On this page we explain how cryptocurrency mining and blockchain technology works. We use Bitcoin as an example. However, there are several cryptocurrencies (altcoins) that use this technology.
Bitcoin: to understand mining it is useful to understand what a blockchain is precise. So before we continue with mining, a crash course in blockchain follows. If you are talking about bitcoin or other cryptocurrencies, it often does not take long before the word blockchain is mentioned.
But what exactly is a blockchain? It is sometimes talked about as if it were a magical technology that will solve all the problems we have in the world. Unfortunately that is not the case. In fact, the blockchain itself is not the most exciting innovation that Bitcoin has brought.
A blockchain is nothing more than a chain of blocks that are connected in an ingenious way. Each block is a box of data filled with, among other things, transactions and a fingerprint of the previous block. Since each new block contains a fingerprint of the previous block.
The entire history of the blockchain, the chain of blocks, is thus baked into the new block. If you change a small aspect in a previous block, the fingerprint changes and with it the fingerprints of all blocks that come after that. If someone adjusts a transaction, this is immediately noticeable because the fingerprints of all subsequent blocks change.
In technical terms, we call the fingerprint of a block a hash. This is a random sequence of letters and numbers that is always the same length. To generate a hash, miners use a complicated mathematical formula in which all information is put in the block.
Simply put, your computer, if you let it mine, is constantly calculating a hash that is the solution for the next block. In the example, we used hashes of only 5 characters in length. We have done this to keep it nice and clear. For example, the Bitcoin blockchain works with the SHA-256 algorithm to generate hashes. Do you put information in this algorithm? Then a series of 64 characters always comes out.
Now you are probably thinking, how hard can it be? If you have the hash of the previous block and you pop the transactions of the new block into the algorithm, a good hash will come out automatically, right? That’s right! But there is an important rule of the game that determines the difficulty of the mining.
To make things more difficult for the miners, the protocol requires that the first X number of characters of the solution be a 0 (zero). That is the ingenious part of the Proof of Work (PoW) mechanism used by almost every cryptocurrency. This is the measure that determines how difficult it is to generate the correct hash and thus the solution.
At the time of writing, each hash must start with a minimum of 18 zeros to be accepted as a valid fingerprint for a new block. The more computers that participate in the process, the higher the difficulty. This mechanism ensures that mining a block takes on average around 10 minutes.
The difficulty level is recalculated after every 2016 bucks. Are more computers joining the network? Then a solution must be found with more than 18 zeros. Are computers leaving the network? Then the difficulty level will be adjusted downwards.
As you know, an algorithm generates a hash based on the input you give it. This input includes the transactions in the block, a timestamp, the fingerprint of the previous block and the nonce . The nonce can be seen as the solution or key that miners are looking for en masse.
Miners change the nonce until the algorithm rolls out a hash that starts with 18 zeros. The only thing that all those computers are constantly working on is adjusting this variable and checking what the algorithm then gives as a result. Do they have a hash with 18 zeros? Then they show it to the rest of the network as soon as possible. The other miners can then check the block and add it to the blockchain if it is correct.
In the latter case, you do not have to arrange anything yourself. These are companies that have set up their own data center in countries where electricity is cheap.
Computers that are engaged in mining cryptocurrencies consume an enormous amount of energy and therefore become very hot. In order to prevent expensive equipment from failing due to the heat, it is important that there is a lot of cooling. It is for this reason that countries such as Iceland are popular locations for these types of companies due to the low temperatures.
The big advantage of cloud mining is that you can start mining cryptocurrencies without having a lot of knowledge yourself. You do not have to buy the devices, you do not have to install them yourself and you are also not bothered by the heat and noise produced during mining. However, before you just decide to pay for a cloud miner, it is advisable to do good research. There are many scammers in the market.
These are companies that generally promise just a little too good returns. Does something seem too good to be true? Then it often is. Is the company transparent about their contact details and address? Do they have pictures of their data center online? Can you find a lot of good reviews about them? Then there is a good chance that you are dealing with a valid party.