctive code that will differentiate it from all other blocks on the blockchain. Then, that block is added to the blockchain. 

When a block is added to the blockchain – it becomes a public matter of record available for anyone to see. A quick look at Bitcoin’s blockchain, for instance, will show you traction data along with the info about when (“Time”), where (“Height”) who (“Miner”) added the block to the blockchain. 

The blockchain network is maintained by network participants. These participants are also called nodes and is composed of a myriad of interconnected computers spread across the globe. Every node has a copy of the blockchain, and all participants are equal in authority. 

Therefore, blockchain transactions take place within a global, peer-to-peer network. Its peer-to-peer characteristic makes it decentralized, borderless, and censorship-resistant. (Censorship resistant means anyone can interact with the blockchain on the same terms as anyone else, and no one person can singly modify the content on the blockchain.)

A central part of many blockchains – including Bitcoin, is mining, which relies on computers to run a series of hashing algorithms to “mine” or process the most recent block. Each blockchain uses a different type of hashing algorithm. For example, Bitcoin uses the SHA-256 algorithm. ‘SHA’ stands for Secure Hash Algorithm. The SHA-256 takes an input of alphanumeric characters of any length and converts it to an output of 64 characters (256 bits). 

Once a block is mined, the miner broadcasts it to all miners (nodes) in the network. They then confirm its validity before adding to it to their copy of the blockchain. They will also include the hash from the previous block onto the new block – hence the name blockchain. 

The model of producing new blocks by running a series of hashing algorithms is called Proof of Work (PoW). PoW is the model used by Bitcoin, the first application of blockchain and the world’s first cryptocurrency. PoW, however, uses extremely high computing power and hence, electricity – leading to the development of other models meant to improve on it – for example, Proof of Stake (PoS). 

The Principles of Blockchain

Blockchain has three main inherent characteristics that have made it such a revolutionary technology. These characteristics are as follows:

  • Decentralization
  • Transparency
  • Immutability 

Decentralization 

On a blockchain, each participant in the network has access to the whole blockchain. No one participant has control over or regulates its information. Also, every participant can validate the records on the chain.

You can also transact directly with other users on the blockchain – send money, receive money, etc. without an intermediary.

In the same way, the blockchain is also architecturally decentralized such that there’s no one single or even several points of failure. For an attacker to gain control of the blockchain, they would have to gain control of more than half (at least 51%) of the network – which is almost impossible.

Transparency

Blockchain technology came with an unprecedented level of transparency. If speaking from a cryptocurrency viewpoint, for example, all transactions are recorded on the blockchain and identified by the owner’s public address. In cryptocurrency, this is what is referred to as pseudonymity, i.e., while their public address is open information, their real identity is not disclosed.

In real-world blockchain applications, for instance, the supply chain, every single step of the process is available for all to see. This introduces transparency never before seen in the world.

Immutability

In the context of blockchain, immutability means that once something has been recorded on the blockchain, it cannot be changed or altered.

Blockchain achieves this via a cryptographic hash function – which is taking an alphanumeric input of any length and giving it an output of a fixed length.

The immutability of blockchains means it can be applied to many situations to encourage accountability when people know that they can’t manipulate information or accounts.   

Conclusion

The technology behind cryptocurrencies is interesting and revolutionary. It’s decentralized, transparent, and immutable nature is what makes it so unique. It’s what has made Bitcoin a household name and pushed cryptocurrencies to the fore. The next time you’re talking about blockchain, hopefully, you’ll be doing so with much more confidence.

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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.   

 

 

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Crypto Videos

What Is Proof Of Work? – Cryptocurrency Mining

 

What is proof of work cryptocurrency mining?

Cryptocurrency mining is a process that is used to verify cryptocurrency transactions and add them to the blockchain ledger. Cryptocurrency mining has been a topic of discussion ever since Bitcoin started getting popular. On top of that, the mining itself has grown exponentially in the past couple of years.

This article will try to explain how proof of work mining works as well as its pros and cons. Proof of work mining in-depth. Proof-of-Work (PoW) is the original consensus algorithm in a blockchain network and is the consensus algorithm that Bitcoin uses. Proof of work is used to confirm transactions as well as create new blocks to the blockchain. By using PoW, miners compete against each other to complete transactions on the network, and the first miner to complete it gets the block reward.

