Mining. What is it?
Mining is the maintenance of the cryptocurrency payment system in working order.
What is a “cryptocurrency payment system”?
It is a decentralized payment system that:
It is located on the Internet.
Open to all.
Its copies are kept by different persons.
Protected by cryptographic methods (nothing can be forged or changed in it).
It has no supervisory authority (no one can control it).
Equal for all participants (everyone has the same rights).
Guarantees complete anonymity for everyone (no personal data).
Eliminates blocking, arrest or any possibility of freezing any funds of participants.
Stores money through so-called “electronic wallets”.
Gives the right to have an unlimited number of electronic wallets to any person.
Access to electronic wallets is provided through a special technology of “private and public keys”.
The payment system never requires the owner of the e-wallet to provide it (or anyone else) with the private key.
The private key is not involved in any exchange in Internet traffic.
All actions with the private key are carried out only in offline mode, without an Internet connection.
The private key is generated randomly once at the moment of creating an electronic wallet on the user's computer (without an Internet connection).
If the owner of an e-wallet loses his private key, he will lose access to his e-wallet.
The payment system is designed in such a way that no one has the ability to calculate the private key based on any data.
The private key is needed to transfer money from one account to another.
To transfer money from one account to another, the owner of the electronic wallet must form a transfer transaction (offline, without an Internet connection) and sign it with an electronic digital signature (EDS). The EDS is generated from the private key. Then the EDS is sent to the server.
The public key is needed so that the payment system can verify that the combination “EDS + transaction + public key” can be created only from one unique parameter “private key”. If everything is correct, the server confirms the transfer and adds it to the database.
The public key is the very same number of the electronic wallet of the payment system participant.
The public key is generated from the private key at the time the e-wallet is created.
The public key is publicly available. Anyone can find out how much money is stored on it.
Thus, even if someone was able to figure out the owner of the e-wallet (his full name), it is almost impossible to confiscate his assets. The private key is usually encrypted with a strong password and stored in a secret place.
This type of savings is not well suited for inheritance and is burdened with a person’s banal fear of losing their private key.
Why is such a system needed at all?
There are no intermediaries or oversight bodies in this system. No one knows for what purpose two unknown people transfer money to each other.
In 2011, American Ross Ulbricht created the website “Silk Road”, where people were allowed to trade whatever they wanted (drugs, fake documents, weapons, stolen jewelry, etc.) for bitcoins. The top 10 items on this site included:
“Silk Road” operated on the anonymous network “Tor” and used a Bitcoin mixer (it split and mixed all user transactions randomly through fake wallets). It was impossible to understand who paid whom.
In 2013, the Silk Road website accounted for 5% of the world's trade turnover in the Bitcoin economy. But it didn't last long. In October 2013, Ross Ulbricht was arrested and convicted of drug trafficking. He received a life sentence.
Who came up with all this?
There is no information about the “creator”. Either he is not alive, or he is carefully hiding. He is known under the pseudonym Satoshi Nakamoto.
He allegedly mined 1 million bitcoins in 2009 to test how it all worked (and whether it worked at all?). After that, he retired. He posted the source code online.
Bitcoins mined by Satoshi Nakamoto (around $50 billion) are now sitting “dead weight” in the payment system without any movement.
How do miners make a living?
Miners are rewarded by the payment system for keeping it alive. Otherwise, it will die.
In order for the payment system to work, miners need to create new entries (blocks) in the payment system database (blockchain) every day.
For each block created, the miner receives a reward from the payment system. The payment system (software) “tells” the miner:
– Thank you, miner! Without you, I would have died long ago. How vitally important it is for me to have someone like you constantly creating new blocks for me.
The software pays the miner a reward (cryptocurrency) to the miner's electronic wallet. This happens as follows:
The miner creates a new block for the payment system.
In response, the payment system gives the miner the right to place the first transaction in this block with the miner's reward.
Next, the miner must place in the created block other transactions of users who are currently using the payment system.
