History Of Blockchain Mining

Cryptocurrencies have become all the rage over the last few months, especially after the meteoric rise in the price of Bitcoin back in December 2017. It used to be that cryptocurrency investing was the realm of experts and savvy investors. But because of Bitcoin’s massive success and popularity after December 2017, things have changed. It has now expanded to include even the smallest and least experienced of investors. Before going into the details of hodling and cryptocurrencies in general, it would be very beneficial for you to get a glimpse of how cryptocurrencies became what they are now.

00:39 - Brief History of Cryptocurrencies It all began in the 1990s when American cryptographer, David Chaum, created what was considered as the first kind of online money in the Netherlands: DigiCash. He created DigiCash as an extension of an encryption algorithm that was considered popular during those times, which was RSA. The technology he created, together with its eCash product, was able to generate a huge amount of attention from the media. It became so popular that Microsoft Corporation tried to buy DigiCash for $180 million with the intention of placing DigiCash on every computer in the world that ran on the Windows operating system. One of the crucial mistakes Chaum and his company made was to reject Microsoft’s $180 million offer and earn the ire of De Nederlandsche Bank (Netherland’s Central Bank), which was the Netherland’s primary monetary authority.

01:36 - All of those crucial mistakes eventually led to the demise of DigiCash in 1998, when the company went bankrupt. The second generation of Internet money was borne from the learning experiences of DigiCash. Companies from this generation came up with alternative payment solutions and money systems that were also Internet-based but with small but important changes. Of these companies, the clear winner was PayPal. The reason why PayPal trumped its competition was its ability to give users what they really wanted in the first place, which was money on the web browser platforms they were already familiar with.

02:13 - PayPal - unlike its peers back in the day - was able to give its users the ability to transfer money to and from merchants and buyers, respectively, using a seamless peer-to-peer money transfer system. PayPal’s massive success is very obvious by the fact that next only to credit cards, it’s the most popular means by which to transact online. But wait - there’s more! PayPal’s success led to other companies emulating it. One of the systems that tried to walk on the same path as PayPal was e-Gold. Unlike PayPal, its primary currency was gold, i.e.

, it received physical gold as deposits 02:51 - from its users and in return, it issued e-Gold or gold credits. E-Gold was able to manage a relatively healthy amount of cross-border transactions using gold. But because of the prevalence of fraudulent investment scams like Ponzi schemes, e-Gold was closed. The next significant event in the history of cryptocurrencies is the 2008 subprime mortgage crisis that nearly crippled the financial system of the United States and affected many of the world’s major financial institutions. This event served as some kind of wakeup call to many of the world’s major economies and has led to the emergence of what is now popularly known as the blockchain, which is the foundation of cryptocurrencies today as we know them.

03:35 - In 2009, an anonymous person (or group) that went by the identity of Satoshi Nakamoto published a white paper that expounded, among other things, the source code, technology and concept of what is now called the blockchain. And together with the blockchain, he launched the granddaddy of all cryptocurrencies as we know it; Bitcoin. The blockchain, while not an earthshattering, disruptive or incremental technology, was considered a foundational one. Why foundational? It’s because it was meant to - and it still does - serve as a bedrock upon other data network storage technologies can be built. The blockchain naturally challenges all the conventional online data management protocols of that time, which included centralization of data.

04:24 - Today, there are more than 16 million units of Bitcoin that are circulating in the digital financial system and these have a total market capitalization of around $50 billion. More importantly, Bitcoin’s already garnering increasing acceptance and support from both the I.T. and business communities alike. As part of its gradual integration into the financial mainstream, some economic powerhouse countries like Australia, Canada and Japan have already begun regulating Bitcoins through tax and legal measures. Since 2009, the growth in the popularity of the blockchain and Bitcoins has surged. This surge in popularity gave birth to other cryptocurrencies, which are referred to as altcoins or alternative coins to Bitcoin.

05:11 - Today, there are more than 850 cryptocurrencies in the digital financial system being transacted internationally, which include Ethereum (Ether), Ripple, Litecoin, Monero and Stratis. And if you combine the total market capitalization of all altcoins with that of Bitcoin, the result would exceed $100 billion. Because of the massive expansion of cryptocurrencies, it appears that cryptocurrencies have created an entirely new and global industry. Because of the massive advances in the blockchain technology, as evidenced by the growth in the number of cryptocurrencies on the market today, newly developed apps that will be created upon the blockchain technology will naturally use cryptocurrencies. And as more and more cryptocurrency platforms and exchanges start to emerge, more and more people will be able to use blockchain-based apps, which in turn will make the latter industry grow even more.