The main working principle of Proof of Work is a complicated algorithm that requires a lot of computation power to use. Transactions get bundled in blocks that require verification. The verification process is nothing but miners competing to solve a mathematical puzzle before the rest of the world. Whoever solves the puzzle first, gets rewarded. The answer to the PoW puzzle is called hash.

The more the network is growing, the harder it is to solve a puzzle first and submit the hash to the consensus algorithm. The algorithms need more and more hash power to solve as speed is a major factor in mining. This becomes a problem because harder mathematical equations are good to prevent DoS attacks and spam but also slow down the puzzle-solving itself, therefore slowing down the network.

This problem is solved by adjustable mining difficulty. How complex a puzzle solely depends on the number of users, current mining power, as well as the network load. In Bitcoin, network difficulty is adjusted every two weeks.
Where is proof of work mining used?
Proof of work is used in a lot of cryptocurrencies, with the most famous one being Bitcoin. Bitcoin was the project that laid the foundation for this type of consensus.
Besides Bitcoin, another large project with PoW is Ethereum. Given that almost three-quarters of all cryptocurrency projects are tokens made on the Ethereum platform, it’s safe to say that the majority of cryptocurrencies use the PoW consensus model.

Why use a Proof of Work consensus algorithm?

The main benefits of the proof of work consensus algorithm are:

The anti-DoS attacks defense
Low impact of stake on mining possibilities.
Anti-DoS attacks defense – PoW imposes some limits on performing certain actions in the network. These actions require a lot of computational power as well as time. This brings the costs of the attack too high, which renders attacks of this kind useless.

Mining possibilities – The PoW algorithm does not care about how much money a wallet has to mine. All that matters is the amount of computational power and how fast a node can solve the puzzle. This prevents whales from being in charge of making decisions in the name of the network just because they hold a lot of funds.

Proof of work disadvantages

The Proof of work consensus algorithm also has several disadvantages. The main disadvantages are:
Huge expenditures
“Uselessness” of computations
51 percent attack.
Huge expenditures – Mining currently requires highly specialized computer hardware to achieve the effectiveness of solving complicated equations. This specialized mining hardware consumes large amounts of power to run, and people are starting to question if the power spent is justified.
“Uselessness” of computations – Besides using a lot of power (mostly electricity), miners also use quite a bit of computational power that could maybe be used elsewhere. Even though this computational power guarantees network security, it cannot be applied anywhere else.
51 percent attack – Small proof of work algorithms are extremely vulnerable to this kind of attack, while Bitcoin may be large enough to be immune to it. 51 percent attack, also called a majority attack, is when a user or a group of users control the majority of mining power, which gives them the power to control most network events. These attacks are considered obsolete as they are easily spotted by the public, and the new blockchains created in the process are rejected.

Mining pools

As it has been previously mentioned, the block reward is given to the miner who solves the mathematical equation first. However, the chances of finding a solution to this problem as a single miner are now slim to none. This is why miners are joining their computational power in hopes of solving the puzzle as a unit and sharing the reward fairly. This is how mining pools are created. These pools are, as the word implies, pooling of resources by miners to split the reward equally among everyone in the pool according to the amount of work they contributed.

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Cryptocurrencies

Consensus and Consensus Mechanisms

Cryptocurrencies operate on a blockchain – a decentralized peer-to-peer system with no centralized authority that makes decisions on behalf of the other participants. While this system eliminates arbitrary decision making and corruption, it still presents a problem. How will decisions be made? How will things get done?

For blockchain networks to make decisions, there is a need to come to a consensus. Blockchains use “consensus mechanisms” to secure the network and verify transactions. Consensus mechanisms are protocols that ensure all nodes (devices that support blockchains by validating and relaying transactions) on the chain are harmonized and can collectively approve and add transactions on the blockchain.

