If you are having a hard time understanding what is mining and how it works, we will break it down for you. In this article, we will cover all the questions that may arise when you learning about mining.
In simple words, mining is just solving different tasks that a network creates. Let’s say you are mining bitcoin and have the following equation: 2+x = 4. Can you guess what x is? If you answered x = 2, then you are correct, and you get the right to gather pending bitcoin transactions, put them into a block and receive a reward for your guess. All other users of the network can just check your solution, but the reward goes only to you. The difficulty in these equations or tasks is called Mining difficulty, and it increases based on the overall mining power of the network.
Mining power is measured in Hashes/seconds (kiloH/s, MegaH/s GigaH/s TeraH/s PetaH/s, ExaH/s). For example, the current network hash rate of Bitcoin is 40 EH/s (Exa hashes per second). The higher hash rate you have, the quicker you’ll be able to solve a task.
What’s the difference between Proof of Stake and Proof of Work?
Bitcoin uses Proof-of-Work algorithm to confirm transactions in the network. The main disadvantage of this algorithm is that every miner is trying to compete with the other, which is a waste of energy for all other miners.
Another problem with the Proof of Work algorithm is that miners form mining pools to increase the chances of getting a reward, which means that bitcoin becomes more like a centralized currency.
Ethereum uses the same algorithm but developers are working hard to implement another way of confirming transactions on the blockchain. The name of the algorithm is Proof- of- Stake. In this algorithm, a node (a person), joins the network, makes a deposit that works as a stake, and then the network randomly decides who may confirm the transactions and create a block. It is worth noting that the network chooses a node according to the amount of its deposit. More money deposited - higher chances to become “the chosen one”.
The are no miners in POS, the person that has been elected is named Validator and they do not mine but forge or mint block. But how can we be sure that the validator won’t confirm a fraudulent transaction?
If a validator confirms a fraudulent transaction a part of his/her deposit vanishes. This financial motivator helps keep the network secure. If a node stops being a validator, his/her deposit and all transaction fees are released after a certain period of time to ensure that all transactions are valid.
In this way, the POS algorithm is more decentralized and requires less energy for the network to function. However, it still favors the rich: the more money you invest, the higher the chances that you will be chosen, the more money you will receive and the more deposits you can make.
Basic Mining Terminology
Mining pools were created due to the increase in mining difficulty. The last ASIC mining has a hash rate of 14 TH/s. Which is extremely low compared to the whole network. A mining pool is a group of miners that are trying to solve the same task, and if they are successful the reward is divided according to the hash power that each miner has.
Cloud mining is an online service that allows you to rent mining equipment to mine cryptocurrency.
The difficulty in blockchain tasks or equations is called Mining Difficulty. The difficulty is adjusted periodically as a function of how much hashing power has been deployed by the network of miners.
Each transaction has a fee for transferring through the network and miners choose which transactions will be added to a block according to the fee that the sender has decided to pay.