Mining, staking and forging for noobs
We often talk about mining, mining farms and energy consumption of cryptocurrencies. But what is mining in 4 simple words?
As we have already read, the blockchain is made up of concatenated blocks, inside which data or financial transactions and payments are written.
In order to avoid scams, counterfeits or even tecnical errors in payments, the data contained in the blockchain must be verified and this is exactly what mining is about.
Mining represents the verification procedure that is carried out by exploiting the computing power of the computers owned by the individual miner or by the mining farm. A mining farm is nothing more than a place, often a warehouse, with a very large number of computers that work and produce blocks.
Once a block verification process is complete, the miner who created the new block will be paid for his verification work. Mining keeps the blockchain alive.
To validate transactions within a blockchain network There are several systems implemented to achieve consensus
A "blockchain protocol" is a common term for consensus methods.
Some of these require investors to purchase physical mining equipment, while others require no physical hardware and only possession of coins.
Let's see the details aboud different consensus methods:
- PoW: Proof of work - This type of consensus is generically called mining and consists in the creation of computational power thanks to mining rigs formed by serialized graphics cards. This computational ability solves the coin algorithm and creates the blocks. Bitcoin is based on this system, which is not particularly eco-sustainable.
- PoS: Proof of Stake - the type of consensus to create blocks is defined staking and is based on the possession of a large number of coins that, when placed in staking in one's wallet and therefore not available on the market, allow the owner to mine the blocks of this blockchain. Ethereum is based on this method, which is greener than proof of work
- DPoS: Delegate proof of stake this type of consensus for the creation of blocks is defined forging and is based on delegates voted by the community of coin owners. Lisk and rise work with this system, which is as eco-sustainable as proof of stake.
In DPOS systems, forging is another way to mine coins in order to validate their transactions and put new money into circulation. This system consists of 101 delegates located around the world who keep a node (server) online where the coin client runs.
This software allows you to maintain the decentralized network, validate transactions, issue new money into circulation and reward delegates for their service. Delegates don't have to be 101 but can be 51, 201, 301, 501, etc. according to the needs of the network. To become delegates there is a voting system based on the amount of money owned (stake).
If you want to become a delegate you need to reach a sufficient number of votes to be able to enter the top 101 (approval).
The DPoS (Delegated Proof of Stake) system is a method aimed at ensuring a network of digital tokens that takes place by processing transactions and achieving distributed validation inherent in the ownership of money without the need for a central authority.
This system represents an evolution that started from PoS (Proof of Stake), also developed in order to reduce costs and the inefficiency associated with the consumption of electricity typical of PoW (Proof of Work) systems, used for example by Bitcoin.
Mining how to do
This block creation can become a profitable business if done with the proper criteria. Obviously we are currently talking about large initial investments in material and hardware.
Before starting, however, we must understand that the two main problems you will encounter will be the exploitation and consumption of the hardware, which will shorten its useful life, and the energy costs given by the electricity bills, which will skyrocket compared to a normal household use. . After that it must be said that each coin is different and that some coins in particular require specific hardware.
Let's see how to mine
The first idea that comes to mind is to use our home PC, or an old laptop set aside in some dusty closet. Old hardware could be an obstacle to profitable mining given the possible low computing power if you use old hardware.
In this case, the mining of coins that are at the beginning of their life and that do not require particular computing power should be considered. But dont put to much hope in that solution.
A second solution can be to participate in a Mining Pool. Basically you participate with your hardware and your computing power in a group where other people gather computing power to undermine. The large number of devices made available means that the possibility of mining blocks in the blockchain is much higher and therefore potentially profitable. The proceeds will then be divided in proportion to the computing power made available. You will have againt the tipical two problems of energy cost and consumption of the hardware, and in addition there is the possible lack of transparency of the group of miners, who could remunerate the individual less than due, cheating him.
A third way could be to rent computing power through CLoud Mining services, services that provide dedicated paid packages for a defined period of time. Since you do not operate with your own hardware, the cost of wear and energy is reduced, but these are replaced by the cost of renting the computing power. In this case, however, there is the possibility of being scammed on the amount of coins that are recognized by the service for the same hashing power rented, a quantity of coin that over time becomes less and less, justified by the growing difficulty of extracting the coin.
Finally, a fourth way is to go big and create your own mining farm, with a lot of networked computers that mine our crypto currencies. In this case we are talking about very high budgets, well over 200 thousand dollars.