Characteristics of a Good Consensus Mechanism

In order to ensure a consensus mechanism is fair and reliable and achieves the function of a “consensus,” it must possess certain qualities, like being:

☑️Agreement Oriented: A consensus mechanism should elicit the highest level of agreement possible from the group

☑️Collaborative: Participants in the group should put the best interests of the group above everything else

☑️Cooperative: Decisions should be made to benefit the group as a whole rather than individuals

☑️Egalitarian: This means the system is fair – every single vote must carry equal weight. No one vote can be more important than the rest

☑️Inclusive: As many people as possible should feel like their vote counts and want to participate in the process, unlike a regular voting process where people are unmotivated to vote because they feel as if their vote won’t count in the long run

☑️Participatory: The consensus mechanism should be designed in a manner that everyone can participate in the process

Consensus Mechanisms Used In Cryptocurrencies

Ever since Bitcoin pioneered the proof of work mechanism, multiple other consensus models have been experimented with and adopted. Some of these mechanisms have been created to sidestep the energy-intensive aspect of proof of work. Others aim to achieve faster and more convenient transactions. With that, here are some of the most common consensus mechanisms used in cryptocurrencies today.  

1. Proof of Work

Proof of work (PoW) is the consensus mechanism used by Bitcoin, the pioneer cryptocurrency. It involves a process known as mining, which confirms transactions and adds new blocks to the chain. To do this, miners usually solve challenging computational puzzles. The first miner to solve the puzzle is the one to add a block and to receive a reward in the form of crypto coins. The computational puzzles have certain unique features. Let’s take a look:

  1. They are asymmetric, meaning they can take a long time to figure out the answer, but it’s very easy to verify if the answer is correct
  2. They are solved with a trial and error method, meaning the only way to solve is to guess and keep guessing 
  3. Their difficulty changes in response to the rate at which blocks are being mined. The quicker the blocks are added, the harder the puzzles become, and the reverse is true

PoW is very effective against fraud, as it makes it almost impossible to alter anything in the blockchain – and that is improbable as it would mean re-mining all successive blocks. Also, no one user can monopolize the process, since both the mining machines and the power required to run them are quite expensive. 

2. Proof of Stake

Proof of Stake (PoS) allows people to validate transactions according to their ‘stake’ – the coins they hold. This means that the more cryptocurrency one has, the more computational or mining power they have. 

PoS was designed as a cheaper alternative to Proof of Work, as the latter uses up excessive power and is therefore very costly. PoS addresses this issue by assigning mining power per the ownership of coins. Instead of using energy to solve difficult puzzles, a PoS miner mines percentage that corresponds with his/her ownership stake. For instance, if a miner owns 2% of the Ether available, they can only mine, theoretically, 2% of the blocks. 

3. Delegated Proof of Stake

This is a special type of PoS. This consensus mechanism is very fast and able to complete more transactions per second (TPS) than PoW and PoS. In a Delegated Proof of Stake (DPoS), crypto coin holders stake their coins to elect a certain number of delegates. The weight of a vote depends on the voter’s stake – e.g., if person A stakes 5 coins for a delegate and person B stakes 2 coins, A’s vote carries more weight than B’s vote. 

Now, these delegates have the power to produce more blocks on the network. Delegates who receive the most votes can create blocks, and be rewarded with coins or a percentage of transaction fees (as is the case with PoW and PoS). The vote is dynamic, so the top delegates can change anytime. Also, the number of delegates depends on the design of blockchain: either a fixed number or all delegates above a certain paygrade. 

 4. Proof of Capacity (PoC)

This is a consensus mechanism that allows miners to utilize empty space on their hard drive to mine crypto coins. It uses a process called plotting, in which solutions to puzzles are pre-stored on digital storages. Once a storage has been filled with solutions, it can participate in creating new blocks. 

The plotting process uses a very slow hash function called Shabal and can take days or weeks. The takeaway is, PoC is a game of space: the more hard drive capacity you have, the more solutions you can store, and the better your chances of mining the next block. Burst coin is the first and only cryptocurrency to use PoC.

5. Proof of Elapsed Time (POET)

Proof of elapsed time is a mechanism that uses a sort of lottery system to choose block producers. Every single node has a fair chance at winning. The idea is to randomly determine who gets to create a new block, based on the time they have waited. 

A POET algorithm works as follows. Each participating node is supposed to wait for a randomly assigned period of time. The node whose designated waiting time ends first gets to create the next block. After this node “wakes up,” they commit to add a new block and then broadcasts the information to the whole network. The process then repeats itself. 

The POET consensus mechanism can only work under three conditions. First, there must be a system in place that ensures no one single person can run multiple nodes and second, that the waiting time is indeed random and third, that the winner actually finishes their waiting time. 