06:09 - History Of Bitcoin Mining In simple terms, Bitcoin mining is a method of calculating the value of cryptocurrency assets through a cryptographic process. These processes mine Bitcoins in blocks, which are simply ledger files that permanently record all recent cryptocurrency transactions. You should know that the size of the block decreases as the number of coins increase. Any block starts with 50 BTC (Bitcoin currency symbol), and as the number of blocks reaches 210,000, it halves. This results in a recurrent halving of the rewards for an individual block.

06:46 - This process is performed so that the inflation rate is regulated. Otherwise, there would be an uncontrollable number of paper currencies printing every second. This concept in itself is proof that mining is not a simple process. It needs investments in the form of power, time, and computations. Also, with an increase in the time of mining these coins, its comprehensive power also increases.

07:12 - Another fact to note is that the speed of emerging Bitcoins is inversely proportional and drops exponentially. Satoshi calculated the number to be approximately 21,000,000, which can never be exceeded. Let us explain this mathematically: A block takes around 10 minutes to be mined. And a complete mining cycle halves every four years. So, it results in: Six blocks per hour. Multiply it further by 24 (hours per day), 365 (days per year), and 4 (number of years in a blockchain cycle). So, we get -> 6 x 24 x 365 x 4 = 210,240 ~ 210,000. After every 210,000 the block size is halved, and each block has 50 Bitcoins. So, sum of all the sizes of block rewards becomes: 50 + 25 + 12.5 + 6.25 + 3.125 + … = 100 So, total number of coins that can be mined: 210,000 x 100 = 21,000,000. If we talk about it in economic terms, the currency is divisible infinitely.

08:28 - Thus, the accurate value of cryptocurrency coins can be ignored as long as we fix a limit, which is 21 million. No doubt there can be a time when the number of mined coins reaches 21 million, and there is no more profit left unless there is a way to redefine the computations and new regulations are determined. But, that can take a while. Let us learn why. The annual consumption of energy for mining Bitcoins has been estimated at 30TWh, which is equal to the stable energy of 114 megawatts for a whole year. Also, an individual transaction of a Bitcoin can take up power used for providing energy to about 10 U.S. houses in one day. Indeed, we can see that the energy consumption expenses for mining Bitcoins are high.

09:17 - Also, if the expenses of the mined coins surpass the costs of equipment and electricity used for mining, the cost-effective and less competent equipment will no longer be needed for this industry. This activity is economically reasonable, as increasing in the mining activities will increase investment in challenging computations, which in itself becomes expensive. In fact, the difficulty in computations has escalated to some 210,000,000,000 times. Also, the overall mining capacity for computations has reached 1,500,000,000 hashes per second. Hack Mining Another emerging mining concept is hack mining.

09:57 - This is carried out using smart devices owned by other users. This mining activity is carried out using a special malware software which hacks into a device without the user being aware of it. After penetrating the device, they discreetly mine using the hacked system. Many users purchase such shady services, which do not cost much. As a lot of power is needed to mine a cryptocurrency coin, a hacker hacks multiple smart devices, and combines the power of the activity.

10:28 - This way, the owner of the smart device does not even notice any changes. A case in 2014 emerged, where an anonymous attacker exploited a limitation in the cloud servers of Synology to mine around $200,000 worth of Dogecoins. More cases emerged, targeting mobile devices in their millions to mine cryptocurrency since the existence of this concept. Hack mining activities are usually successful as hackers can read the software codes better than the security teams of the manufacturers. They tend to locate the vulnerabilities in their systems and exploit them for their advantages.

11:05 - Therefore, beware, as you may never know that your computer system is also helping a miner get rich. Factors That Influence Mining As the activity of mining is intricate, it is prudent that you choose the right hardware. One has to keep in mind specific factors that affect the overall performance of a Bitcoin mining process. Let us discuss each factor. Hash Rate: Hash rate can be defined as the number of calculations performed by the hardware in one second. This rate is of high significance, as the higher the hash rate number, the faster the calculations, which will close the block and reward you much quicker.

11:44 - Miners keep a look-out for a particular output from the hash function. For the hash functions, the same output is generated for the same input, yet they have been fabricated to show erratic behavior. Thus, miners try several random inputs to find a particular output for the hash function. You should understand that the competition in mining is robust, so to obtain a reward, a miner needs to search through all the random inputs as fast as possible. Thus, a higher hash rate facilitates faster search output – thus increasing the probability of being rewarded.

12:20 - To measure hash rates, we use the unit MH/s (megahashes per second), GH/s (gigahashes per second), and TH/s (terahashes per second). You may have already seen these units displayed above, but now you understand their importance. Furthermore, a hardware’s hash rate is particularly fabricated for Bitcoin mining, which can range from 336 MH/s to 14 million MH/s. Consumption Of Energy: The next factor of importance in Bitcoin mining is the investment in power input. Powerful hardware that you are planning to use for computations is going to need a convenient supply of electricity (energy).