In this case, we must take it into our head to become entrepreneurs, so first of all we will have to think about locating the farm in a country with a low cost for electricity. Later we will have to think about what to mine, because for each coin or type of coin there are different hardware that are more suitable. Mining Bitcoin or ethereum is not the same thing. And let's remember that we have to mine a profitable coin, which is not so obvious today.
The supply of hardware for the creation of the farm will be a problem to consider given its possible scarcity and cost, and also its replacement given the premature wear that we will encounter.
We will also need at least one or more professionals dedicated to the management and replacement of parts.
Since the farm has to operate 24/7, it will be a long and demanding job. Creating a farm is not easy and not always profitable, in fact these are general indications. Many farms have been opened and closed in a short period of time not only due to the inability of the entrepreneurs but also due to the volatility of the market. It is a difficult market and it is necessary to have very in-depth specific knowledge, both in the technological and in the economic field.
Cryptocurrencies to be mined.
If you have decided to dive into the world of mining, you must know that it is important to carefully choose which currencies to focus your efforts on, in fact, depending on the currency chosen, mining may require specific hardware or even more or less power. Furthermore, with a view to evaluating the investment, it must be considered that the trend in the value of the currency (heavily influenced by the progress of the underlying project and the size of the community) affects the results.
What if the miners suddenly stopped?
What if miming no longer generates profits? That is, what would happen if the revenues did not cover the costs of the equipment and the electricity used and the miners decided to stop or switch to another currency? Is it true that without miners, Bitcoin would stop working or become too slow?
No it does not. a blockchain continuously adapts its criteria to keep the creation rate constant. If there were 90% fewer miners, then 90% fewer calculations would be needed to approve a new block, and the operation would not be affected.
The absolute value of the reward for a new block decreases over time, all programmed according to the rules that govern Bitcoin. During the first 4 years of its creation (2009-2012) the reward was 50 bitcoins
However, in the event that the miners all stop their activity, the blockchain would stop and consequently it would no longer be possible (until the mining activity is resumed) to carry out any transactions or add blocks to the blockchain.
Learn more about Mining from an investor perspective here.
Cloud Mining
Let's go into the details of Cloud Mining. Btw you can learn more about Mining here.
Cloud mining is a service that allows you to mine bitcoins without having the necessary hardware but renting it through contracts with different companies around the world.
Bitcoin mining as we know is demanding and expensive, consumes energy and is sometimes even unprofitable.
In addition, profitable mining today after the last halving of May 2020 is even more difficult as the reward for closing a block begins to be scarce, and it will get worse and worse given how bitcoin is structured.
Without a low-cost power source to lower operating costs, mining farms are often a loss.However, cloud mining comes to the aid of farms that by selling their own mining contracts are able to recover funds for their survival.
For many people just entering the cryptocurrency world and wanting to diversify their investments, cloud mining contracts can be a possible way to go.
Simply investing your capital, sometimes without even setting up the machines yourself, is a strategy to be considered risky.
In fact, it must be assumed that for the user who has just entered the crypto world, lacking the appropriate equipment, the necessary skills, and low-cost electricity, cloud mining contracts are also a risk of being scammed.
These contracts de facto discharge part of the farm investment risk on the users who sign them, in exchange for a part of any profits.
These contracts are actually simple rental contracts for equipment and management to mine coins.
The owner and manager of the farm collects the fixed monthly or annual fee of the contracts sold and not through the creation of cryptocurrencies.
There is no need to mine bitcoins in reality, the farm could in cases of scam, not even exist with the manager who cashes the contracts without delivering bitcoins to customers because the farm fails to mine due to the difficulty of mining.
Serious cloud mining companies exist, you just have to commit to finding them, however, being aware of the risks of the investment. You must always stay away from those who promise you easy, fast and abundant earnings by paying very little.
If you really want to invest in cloud mining, privilege the study of coins and how to set up the machines.
Look for contracts where you set the usage parameters of the rented computers. If you have been good, you will have to celebrate.
Virgin BTC- A brand new Bitcoin...
Speaking of mining, you also need to know what virgin bitcoins are.
A virgin bitcoin is a bitcoin that has just been mined or that has never transacted on the blockchain or that has a certified transaction history.
In the world of cryptocurrencies, many scams have occurred against bitcoin users, while other bitcoins have been used for illegal activities, theft or money laundering.
Since the blockchain is visible to all, it is possible to track the history of every single bitcoin by checking its transaction history. Which is difficult but real.