6. Proof of Burn

The proof of burn mechanism works by allowing miners to “burn” or “destroy” the cryptocurrency tokens, which allows them to create blocks in proportion to the coins burnt. 

The idea is that miners should show proof they have burned some coins – that is, sent them to an address where they can’t be spent. The process, unlike proof of work, for example, does not consume too many resources, and it also enables the network to remain quick and agile. Miners can either burn the native currency or coins of an alternative chain, upon which they are rewarded with the currency of the native chain. 

7. Proof of Authority (PoA)

In a PoA consensus algorithm, people stake their identity to become block producers. The blockchain is secured, and transactions are verified by approved accounts known as validators. To become a validator, users disclose their identity, which is then cross-referenced with existing public data. There are three requirements which qualify one to be a validator on a PoA blockchain: 

1. Their identities must be formally identifiable on-chain with the ability to crosscheck it from data available on the public domain

2. Eligibility to become one should be above par – so that the position is filled by people with an honest incentive

3. The process must be uniform and fair across the whole choosing process  

The idea behind the PoA principle is that validators will act in good faith; trust is indeed the foundation of the protocol. 

8. Proof of Importance (PoI)

First introduced by NEM for its cryptocoin -XEM, the PoI consensus mechanism takes into account other qualities more than just the amount of coins one has. It is based on a user’s contribution to the network in all areas, including reputation, frequency of transactions, and overall balance. 

With PoI, the more active a user is, the more they qualify to “harvest” new blocks on the blockchain. This was designed to encourage network participants to actively conduct transactions rather than hoarding coins. 

The technology underlying PoI ensures the mechanism is manipulation-proof – so users can trust that miners’ selection is reliable and fair. 

9. Practical Byzantine Fault Tolerant Mechanism (PBFT)

PBFT is derived from the Byzantine Generals’ Problem, an analogy used in computer science. The Byzantine Generals’ problem is as follows. A group of Byzantine generals is preparing to launch an attack against an enemy. To win, they must attack at the same time. But the problem is, some of the generals might go rogue or act maliciously. So how will they launch a successful attack despite this probability? 

In other words, in any distributed computing system, there is always the possibility that some actors will not be honest or reliable. This is where PBFT comes in. The “fault tolerance” is the ability for a distributed computing network to reach a consensus despite the presence of malicious nodes that might fail to send information or relay the wrong information altogether. The majority of participants (at least 2/3) have to agree and execute transactions at the same time to avoid complete failure.

10. Proof of Activity 

Proof of activity is a hybrid of proof of work and proof of stake that attempts to combine the best qualities of both. The mining process starts with a standard PoW procedure – miners rushing to solve a computational puzzle. When a miner finds a new block, the system switches to PoS, with the block being only a template bearing header information and the miner’s reward address.

Then, a random group of validators is chosen from the network to validate the new block – according to the header information. Being chosen as the signer for a new block depends on the amount of cryptocoins a validator owns. When all validators sign a new block, it becomes a complete block and is then added on to the public blockchain network. 

In cases when some selected validators are not available to approve block, the process proceeds to the next new block, with other validators being chosen to sign on. The system runs in that manner until sufficient validators are available to sign off all produced blocks. In the proof of activity mechanism, mining rewards plus/or transaction fees are split evenly among the signers and the miners.

11. Leased Proof of Stake (LPoS) 

LPoS is an attempt to improve the proof of stake mechanism. PoS only allows users to create a block if they meet a certain minimum balance of coins. Also, not everyone can participate in securing and maintaining the chain or even get rewards. 

LPoS solves this by granting users the ability to “lease” their tokens to different contractors and receive a percentage of the payout as a reward. The more tokens are leased, the bigger the chance for a user to be selected to produce the next block.

In an LPoS environment, users can decide to run a full node or lease their stake to a full node. If the full node is selected to add a new block, the user gets a piece of the total transaction fees. In this way, the system allows everyone to participate in maintaining the network.

Conclusion

The takeaway is that all these mechanisms have the same goal: to reach fair and transparent decisions for all network participants. It’s intriguing to see how various mechanisms have evolved over time, and it certainly will be fascinating to watch as more enter the space, with each being (hopefully) better and more effective than its predecessor.