How many bitcoins can you mine?
Bitcoin is limited to 21 million bitcoins. In 2024, 20 million bitcoins have already been mined.
What will happen when miners “print” all the bitcoins?
Miners are the “owners” of the payment system, and everything rests on them. So long before miners print their last bitcoin, they will start charging fees to users.
In 2010, the fees in the Bitcoin payment system were 1 cent, in 2024 – $1 dollar. In the future, these fees will grow.
Who buys bitcoins?
Initially, Bitcoin was perceived as an unregulated shadow market with an unpredictable rate, a speculative bubble. But then rich people (mostly in the US) declared it “digital gold” and started buying up all available “assets”. The rate skyrocketed.
The total number of Bitcoin payment system users in 2024 is estimated at 10 million people. But 90% of all bitcoins are currently stored by 1% of users.
What amounts are we talking about?
The global cryptocurrency market capitalization in 2024 was about $2 trillion. Bitcoin accounts for $1 trillion.
In 2023, $30 billion worth of Bitcoin was mined.
World leaders in bitcoin mining:
Is it possible to mine bitcoins on video cards?
No. Bitcoins are mined only on special equipment called ASIC. Mining Bitcoins on any other devices, be it a video card or a processor, has been unprofitable since 2015.
ASIC can be bought on almost every corner, be it Ozon or Wildberries.
After purchasing an ASIC, you need to plug it into an electrical outlet, call an IT specialist, install the necessary software and watch the money drip into your account.
How much electricity does an ASIC consume?
A lot. A lot. In the US, miners “eat up” more than 1% of all electricity generation in the country, in Russia – 2% (approximately as 2 regions of the Russian Federation). But 90% of miners in the Russian Federation are industrial miners (people who have invested a lot of money in this industry).
How does the mining process work from a technical point of view?
The miner has an “obligation” to the payment system – to create new blocks for it. Blocks are created according to the following principle:
The miner has an up-to-date database.
The miner looks at the latest block in his database.
The miner tries to find a hash from the last block of the database so that the payment system will allow him to “attach” a new block to the previous one.
The hash is selected by random enumeration.
If a miner has chosen the right hash, he should notify other miners (all over the world) that he has managed to create a new block for the payment system.
At this point, all other miners update their databases and start looking for a hash for the new block.
And so on in a circle.
What is the probability of choosing the correct hash?
It all depends on the number of miners on the Internet. If there are too many of them, then the probability of picking up a hash of one random miner with low generating power is ~0%.
Pools
To reduce the influence of luck and to receive rewards more evenly and predictably, miners combine their computing power into pools.
A special feature of the calculations performed by miners is the ability to apply maximum parallelization of processes, when each pool participant searches for their own solution to the problem (finding a hash) without linking their actions with other participants.
From the point of view of the payment system, the pool acts as a powerful single miner. But due to the total computing power, the probability of receiving a reward for the pool is equal to the sum of the probabilities of receiving a reward for each of its participants. All the money earned by the pool is distributed equally among the participants, according to their computing power.
Mining on video cards.
Ethereum (ether) is the second largest cryptocurrency after Bitcoin ($300 billion). Until September 15, 2022, Ethereum was mined exclusively on video cards. But then the Ethereum payment system switched from PoW to PoS algorithm and changed the rules of the game. Miners were replaced by “validators”. The need for miners disappeared.
Due to the excess of generating capacity, most miners either closed their “farms” or went into niche projects with low capitalization. The income from such mining on video cards as of 2024 is insignificant and does not cover the cost of video cards.
Results
The creator of the world's first cryptocurrency was clearly a genius. He showed the world how to create a completely anonymous and secure payment system that is transparent, open and at the same time reliably protects digital money on the Internet.
But the number of users of cryptocurrency payment systems is small. And they are not convenient to use.
On the other hand, there will always be someone who wants to hide the fact of transferring money from one person to another, and cryptocurrencies are ideal for this.
