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Mining cryptocurrency can be a lucrative endeavor with enough computing power


Mining cryptocurrency is in the news a lot lately. People are finding their computers have been compromised by malware and are mining, or in some cases entire botnets are mining. But what does that mean?


This isn’t mining in the traditional sense. There are no pick axes or canaries involved. Instead. it’s more about trying to win a blockchain lottery to earn the reward at the end.


What does that all mean? Let’s hash it out.


What is cryptocurrency?

To begin a discussion of mining cryptocurrency we need to start with what cryptocurrency is. Cryptocurrency is a digital form of currency with a cryptographic underpinning that is used as a secure medium of exchange. There are literally hundreds of different cryptocurrencies with varying real-world values. Many believe it’s the future of currency.


The most popular cryptocurrency is bitcoin, you may have heard of others like Etherium, too. While cryptocurrencies may differ in terms of the algorithms and encryption they use, they all share one similiarity: blockchain. And that’s what we need to talk about next.


What is blockchain?


Blockchain is a digital ledger of transactions that is impossible to alter. It uses hashing and a concept similar to salting to continuously complete blocks of information that chain to form an immutable ledger.


Hashing is the act of mapping data of any length to a fixed-length output. When cryptography is involved it’s a one-way function. The most popular hashing algorithm is SHA-256, which outputs at a length of 256 bits. Every hash value is unique. Even the tiniest alteration to the data being hashed caused the entire value to change.


Hashing is considered one-way because of the amount of computing power it would take to reverse-hash it. For a 256-bit output, calculate 2 to the power of 256 (2 X 2 X 2… 256 times). Your odds of finding the correct value are 1 in… the product of that equation. Those are astronomical odds. It would take a supercomputer thousands of years to compute that.


Blockchain + Cryptocurrency


Now let’s fit it all together. With a cryptocurrency blockchain, as transactions occur they are broadcast and added to various private ledgers. Each one of these transactions is digitally signed for the sake of authenticity. On the other end, there are people or groups collecting these transactions and building ledgers.

They are also computing to find a value that when hashed along with the ledger, produces a set number of 0s at the beginning of the hash value. That’s the portion that’s similar to salting.


So let’s say that for our example cryptocurrency, we’ve set the total to 10 0s. That means the first 10 spots of the 256-character hash value should all be 0s.


When the correct value is found, the block is closed, it’s broadcast officially and added to everyone’s blockchain, then the hash of the old block is put atop the new ledger and the process begins again. This is how blocks are created in the chain.


So, what is mining cryptocurrency?

The act of computing the correct value to satisfy the hash function in blockchain is called mining. When it comes to cryptocurrency, a reward is provided to whoever solves for the correct value. That makes it lucrative to compute the correct value, though it takes quite a bit of power to accomplish that.


Oftentimes people pool their computing power together and split the reward if they solve for the correct value. In other cases, hackers have been known to co-opt others’ computers and use some of their computing power – behind the scenes – to mine cryptocurrency. There are entire botnets doing nothing but mining.


Really, solving for the correct value is like winning the lotto. There are countless people and botnets attempting to find the value and whoever finds it first gets the reward.


Of course, if you can accumulate enough computing power you could solve for the value enough of the time that you could accrue a substantial amount of cryptocurrency.


Wrapping Up


When someone says “mining cryptocurrency” what they’re referring to is the act of trying to compute a specific hash value by producing a set value that, when hashed along with the block ledger, produces a specific result. This requires considerable computing power, but considering the rewards – it’s well worth it.


What we Hashed Out (for Skimmers)

Here’s what we covered in today’s discussion:

Blockchain is an immutable ledger of digital transactions
Cryptocurrency is a digital currency that is a secure medium of exchange
Mining cryptocurrency is computing a specific value that produces a specific hash result and completes a block on the blockchain

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Cryptocurrency remains one of the hottest topics in recent years. The combination of technological innovations, software prowess, and business acumen attract a wide variety of people.

However, it's so easy to get swept up in the minutia of cryptocurrency jargon. Right now, that jargon is what's keeping the general public from understanding how it works. If the average investor struggles to understand the language behind an idea, then why do cryptocurrency fanboys swear that everyone will support it within the next decade?