13:04 - Before proceeding, you will need to understand the energy consumption of the hardware in watts. Plus, you will have to calculate your electricity bill as per the predicted number of watts. This calculation will help you to anticipate whether your investment in mining Bitcoins is less than the rewards you are going to earn or not. Utilizing the consumption of energy and hash rate in numbers will help you figure out the number of hashes that you receive for each watt expended by your hardware. For achieving the numbers, you can divide the hash rate by the watts.

13:36 - Here is an example: Assume that the hash rate of your hardware is 4,000 MH/s with a requirement of 30 watts, so the consumption of energy will be 133,333 MH/s per watt. You can even use an electricity rate calculator online, or simply check your electricity bill to know the actual cost of your investment in the power supply for your hardware. Hardware: At one time, the concept of Bitcoin was too good to be true. People from a multitude of regions and cultures were attracted to this financial technology that offered freedom. There was no role of a centralized network, which relaxed users.

14:18 - Now, they had the power to check their transactions through an autonomous system that did not function through corporations, tax authorities, banks, and other third-party organizations. There is no one to keep an eye on how one spent his/her own money. Moreover, in the past few years, the value of Bitcoin was not motivated by mere profit, but was admired due to the unique concept and philosophy it followed. Back then, computers were all that were needed to transact and calculate the exchange of Bitcoins. As technology advanced, miners found that better GPU processors were able to calculate and mine Bitcoins at a faster rate.

15:00 - In fact, the results were almost 100 times more efficient than previously. Thus, mining hardware manufacturers came into existence, and they started designing hardware specifically for this purpose. This conclusively gave birth to the concept of cryptocurrency mining. Nowadays, mining Bitcoins has become quite profitable. Many are even paying their regular bills through the rewards generated using mining of Bitcoins.

15:28 - The mining farms consist of graphic card processors and cooling units to keep the computation running continuously. Apparently, a mining farm will require a vast supply of power, which is not usually available to individual miners. Thus, the big corporations invest in the energy utilization and virtually gather limitless resources to create mining farms. However, there is still a way for individual miners to make a profit. And that is by joining with other miners and combining their power. This is known as a mining pool.

16:02 - Proof Of Work You should also be familiar with the phenomenon ‘proof of work’ in the mining industry. A Proof of Work is a part of data that is quite time-consuming, costly and difficult to produce. It is needed for acknowledging particular needs. However, it has to be more streamlined to check whether it satisfies the specific requirements or not. Production of a POW can be formulated randomly with reduced probability.

16:28 - Lowering the probability results in more chances of trial and error, which is essential to validate before generating a proof of work. Bitcoin uses a hash cash proof of work system, in particular. The hash cash method used in Bitcoin mining helps reduce spam emails, as the sender will have to provide a valid proof of work in the contents of the email, including the To address. Any legit email can show the proof without any difficulties. On the contrary, spam emails will not be able to do so, as there is a need for computations for generating the proof.

17:03 - In Bitcoin system, the hash cash proof of work generates blocks. This proof of work is attached to an individual block’s data so that it can be validated. Its difficulty is also regulated so that there is a limit on the generation of new blocks. Thus, each block generation takes roughly 10 minutes. Moreover, as the probability is set at a low value, the success of a generation of proof of work becomes unpredictable, as there is little information about the particular computer that will be generating the successive block.

17:36 - Also, there is a requirement for validating a block, which is based on a lower hash value than the present target. In other words, every block that generates consists of the hash value from the previous block. This results in the chain of blocks that together incorporate a lot of computational work to produce Proof of Work. Furthermore, altering a block will require reworking on all the following blocks. This way the blockchain remains safe from being tampered with.

18:06 - : Miners and Mining Miners do the mining, so if you know what mining is then you know what miners do. So what is mining? No, it is not taking a pickaxe and chipping away at a cave wall to expose the precious metal in the stone. Mining is a computational and mathematical process that places these blocks we’ve talked about in previous chapters in a sequence that cannot be retroactively altered. Once the transaction is in the block, a confirmation is said to be complete. That takes about ten minutes. If you really want the transaction to be solid, in the event it is a large transaction, then wait for six confirmations and you can be dead certain that the transaction is confirmed and without any possibility that the sender will reverse the transaction.

