2/The Flow of Coins
From how miners obtain them to how they are spent, saved, or traded
The Coins — Each coin has its parameters: its name, proof-of-work algorithm[1], block rate[2], block reward[3], and block reward schedule[4]. In fact, there are hundreds of coins beyond the realm of Bitcoin. Coinmarketcap.com tracks 335 different cryptocurrencies and this site will automatically build a coin to your specifications for a fee of 0.05 BTC. By coin’s design, the supply of coins available to the market is controlled and mining is the only way to introduce new coins to the supply.
The Miners — Individuals that employ the use of hardware and processing power to validate transactions. In the case of Bitcoin, every Bitcoin in circulation was at some point mined. Other cryptocurrencies may be “pre-mined” where a portion of total circulation is deployed at the launch of the coin. Other coins, like the Ripple and NXT are non-mineable, meaning that the coins’ creators are entirely in control of the supply. The most successful coins in terms of adoption and use are typically mineable and not pre-mined. For these coins, miners play an extremely important role in sustaining the network and ecosystem around the coin.
The Hardware — Anything from a CPU to a mobile phone can be used to mine cryptocurrencies, but generally mining hardware falls into 3 categories:
General computer hardware (CPUs and GPUs) — Components within almost any personal computer that can be used to mine. Their intended function is typically not mining, but some equipment is better than others. For example GPUs usually mine faster than CPUs and among GPUs certain of them outperform others at various levels of power consumption. Before the introduction of ASICs, GPUs are the primary tool used for mining.
Application-Specific Integrated Circuits (ASICs) — Hardware developed expressly for the purpose of mining cryptocurrencies. These are usually specific to the type of hashing algorithm used by a coin, although a lot of recent ASIC manufacturers have developed machines for mining using both SHA-256 and Scrypt algorithms. When ASICs are introduced to a hashing algorithm, it becomes unprofitable to mine using GPUs due to dramatic increases in network hashrates. An entire industry was born out of a need to hash faster and generate bitcoins/altcoins at quicker and more energy efficient rates.
Mining Contracts (mining-as-a-service) — Companies like Ghash.io or even exchanges like Cryptsy will offer mining contracts. Anyone can buy a contract for a given hashrate and fixed period of time during which the contract holder receives the rewards from mining.
The Pools — At the current network hashrate, using an advanced ASIC that generates 600 GH/s at a cost of $2,196 for the hardware and not including energy costs, it would take an average of 3 years to find your first block. That is, it is becomes prohibitively costly to mine alone, thus the mining pool. A mining pool is a collection of miners that are combining their computing resources to find blocks. When a block is found, coins are distributed to all participants based on the amount of work contributed towards finding that block. This is advantageous for miners as they begin to collect rewards much sooner (albeit less in value) and more frequently. The pools typically charge a fee (anywhere between 0% — 2%) to the miners.
This is how coins are distributed, and entire classes of service providers and hardware manufacturers have blossomed as a result. The protocol controls the supply, pools combine hashing power across individual miners and distribute block rewards, and miners using specialized hardware then collect their earnings from mining and have a choice: Spend, Save, or Trade.
It is with this choice that miners influence the direction of the ecosystem outside of mining. Are miners most interested in cashing out to FIAT or trading for a cryptocurrency that they believe in more? Do they simply want to hoard all the coins that they can obtain? Or are they mining aggressively to manipulate the marketplace of smaller coins? Do miners feel a sense of community with their coin and do they mine it altruistically as opposed to pragmatically? Are miners willing to spend or share their coins for the purpose of furthering virtual currencies? What happens when the miners flee?
[1] Or proof-of-stake, etc.
[2] Rate at which blocks are found, for example BTC = 1 block/10 min, LTC = 1 block/2.5 min, DOGE = 1 block/min
[3] Number of coins rewarded to miners
[4] How the rewards change over time, for example BTC: reward reduces 50% every 4 years, DOGE: random (0 — 1M) for the first 100,000 blocks, random (0 — 500K) for blocks 100,001 — 144,999, 250K for blocks 145,000 — 200,000, halving every 100,000 blocks until 600,001, then fixed at 10K beyond
