All You Need to Know About Cryptocurrency Mining
Cryptocurrencies are one of the hottest topics being discussed on the Internet today. While many people are trying to make their way in the industry, others are working on earning cryptocurrencies using specialized equipment and mining farms built from a large number of video cards. In this way they aim to provide themselves with a permanent source of additional or even basic income.
In this article we will cover all you need to know about cryptocurrency mining, its role in blockchain networks and alternative ways of reaching an agreement and looking for new blocks. Mining is increasingly being criticized as useless work which wastes vast amounts of electricity and doesn’t give anything in return. We will try to figure out if this is the case.
The Role of Mining in Blockchain Networks
Cryptocurrency mining is not just a way of making money. Miners have an important function in blockchain networks. They solve mathematical problems, open new blocks and approve other users’ transactions in the net. Miners save blockchains from block fraud and hacker attacks and guarantee the network’s decentralization.
Cryptocurrency mining is essentially a form of output, specifically the issuing of new coins. But the main function of mining is different. The main function is to reach an agreement on the net on the basis of which transactions can be considered valid, so that none of the users can spend coins he or she has already spent in another transaction. That’s why receiving bitcoin is just a side effect of doing useful work, even though its usefulness is constantly being criticized by experts.
The Effectiveness of Mining
A home computer’s capacity used to be sufficient for cryptocurrency mining in the beginning stages of the cryptocurrency industry. However, today much more processing power is are required for mining. The number of Bitcoins that can be issued is limited to 21 million coins. This means that the more coins come into circulation, the harder it gets to mine them. This has a significant impact on computational complexity, energy consumption and mining effectiveness. The complexity of mining alternative cryptocurrencies, the issuing of which is unlimited, increases at a slower pace.
If you look at Bitcoin and other cryptocurrency mining equipment from the world’s leading suppliers you may notice the equipment getting more powerful every month. This is a direct consequence of the increasing complexity of mining. Competition in this market is similar to a real arms race.
ASIC-miners are the most effective devices for mining Bitcoin and a number of other popular cryptocurrencies. These devices have special chips designed to solve mathematical problems during the mining process.
There is a simple but significant story to illustrate the power of ASIC-miners in comparison with common farms built from video cards. Developers of Dash (a popular cryptocurrency) have gone so far as to create their own encryption algorithm. It is called X11, as It uses 11 hash-functions at once. According to its authors, the algorithm should protect the cryptocurrency from ever being mined using ASIC-miners. However, the ingenuity of equipment manufacturers has surpassed that of developers, and now Dash cryptocurrency can also be mined using ASIC-miners.
Thus, due to the constantly increasing complexity of calculations and growing number of miners, cryptocurrency mining is gradually turning from just a way to make money into a kind of competition, since only the first to solve a block on the network receives cryptocurrency as a reward. In order to reduce the chance factor and evenly distribute the reward in accordance with the computing power of equipment, miners create pools.
The increasing complexity of calculations makes it necessary to enhance equipment productivity with each subsequent block in order to create the same number of coins. This relationship can be seen in the graph below.
Some blockchain networks impose software restrictions in order to only permit mining from personal computers, thus making blockchain resistant to calculations made by ASIC-miners and ensuring that the network does not consume large amounts of electricity. These solutions have already been implemented and are used in such networks as PrimeCoin, Cuckoo Cycle, CryptoNight and Ethash, as well as in some less popular blockchains.
Problems in Mining and its Alternatives
Mining is based on the Proof-of-Work system, which allows for an agreement to be reached and transactions to be verified in a Blockchain network. The Proof-of-Work system was invented back in 1993, but received widely recognized application and popularity only in 2008 with the emergence of the first cryptocurrency — Bitcoin. The use of PoW at the core of the Bitcoin network provides reliable protection against 51% attack.
The major argument against the Proof-of-Work system is that the network wastes a huge amount of electricity, which is being consumed by miners to find new blocks. PoW is even quite eloquently called a monster, which devours electricity in pursuit of profitability from mining. This criticism became relevant when, in 2012, the Bitcoin network’s total capacity surpassed the performance of the most powerful supercomputer on the planet. Since then, computing power has been steadily increasing following the increasing complexity of mining.
These shortcomings lead to the emergence of the first alternative to the Proof-of-Work system — the Proof-of-Stake algorithm. According to the PoS approach, new blocks are not solved by miners, but are created by network participants with a probability that is dependent on their share of the cryptocurrency in the turnover. The more coins stored by a member of the network, the more likely they are to record a new block in the blockchain and receive a reward.
The Proof-of-Stake algorithm initially emerged as a basic principle of the PPCoin cryptocurrency blockchain, which is now called PeerCoin. The general idea of all variations of PoS is to completely replace external resources (electricity, as well as coal, oil and other energy sources from which electricity is extracted) with internal ones, i.e. the coins themselves.
In fact, PoS is the same lottery, so to speak, as PoW, with some qualitative differences. It does not require huge computing power to search for new blocks, since hash generation can be done within a defined space and does not call for specialized equipment; while the probability of finding a new block depends only on the amount of coins in a member’s account and on the current level of complexity in the network.
PoS has the following advantages over the PoW approach:
● Energy is saved;
● The arms race is curbed;
● The price of an attack is high — 51% — which makes the attack itself simply impractical.
Thus, in the PoS approach, the work of miners, which practically burns through physical resources in the form of oil and coal, is replaced with a virtual resource found within the ecosystem itself.
The Universa Solution
There are few alternatives to the Proof-of-Work mining method and algorithm for confirming transactions, with their advantages and disadvantages causing controversy and disagreement. Experts agree on one thing, which is the need to create unique solutions for solving the various tasks for which the network was created. These solutions must be fully tailored to the tasks at hand. Universa blockchain does this in its own efficient way.
In Universa, the only work that is done by machines is processing highly important data and performing smart contracts, which does not call for a massive amount of electricity, and does not require users to own heavy duty equipment like video card farms or ASIC-miners. Universa developers believe that mining is futile, consuming gigawatts of electricity per hour while giving nothing back to the network. Essentially the only thing it does is provide miners with cryptocurrency.
The philosophy behind Universa is to not let users’ important business data be stored recklessly in vulnerable and sometimes unknown places around the world. In Universa, all data is securely encrypted and regulated by strict security rules, which makes it possible for companies to entrust even the most important information and key business processes to blockchain. This results in a definite increase in the level of confidence in blockchain technology, and will stimulate its future development and expansion.
Instead of mining coins, the nodes in the Universa network check the status of the network and perform smart contracts. Instead of mining, which simply burns time cycles, Universa blockchain only grants the right to create new blocks to licensed nodes. This approach means that a status can be changed without having to wait for the new block to be created, and checked by a trusted member of the network, thus allowing an agreement to be reached in less than 10 milliseconds, even in a large-scale network. If we are to compare, the Bitcoin and Ethereum blockchains sometimes require way longer than 10 minutes to create a block and confirm changes in the network.