The authorities of a country could keep an eye on some wallets with bitcoin inside involved in criminal actions. In this case, if these were passed on the wallet of some exchange, they could be blocked or not accepted by the exchange.
This can create concerns and some financial intermediaries may not accept bitcoins of non-certified origin.
And here a Bitcoin without transactions is very useful and therefore its price will be higher than a normal bitcoin, in the order of 20 or 30 percent more.
The increased regulatory push drives the demand for virgin bitcoins.
Bitcoins without a clean history are not to be considered dirty or unused but we simply don't know what their life was like before we had them in our wallet. Life that may have been extremely adventurous
Blockchain protocols: investors point of view
In previous articles we have seen that there are different types of coins and therefore there are different ways to create them, or rather, to mine these coins. Learn more about mining here.
With different protocols for creating coins, from the investor's point of view we have another feature to be studied before making any purchase.
In fact, cryptocurrencies investors must analyze the blockchain protocol before investing in coins. Consensus algorithms can be the key to success with effects on inflation rates, security and the total value of the currency. Learn what is a Blockchain here.
But what is a Blockchain protocol?
A blockchain protocol is the common term for defining consensus methods.
Consensus methods are different systems created to reach consensus and validate transactions in a blockchain network.
Some require miners to hold coins, others require hardware to mine such as computers or graphics cards.
We know there are 3 types of consent which are:
Proof of work, proof of stake and delegated proof of stake
Let's briefly see some details:
Proof of work: from energy to value
Bitcoin and other coins use Proof of Work (PoW) as a consensus algorithm.
In the PoW consensus type, miners participate in the network by adding large amounts of computing power.
Big miners create physical mining rigs, consisting of several graphics cards in series, if not hundreds.
More powerful platforms equate to more chances of closing the next block and receiving the next block's reward coins.
Blockchain Transactions also include transaction fees.
So, in this case, the miner has to buy a large number of expensive graphics cards, spending a lot of money before earning a single bitcoin (or any other currency).
Miners can create a mining pool to combine their computing power and add more chances of receiving rewards.
In the proof of work economy Miners must spend thousands of dollars to build computer technology plants and pay high electricity bills to participate in networks of this type of blockchain otherwise, there would be no currency and no blockchain
In theory, these costs should add great value to a PoW coin
Miners don't want to sell coins below their mining cost
If you want to find out the minimum cost of a coin of this type, you need to look:
- The cost for miners to mine new coins (rig + electricity)
- The time to create a block and its reward
Let's take an example. If we have a PoW scheme with:
- Quick block creation times
- High reward
- Low total amount of money offered
Then the total supply will reach its maximum rapidly. As long as the demand for money is high, the currency should perform well. Otherwise you can see how the market reacts and wait until all the coins are created.
In another PoW scheme we have:
- Slow block creation times
- Low reward for blocks created
- high total money supply
In this example, the inflation rate is low due to lower demand. The coin will be profitable as long as it is new and scarce on the market.
Proof-of-Stake: no more platforms and computers
Proof of Stake or PoS does not require the purchase of mining rigs or the payment of huge electricity bills
The POS is a very different consensus model that allows all coin holders to contribute to the network and block building
You have to keep the coins in your wallet, activate staking and leave your computer on and you will receive rewards by acting as a miner
In this way, the Pos is a great incentive to hold coins also because the more coins you have, the more you contribute to the network and the more you have the chance to solve the next block.
So, in this case, miners have to spend a lot of money to buy coins to stake.
This is much simpler and faster than the proof of work protocol
The only available metrics are total supply, current supply, inflation rate, and current market price. So, you can analyze this market in a similar way to a fiat currency by measuring supply and demand.
DPOS Delegate proof of Stake with reliable nodes
This is a variation of the classic POS.
In this protocol, all coin holders elect delegates.
These delegates are the only ones authorized to verify and add new blocks to the blockchain.
In this case we can have a centralization of the first users with many coins. By the way, delegates need to be voted on by the community, so a good reputation and participation in the coin community is needed.
Lisk as an example has a Dpos consensus scheme.
As we said earlier for the consensus on the POS, if you want to be a miner you have to buy a lot of coins, but unlike the POS, in this case you have to trust the community. And you can't buy or sell trust.
There is no perfect system, but these 3 systems can solve the inherent control problems of a decentralized currency. It should also be noted that you have to consider the environmental problem of energy consumption among various factors.