On this page, we try to explain the concept of mining. We explain this phenomenon on the basis of cryptocurrency mining and we explain how blockchain technology works. We use Bitcoin as an example in the text below, but there are several cryptocurrencies (altcoins) that use this technology.
When you buy crypto, there is a certain form of mining on the blockchain associated with it. You may have heard about it before, but how does mining actually work now? What are miners, what do they actually do and why are they so important for network security?
Miners are the ones who check the transactions on the network and add them to the blockchain. They collect a bundle of transactions in a block and then put their computer to work so that it is the first to find the solution needed to publish the block. Will you be the first to publish the block with a valid solution? Then you will receive a reward in the form of new cryptocurrency. That is why this process is also called mining; it is the way new bitcoins and other cryptocurrencies are created.
What is the connection between mining and the blockchain? Therefore you need to know what the blockchain exactly is. A blockchain is a chain of blocks that are connected in a very smart way. Each block is filled with data in which you will find, among other things, the transactions and a fingerprint of the previous block. Because every new block contains a fingerprint of the previous block, a direct link with the entire history of the blockchain has been recorded in the new block. If you change something in a block, the fingerprint changes and so does the fingerprints in all blocks change. This also applies to the adjustment of a particular transaction.
As a technical explanation, a fingerprint of a block is called a hash. This is a random sequence of letters and numbers that have always the same length. To generate a hash, miners use a complicated mathematical formula in which all information is put in the block.
Mining can best be explained as a computer that is continuously calculating a hash that is the solution for the next block.
To make things more difficult for the miners, the protocol requires that the first X number of characters of the solution be a 0 (zero). That is the ingenious part of the Proof of Work (PoW) mechanism used by almost every cryptocurrency. This is the measure that determines how difficult it is to generate the correct hash and thus the solution.
The miner who is the first to find and publish the right solution will receive a reward in the form of a bitcoin.
What makes bitcoin mining more secure than any other transaction system? It is a decentralized payment protocol. This means that the transaction system is not managed by a central party, but by thousands of computers on the network.
Do you want to influence the bitcoin transaction system? Then you must have access to more than half of all computers on the bitcoin network. This is also called a 51% attack. Bitcoin’s network is currently so extensive that it is virtually impossible.
The structure of the blockchain is another property of bitcoin that has to do with bitcoin’s security. All bitcoin transactions are tracked on the blockchain. A new transaction block is added every ten minutes.
This new block is connected to the previous block, which is connected to the block before it. Each block also contains a little bit of information from the previous block. In this way a chronological chain of transaction blocks is formed.
But what makes this chain so safe? The further you go back in the chain, the more difficult it becomes to manipulate the blockchain. That would mean that you also have to manipulate all blocks afterwards. And that while the bitcoin network is already busy with the current chain. It is impossible to compete against the thousands of nodes on the network. If you want to do that, you are always running behind the facts.
The bitcoin network is built on security. You can also take safety precautions yourself to use the bitcoin network as safely as possible. Below we give you a number of tips, so that you can use bitcoin in the safest way possible.
Preferably use a hardware wallet. This is the safest way to store your bitcoin. A hardware wallet ensures that access to your bitcoins remains offline and encrypted. That way you only have access to your own bitcoins.
Many people keep their bitcoins on a cryptocurrency exchange or on an online wallet. This is a lot less safe. An exchange is a central party. Is the exchange being hacked? Then you have a good chance that your bitcoins will be lost. In addition, the private keys of your bitcoins are stored online. This also increases the risk of losing your bitcoins. A hardware wallet is therefore a wise choice! But then of course you should not forget your password to unlock your bitcoins again 😉
Because there was more and more competition among miners, it became less and less profitable to mine. In the end, there is only one lucky miner who gets to add the next block to the Bitcoin blockchain and claim the bitcoins as a reward. If you are mining with 10,000 people at the same time, it can take a long time before you emerge as the winner. To spread the risks, people have started working together in so-called mining pools.
Once you are mining, you also have to find out the power consumption. You naturally want to mine as much as possible and the computer will therefore be active for a long time. A standard PC, with a fairly recent video card, will consume an average of about 250 watts. You can use the website Stroomkosten.net to calculate what you will spend approximately per week, month or year. As energy costs (kWh), you can count about 19 cents per hour. In this example, a PC that’s active 24 hours a day for 30 days in a month will cost approximately EUR 330 per year in electricity. You must therefore also deduct these costs from the income that you receive from mining cryptocurrencies. By the way, you should not forget that you will also have to replace hardware parts in the long run. And you probably won’t always be mining 24 hours a day.
To calculate the yields, you can do the math yourself. But with the website whattomine.com that is a lot easier. Click on “Coins” on the website and select the coins you want to mine, for example Ethereum. Enter the requested information, such as the hashrate and the electricity costs. You can even calculate the costs of the hardware. Then click on “Calculate” and you will get an overview of the gainings (or losses) per hour, day, week and more. In our calculation for a PC with the GeForce GTX 1070 video card, we would earn around 2.50 euros per week on the bottom line. With this website you can get a good idea of what is currently lucrative to mine. Of course you have to take the calculation with a good grain of salt. But it does give an indication and overview of the different hardware devices and the cryptocurrencies.