What is cryptocurrency mining? Mechanism & Practices!!

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What is cryptocurrency mining? Explain the mechanism and practice method

“What is cryptocurrency mining?”

“I want to know how mining works”

Maybe some of you who are thinking of starting to study virtual currency (cryptographic assets) have such a question.

In a word, virtual (cryptocurrency) currency mining is the work of approving the transaction contents of virtual currency and closing the transaction.

In this article, I will thoroughly explain the mining mechanism with illustrations! We will also explain in an easy-to-understand manner the method of cryptocurrency mining, the mechanism of rewards, and the tax on profits obtained from mining.

If you are interested in cryptocurrency mining or are thinking of starting mining, please refer to it!

What is virtual currency (cryptographic asset) mining?

Mining is the process of approving the transaction details of virtual currency and closing the transaction.

Bitcoin (BTC) and other virtual currencies do not have a country or central bank that controls the issuance and distribution of currencies like the dollar.

Therefore, we have adopted a system in which an unspecified number of participants participating in the network manage their currencies using their own computers.

A network in which individual terminals jointly manage data without a central administrator is called ” P2P (peer-to-peer) “.

Participants in the network will check the transaction details of the virtual currency and approve it if there is no problem. In this way, cryptocurrency transactions can only be completed after approval by P2P participants.

In the world of cryptocurrency, this “confirmation and approval of transactions by a third party” is called mining, and the people who perform mining are called “miners”.

Miners perform mining according to their own rules called ” consensus algorithm ” and receive newly issued coins as a reward. The consensus algorithm will be explained in detail later in the section “What is the” consensus algorithm “that determines mining rules?”.

Mining mechanism

The transaction history of virtual currencies such as Bitcoin is all recorded in a huge transaction ledger on the Internet called a blockchain.

Information such as “when, who, and how much virtual currency was traded” is stored in each block that makes up the blockchain.

It was named “blockchain” because it has a structure in which blocks containing such information are connected one after another like a chain.

By the way, in the case of Bitcoin, one block is generated in about 10 minutes. In other words, if you send money with Bitcoin, it will take about 10 minutes to complete the transaction (remittance).

The reward for one mining is over a million $!?

Miners approve cryptocurrency transactions and are rewarded in return for helping to generate blocks.

In general, the reward is “you can get a fixed number of mined currencies”. For example, in the case of Bitcoin, the rule is that the success fee for one mining is 6.25 BTC (as of November 2020).

If 1 BTC = 48523 USD, you can get 58620 USD just by approving one transaction. As mentioned above, in the case of Bitcoin, one block is generated in 10 minutes, so the total amount of rewards that can be earned in a day is 8441700 USD

It may seem easy for anyone to make a lot of money, but it’s not really that sweet.

Only one person can get the reward

This is because there is a rule that “only the first person who succeeds in approval” will receive the mining reward.

Mining requires a huge amount of calculation, and you must have a high-performance personal computer to perform it. In addition, since the machine needs to be operated for a long time, it costs a lot of electricity.

In this way, a large number of miners compete in calculations, and only the one who solves the problem first receives a reward. Calculation in this case means using a function called “hash function” to derive a numerical value called “nonce value”.

Bitcoin is difficult to mine

The difficulty level of successful mining is called “mining difficulty level (difficulty)”. In general, the higher the mining reward amount, such as Bitcoin, the more competitive the currency and the more difficult it is to mine.

When the value as a currency was not high yet, it was possible to mine Bitcoin on a personal computer.

However, now that the price is over 9360 USD, businesses with computer equipment dedicated to mining dominate almost all rewards, and it is almost impossible for individuals to get Bitcoin mining rewards. It is said.

These companies have created facilities called “mining farms” in countries with low land prices and low electricity bills, such as China, and put a large number of machines there to perform mining 24 hours a day, so they process personal PCs. You can’t compete with your abilities.

However, in the case of altcoin, which is not as expensive as Bitcoin, the competition rate is not so fierce, so it is possible for individuals to get mining rewards depending on the brand.

Mining rewards are halved when Bitcoin’s half-life is reached

Mining rewards are ruled to decrease at regular intervals. In the case of Bitcoin, it is set to be halved every time 210,000 blocks are generated.

The total amount of Bitcoin issued is designed to be 21 million BTC, and it is newly issued for each block generation as a mining reward (block generation reward).

As of November 2020, about 18.5 million of them were issued, and the mining reward was 6.25 BTC.

The relationship between major currencies and mining rewards is summarized in the table.