18:52 - How does this work? While regular nodes are in charge of going through a checklist and making sure every transaction that is broadcast to them from a neighbor passes all the time on the checklist, the miner is responsible for something just as important. The miner has to legitimize the blocks and tie them together to the preceding block. This takes a large investment and a tremendous effort and is not as simple as one may think based on the description earlier in this book. In the rest of this chapter, we will go through the other processes and show you how difficult, expressive and how it requires a high level of skill to execute. To act as a barrier, the Bitcoin system requires that only able parties are invoked in the mining operations of putting together blocks.

19:37 - What is even more brilliant about this system is that the difficulty and complexity scaled up with interest. When Bitcoins first entered the market, almost anyone who wanted to be a miner could – they just needed a regular old PC to do it and they could start mining but, as more and more people got clued on to Bitcoin and wanted to mine, the processing requirements evolved. It now takes expensive equipment, and lots of it, to be able to make a return on your effort. There are not mining farms as large as factories and this has precluded the individual from using spare resources on his laptop to participate. Just keep this at the back of your mind as we start explaining the proof of work and why it’s needed and then we will expand from there to the complexity of the mining process and how that is determined.

20:25 - Proof of Work To put it simply (and we will explain this here in greater detail) your Proof of Work (POW) is the way the system knows that effort has gone into creating the block. This is how it knows that the lock was not just thrown together and that resources of value had to be expended in terms of time, energy and assets that had to be deployed to do the work that comes up with the solution. The proof of doing the work is contained in the solution to the puzzle. You can guess at it, or you can approach it from a particular direction; you can come at it in any way you want, but the point is that you have to work at it and keep trying until you get it. When you do, and if you are the first one to solve the puzzle, then you get to submit that block as the next in the chain and get your reward for that.

21:12 - The miner first chooses the transaction he wants to place in the block, and then starts to conduct a hashing operation on it. The transaction IDs are placed in a Merkle Root and the rest of the information is added. This, as you saw, includes the time, date, previous block’s hash and the nonce. This is where the puzzle comes in. Puzzle The puzzle is to solve the nonce. Let me show you how. Imagine that the information that was to enter the block included the following items, and let me just use random information to mimic a real block. Received Time 2018-05-02 00:01:47 Miner SlushTool Previous Block Hash 0000000000000000003169d3297051de41502f769f2c36f6abffa7db8985ba77 Merkle Root 57c16f1ab60394b5de123835f4f4beaafbc9629429292b0cb238fc228f798f70 If you were to hash the above information, you would get this: EB603B946FDA9F623C2D8770B60DA775AD7B99EAC082B319116BA39664A6D04E If you notice, the nonce is not present in the information above, and it is not in the hash result.

22:52 - Now, just to prove a point, I am going to just say that the nonce is 1 and so I am going to add the number 1 to the whole thing and run the hash program again. This is what I get: E8B3CB25EA9D72236999330B7D2AFA878FDE9AA35D16A6EF42F52D4024972247 You see the hash has changed. If I change the nonce to 2, this is what I get: 4A03F84264FADC60A1A9A6BD90C1B1DD3033590C7844DED0166379332559AB83 So, you get the point – changing the nonce alters the hash output. What if my constraint was that I want the output hash to be something that starts with the number 0? What do I do then? Well, since I cannot reverse engineer it, I am left with only one way of solving that constraint, and that is to randomly look for numbers that would get me that nonce. So, let’s say we use this constraint as an example – I want to have the hash start with zero.

24:10 - That means I have to keep randomly guessing the nonce until I find the nonce that results in the hash starting with zero. For this example, I had to randomly try it until I found that the nonce of 222128 resulted in the hash being: 0522BF5F28591F9F6D190EEDACFC700B869D3C35EF3DEF5023D57029589AE448 So, this hash satisfies the condition that the hash has to start with the number 0. It was fairly simple and it took me a few minutes of repeated calculations to get the nonce I needed, but this was a simple constraint. The typical constraint is significantly higher in complexity and difficulty. You can see it in two ways. First off, you can see the hash of the last block which is included in the current block.

25:11 - It is: 0000000000000000003169d3297051de41502f769f2c36f6abffa7db8985ba77 If you notice the hash has 18 zeros up front. That means the algorithm assigned the miner the puzzle and told him he needed to find the nonce that would result in a hash that began with 18 zeros. That is not always the case. The system alters the number of zeros it wants the miner to find based on the difficulty it deems appropriate. One zero is fairly easy to obtain, two zeros in sequential order would be less so, and, by the time you get to 10 or 18 zeros, you would have to hash millions of times before you can get to the answer that you are looking at. However, the many zeros the system is going to constrain you with depends on what it deems the difficulty should be for you to be able to find the nonce.

25:58 - The level of difficulty that is needed can be ascertained at any point by looking at the difficulty chart.