What is mining? Is Bitcoin Mining a Scam? Principles and Current Analysis of Mining

preamble

Believe me, you must have heard a name that is both familiar and unfamiliar - “mining”, you may also have heard it because of the story of “going to the mine” and the riches of the night, but in fact, mining has a lot to do with the problem mentioned earlier, and they are all related to another term - the mechanism of consensus. So... what exactly is the consensus mechanism? What does it have to do with mining? And what kind of “mine” is mining? Don't be intimidated by these proprietary terms, just look down and you'll find that blockchain isn't that hard! In this article, you will know:

1. What is a consensus mechanism?
2. What is mining? How to mine?
3. Where do mining rewards come from?

What is a consensus mechanism?

It is clear that the mechanism of consensus has always existed with you and me. If you and your friends want to decide what to eat for dinner, some want to eat ramen, some want steak... and so on. In the end, you all decide what you want to eat by voting. As a result, more people want to eat ramen, so decide to eat ramen together. From a difference of opinion to a unanimous decision to go for ramen, you have a “consensus” about this dinner. And you are the consensus generated by voting, so “voting” is the “consensus mechanism” by which you produce decisions. As it stands, consensus mechanisms seem to be common, so why is it particularly important in the world of blockchain?

Why Blockchain Needs a Consensus Mechanism?

You may not be able to decide what to eat for dinner, so you can't eat your own favorite. But in a decentralized blockchain system, the problem can be very serious! If you don't set a standard for logging data first, everyone just follows their own record. Without a clear consensus direction, the system record will create confusion and cause the entire system to fail!Therefore, a blockchain system must first set up a consensus mechanism that allows participants to follow the consensus generated by this rule to maintain the correctness of the system data so that the system can continue to function.But if it is a blockchain system that anyone can participate in, how can people from all over the world, who do not know each other, jointly maintain the blockchain system? This is talking about another term that often appears with the consensus mechanism - mining.

What is mining?

When you heard about mining, did you see a picture of putting on a helmet, holding a hoe, and going into a mine pit to dig for gems? While in the world of blockchain, mining is not the same as it was said before, the two goals are the same - making money by mining, creating something of value. In general mining, it is about obtaining valuable minerals such as gems; in blockchain, it is about helping others to keep records. Why is it profitable to help others keep accounts? This is like asking why banks are helping people keep their assets. Since the bank can derive benefits from it (such as transaction fees), it will be willing to do so. In general, blockchain consensus mechanisms often also include a reward mechanism that gives miners who help maintain and package data records onto the chain with some incentives to help the system work. And the most common reward is cryptocurrency. ※ In addition, so-called bundling means the process of connecting to the previous block, after encrypting the data in the new block, using special encoding technologies - such as Bitcoin's SHA256 hash functions, such as SHA256.These people who help package data are known as “Miners,” and the process of logging data packing onto the blockchain is known as “Mining.” In other words, the mines mined by blockchain miners are cryptocurrency rewards that miners receive to complete their accounts according to a consensus mechanism. Of course, the way to decide consensus is not just a vote, but in the world of blockchain. Common consensus mechanisms, such as PoW, PoS, etc., below let's use these two consensus mechanisms to illustrate how miners want to mine.

Proof of Work (PoW)

Workload proof is the first and most widely used consensus-mechanism model. Familiar cryptocurrencies, such as Bitcoin (BTC), Ethereum (ETH) 1.0, and more, all adopt this model. IN WORKLOAD PROOF, ALL MINERS ARE INVOLVED IN CALCULATING A CRYPTOGRAPHICALLY GENERATED MATHEMATICAL PUZZLE (THE HASH FUNCTION VALUE MENTIONED IN THE PRECEDING PARAGRAPH) AND SEEING WHO CALCULATES IT FIRST. The first miner to solve the problem gets an accounting of the block and connects a new block (also known as an outblock) to the blockchain, then broadcasts the new block to the web as a recognized record on the blockchain. The other miners continue to compete for the next math problem based on the new block.In other words, when the workload is proven, the more work resources (arithmetic) are invested, the faster it is calculated, the easier it is to get accounting.Under this mechanism, the graphics card's numeracy becomes the key to how generous the rewards are. This is also one of the reasons why graphics cards are difficult for a while. However, due to the workload, miners need to invest a lot of energy to solve the problem. The New York Times once reported that Bitcoin's mining power usage in 2021 was nearly 7 times the total electricity consumption of Google globally in a year of operations, showing how much it consumed resources.

Proof of Stake (PoS)

Concerning the issue of the workload proof model consuming resources, in 2011, Bitcointalk proposed a proof of interest model on the forum as another consensus mechanism. Now, many blockchains, such as Addencoin (ADA), Ethereum 2.0, etc., have started using POS consensus mechanisms, making graphics card mining a sunset industry. Those who require proof of interest to participate in accounting need to deposit a certain amount of coins in advance. The more you stake, the greater your chances of getting a bookkeeping. Typically, in order to avoid large staking nodes monopolizing the bookkeeping, “Coin Days” are assigned depending on the duration of the deposit, and the age of the lot is recalculated as soon as the bookkeeping is obtained.In other words, in the case of a proof of interest, the more and longer the pledged coins, the easier it is to obtain a bookkeeping.In particular, in the proof of interest model, if a miner verifies that a fake transaction is discovered on the chain, the system will deduct a certain “penalty” from his pledged currency, ensuring overall transaction security. ※ Additional Notes: PoW is mining with the power of a computer, so some people call it “fortune mining”; while PoS works differently from PoW, both are rewarded by packaging data on the chain, so some also refer to PoS as “coin mining”.

Where do mining rewards come from?

Miners mine cryptocurrencies, which we already know, but where do these cryptocurrencies come from? Here we take the Bitcoin system as an example. When a miner obtains a ledger and completes the work of packing data into the chain, he receives two rewards:

1. New coins issued with new blocks

In the Bitcoin system, each new block is generated, along with the issuance of a certain amount of new coins to the miners who pack the block.

However, Bitcoin reduces the output of new coins by about half every four years for each new block (starting with 50 coins, 25 in 2012, 12.5 in 2016...). The total issuance volume of Bitcoin is estimated at 2 million, and if it follows the previous rate of issuance, it will be completed by 2140.

If no new coins are produced, what is the motivation for miners to mine afterwards?

2. Transaction Fee

A certain percentage of processing fees are charged for each Bitcoin transaction. Miners with bookkeeping can also receive the entire transaction fee for the block as a reward.

In other systems, such as Ethereum, users can even choose to pay higher processing fees (known as gas fees in Ethereum), giving miners the priority to pre-package transactions with higher processing fees, speeding up the speed at which transactions are confirmed.

Therefore, even in the absence of new coins, processing fees are still available as incentives to reward miners for mining.

epilogue

The consensus mechanism is an indispensable presence of blockchain, especially a public chain system in which anyone can participate. And mining is the driving force for people to get involved in system maintenance, and both are arguably the soul of blockchain and the key to the sustainability of blockchain systems!

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