Currency name Mining reward (as of November 2020)
Bitcoin (BTC) 6.25BTC
Ethereum (ETH) 2ETH
Bitcoin Cash (BCH) 6.25BCH
Monacoin (MONA) 12.5MONA

There are three main types of mining

Several ways to try it alone or with multiple people, so let’s check each one.

Ø Individual “solo mining”

Solo mining is a method of mining steadily by one person with all the equipment.

However, mining such as Bitcoin, where financially-powered miners are concentrated, is extremely difficult.

For example, if you do solo mining on a computer with a high-performance GPU, you would be lucky if you could get a reward once every 500 years. Bitcoin solo mining is not very realistic considering the cost of installation and operation.

However, lesser-known coins may not require a high-performance machine because there are few competitors for mining.

Ø “Pool mining” performed by a team

Pool mining is a style in which multiple people provide computing power to each other in a mining pool and perform mining as a team.

The mining rewards obtained by combining the computing power of the team will be distributed according to the computing power provided.

The mining success rate is higher because it provides more computing power than solo mining. Prizes are distributed according to the computing power provided by the team members, so the income is stable.

On the other hand, even if the individual mining performance is high, the reward is distributed among the members, so there is a disadvantage that it is difficult to obtain a large reward.

Ø “Cloud mining” left to the trader

Cloud mining is a style in which you receive mining rewards as dividends by investing in organizations and companies that are mining as a business.

You don’t have to prepare your own computer or power, and it’s easy to get started without any expertise. It’s easier to think of it as an investment in a mining company rather than mining.

However, it is necessary to carefully identify the vendor. In the past, there have been cases such as “mining fraud” in which money is deceived.

Can Bitcoin mining be done by individuals? Explain what you need for mining

Like the “solo mining” introduced earlier, even individuals can mine Bitcoin as long as they have the equipment.

What you need for Bitcoin mining is an ASIC. Machines such as CPU (Central Processing Unit), GPU (Gravo), and FPGA can also be used for mining, but it is inefficient.

Whether it is a suitable machine depends on the hash algorithm used for the coin.

Mining is possible if you have a home computer or smartphone

It is also possible to mine from a home computer such as Windows or Mac or a smartphone (smartphone). The reason is that it has a CPU.

However, it will be difficult to make a profit because the calculation efficiency is poor with a personal computer or smartphone.

CPU & GPU not recommended

For Bitcoin mining CPU and GPU are not recommended. This is because the electricity bill will be quite high.

CPU and GPU have some differences in calculation processing, but they both consume a lot of electricity.

If you want to participate in Bitcoin mining, we recommend ASIC. “Participation in ASIC” and “Being superior to many rivals in terms of electricity bills paid” are the main conditions for profit.

In addition, some coins are designed so that they can only be dug with the GPU, so if you want to mine with the GPU, those coins are also recommended.

Equipment with advanced computing power

To find the nonce value required to generate a block. Hashing processing is require thousands of times and many times.

For that purpose, computing power and device configuration specialized for executing hash functions are required.

With coins that are well-known and profitable. Such as Bitcoin, many miners are entering the market. So it is necessary to invest in equipment with even higher computing power.

The profit of the mining business depends on the electricity bill

To win the competition between miners, you need to have a lot of computing power higher than your rivals. And be able to run your computer when you need it. Indispensable for this is inexpensive electricity.

When running many machines in a place such as a warehouse. It is necessary to keep the room temperature below a certain level with sufficient air conditioning.

Of course, it uses a lot of electricity, so in a country with a high electricity bill, the cost will be too high for profits. Therefore, the mining business is in the red and not profitable.

“Staking service” I recommend if you want to get stable rewards

individuals can also participate in bitcoin mining. However, due to the high-performance machines. With large amounts of power required. And with fierce competition, it is now almost impossible for individuals to enter and profit.

For those who want to earn stable profits using virtual currency. I recommend the “staking service”. Which is an alternative to mining.

Staking is a mechanism to support the operation of the blockchain of a specific virtual (cryptocurrency) currency and get a reward by holding it. In order to get rewards, you need to lock (deposit) a certain amount of virtual currency.

For example, it would be easier to think of it as a mechanism for receiving interest by depositing money in a bank account for a certain period of time.

What is CoinCheck’s Risk (LSK) Staking Service?

The staking service we provide is design to distribute the rewards. We earn through the voting process of the LSK network to customers, who own LSK at Coincheck (cryptocurrency check) and meet the conditions for the grant.

If the delegate (transaction approver) we vote for is select in the top 101. We will receive a part of the Forging reward received by the delegate as a voting reward. And for customers who have LSK at Coincheck. We will give it according to the amount of possession.

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