This term mining would be familiar to many of readers already. It is an algorithm by which all the miners in the bitcoin network add a new block to the distributed ledger called blockchain. Mining as such is the execution of a system that many cryptocurrencies including bitcoin follows called the proof of work.
In simple terms, mining is the process by the nodes in the network adds a new document to the common chain of consensus or agreement documents. OR, it could be described as competitive bookkeeping.
Hashing Process | Source: Internet
Bitcoin relies on cryptography.
A block in the blockchain includes all the transaction data that happened within the bitcoin network thus building ths public ledger of transactions. The computational problem is different for every block in the chain, and it involves a particular kind of algorithm called a hash function. For example, a coin could use the NSA algorithm SHA-256 which converts any input into 64 character long string which is not retraceable to input. In the above diagram, nonce is a random number. Meta-data could be a time-stamp. Together it forms the input for the hash which the hashing algorithm converts it encrypted string.
Proof of work (PoW)
It is the foundation of the “decentralised” economy that the founder of bitcoin, Satoshi Nakamuro, based his dream algorithm upon. Proof of work is a concept which was earlier invented as a way to safegaurd a node/computer from email spamming. It was later identified that it could be used as the basis for an economy which resulted in a trust based system. In Bitcoin, the challenge involves a double SHA-256 hash of the input string. A miner wins if the hash output contains at least n leading zeroes. This specific hash is found by brute force by trying out different random numbers.
// a losing hash for Bitcoin
787308540121f4afd2ff5179898934291105772495275df35f00cc5e44db42dd
// a winning hash for Bitcoin if n=10
00000000009f766c17c736169f79cb0c65dd6e07244e9468bc60cde9538b551e
After a winning hash has been found, it is broadcasted to all nodes in the network to get verified by at least 51% of the network and form a consensus. The winning miner gets a reward of a preset number of coins.
Why PoW does not make sense.
There are better algorithms that have been come up including the proof of stake algorithm which states all the disadvantages of the PoW. The significant ones among the are:
Miners competing for solving the proof of work to mine same coin and thus wasting a lot of resources. More rich the miner, more hashing/mining power he would possess and thus create a bias.
Miners pool resources in order to avoid wastage in pooling and thus improving their efficiency. The current top 3 mining pools combined would possess more than 51% stake in bitcoin, which is a potentially risky situation as having 51% stake would give control over the bitcoin economy.
If every node needs to keep record of every transaction happened, the size of the ledger would be huge. As of 2014, the bitcoin ledger was 15gb which would have grown exponentially making it infeasible for most miners. Therefore, arose this concept of light nodes which would store details pertaining to their transactions and all of most current transactions. They take part in the consensus only in case of conflicts. Thus inferring that bitcoin is now partly decentralised.
Why Hard forks make BITCOIN worthless
These are general disadvantages pertaining to all the crypto-coins using the Proof of Work algorithm. Leaving all the technical aspects, the most striking disadvantage that I found about bitcoin is that after the bitcoin has been taken over by the developer community the developers make these slight modifications to the algorithm which they fork it to the public algorithm. There are two types of forks: soft forks and hard forks. Soft forks are timely updates to the bitcoin system. Hard forks happen at the time when there are conflicts between the developers in the bitcoin community. At this moment there is this split within the developer base and blockchain now branches out into two making two different blockchains with the nodes/developers within the new network get all the coins within their new network and also get to keep them in the old network as well. Some examples of new currencies that deveoped out of these ‘conflicts’ are Bitcoin Gold, Bitcoin XT, Bitcoin Classic and Bitcoin Unlimited. This is well against the concept of having a theoritically limited number of coins within the network.
The bitcoin’s mast head concept of anti-inflation crypto-economy is blotched by this immature action by the developed community. Therefore, the business value in investing in the bitcoin is brought down.
Link to the original post: https://medium.com/@rohanrony/what-is-bitcoin-mining-and-why-it-does-not-make-sense-9ed7fd8a2f74
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