Wiser! Essays: Cryptocurrency mining explained. What is the difference between Proof of Work and Proof of Stake and why is it important?
You may have heard the term “mining for Bitcoin” and wondered what it meant. Of course, it’s not just related to Bitcoin. Mining is the term used to create all cryptocurrency, aka tokens on a blockchain network.
In this beginner’s guide, I explain some of the terms and concepts behind creating cryptocurrency. And show you how you can start to mine cryptocurrency youself!
First, the basics
What is Mining?
Mining is the process of administering and adding data (in the form of transactions) on a blockchain (the name given to the computer ledger that records every transaction in a sequential history of entries.)
It involves continuous “work” to be done on computers to produce a steady accumulation of data.
Think mining for minerals. The work here is continuous, repetitive, ardous and requires a lot of resources. Minerals are uncovered slowly in small quantities, but over time, they accumulate into large piles.
Mining for crypto is much the same.
What is a Blockchain?
You’ve all heard of Bitcoin. Well, Bitcoin is an app built on a technology called blockchain. (Think WhatsApp on your iPhone. WhatsApp is the app and iOS is the technology).
A blockchain is simply a sequential “chain” of “blocks” of data. Each new block is added onto the end of the last block to create an ever increasing chain of blocks of data. Because the chain is a continuous link of blocks, once the block is added to the chain, it can not be removed or changed. This is why blockchain is often described as ‘immutable”.
It’s a permanent record on a blockchain.
A block contains details of a transaction, such as how many Bitcoins you just bought, and the ID of the block before it. This is how a blockchain maintains its integrity and order in the chain. In this way, whenever you look at a transaction in the blockchain, you can always chase every entry that came before it all the way back to the beginning of that blockchain.
What is Blockchain Mining?
To add each new block to a blockchain, a Miner, using their computing resources, must solve a computational puzzle. Mining is the act of solving this puzzle.
And it’s a race between the Miners as to who completes the puzzle first. Each competition to solve the puzzle lasts around 10 minutes before the clock resets and starts again.
The 1st miner to encrypt the block, making it safe to share across the internet, is awarded cryptocurrency for their work. The winner shares their results with all the other miners, who verify the encryption is safe and the work is done.
Once verified by the other miners, the winner securely adds the new block to the existing chain.
This is called “proof of work.”
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What’s the difference between Proof of Work and Proof of Stake?
If you follow crypto, and especially the debates about the issues with Ethereum on costs (“gas fees”) and scalability, you will have heard the terms “Proof of Work” and “Proof of Stake”.
They are (simply) the two mechanisms used to validate transactions in a blockchain network like Ethereum.
When blockchain tech was first designed, it relied on Proof of Work as the means by which “miners” (the operators of the computers that run the network) are rewarded based on the amount of work they undertook.
As each new block is created, the miners would be rewarded for the large amount of work they had to invest in order to hash an individual block. (Mining involves solving a mathematical problem with a unique answer, called a hash. They must be smaller than a target value and require many attempts to be made before the successful production of a viable block hash.)
It is an expensive system that requires huge computational resources and much energy consumption.
This is a major downside to Proof of Work as a mechanism for running the blockchain network - the cost and environmental impact of massive electricity consumption!
By contrast, Proof of Stake is carried out by validators, not by miners.
Validators are chosen through a pseudo-random selection process primarily based on how many tokens (cryptocurrency) they are holding in the network as their wealth, ie., stake. This incentivises validators to keep tokens ion the network and not sell or exchange them. Because the more tokens you hold, the better chance you have of being chosen to validate, and thereby earn more tokens.
Should you mine Crypto?
If you have a modern laptop and supply of electricity then give it a go. You can generate tokens using your computer when it is sitting ideal and, fingers crossed, will be worth more than the cost of the electricity used to run the machine.
Start mining cryptocurrency today
MinerGate’s cryptocurrency Miner app is a piece of easy-to-use, high-performance mining software for your home computer.
Try it here…
- Follow this link and set up your account for free.*
- Download the app to your computer.
- Set up your account and chose your crypto to mine.
- Start mining and earn crypto that you’ve mined yourself.
- Let me know how you got on!
* Note: this is an affiliate link