In the words of United States Senator Thomas Carper, "Virtual currencies, perhaps most notably Bitcoin, have captured the imagination of some, struck fear among others, and confused the heck out of the rest of us." This list of terms starts at the very basics of the industry to explain key phrases and words you'll probably hear a lot as digital currencies get more popular.

Cryptocurrency

Let's start with understanding the key concept -- cryptocurrency. In short, cryptocurrency is a medium of exchange that uses cryptography to transfer funds. It was designed to be anonymous and (surprisingly) secure. It's completely decentralized and thus relies on a massive public ledger (called a blockchain) in order to validate transfers and maintain the ledger.

There are no fees and no extensive regulations which pique the interests of those exhausted by financial squabbles within their own countries.  Cryptocurrencies might be brilliant for those willing to take a risk on investing, but major banks have stayed relatively clear of them. Cryptocurrencies make it hard for central banks to influence the price of credit in an economy.

They take away a regulatory body's ability to gather data about economic activity. Many banking executives expect cryptocurrencies will also hinder a central banking agency's ability to control exchange rate and other major functions of monetary policy.

Cryptocurrencies -- especially bitcoin -- have garnered a reputation in pop culture as being the go-to transaction for illicit activities like drug deals. (And, due to the extensive anonymity offered by the very nature of cryptocurrencies, we can neither confirm nor deny the validity of that association...)

Still don't get it? SciShow did a brilliant explanation of Bitcoin (but Cryptocurrencies as a whole) which you can watch below.

Bitcoin

In 2008, Satoshi Nakamoto created the world's first (and arguably most important) cryptocurrency. He never intended to invent an entirely new currency system; he just wanted to make a "peer-to-peer electronic cash system" unconnected to anything else.

The most important contribution of Bitcoin's initial founding was that it developed a decentralized digital cash system after decades of failed attempts.







Innovation
The Most Popular Digital Currencies You Should Know About

Bitcoin remains the most popular and most frequently traded cryptocurrency to date. In March 2017, the value of Bitcoin outweighed the value of an ounce of gold, $1,268 compared to gold's $1,233. The value peaked at nearly $5,000 earlier last month.

Altcoins

These are basically any cryptocurrency that isn't Bitcoin. It's a blend of "alternative" and "bitcoin." All altcoins also use decentralized control and a similar blockchain transaction setup. Popular altcoins include any initial coin offering (ICO) group. Ripple, Litecoin, and Ethereum are big names amongst altcoins.

Fork

Forks are what happens when two bitcoin roads diverge in an internet woods, to borrow a Robert Frost poem. It's when developers don't agree on how to improve the program, and thus the codebases split. The blockchain can handle this split but, since the realm of cryptocurrency isn't regulated, the developers sort out values on their own.

The most famous fork was in August 2017 when bitcoin split to form another cryptocurrency -- Bitcoin Cash. As with operations in any new bank, resulting companies take time to draw in users. Two new forks could be on their way before 2018. The proposed Bitcoin Gold claims to have a new algorithm and a truly decentralized market. The other fork would be Segwit2X and looks to boost the capability of bitcoin. Ethereum is also planning on its first fork within the next year.

Address

An address is a name by which you send and receive bitcoin. It's like an email address as users send bitcoins to a person by sending it to one of their addresses. However, unlike email, people have many different Bitcoin addresses and different addresses are used for each new transaction.

Mining

It's one of the most popular words associated with bitcoin and other cryptocurrencies. Bitcoin mining is how new money is added to the public ledger (see 'blockchain' further down). However, mining for gold in real life might be easier than mining for cryptocurrencies given the increasingly difficult puzzles.

Anyone who has access to the Internet and decent hardware can mine. In an oversimplified explanation, participants have to solve an incredibly difficult puzzle. The first person to solve gets to put a new block on the blockchain and win the rewards. Essentially, miners invest time, money, and technological effort into hopefully 'striking it rich' on solving one of the hash algorithms and adding to the blockchain.

Signature

The bitcoin signature is one of the most important safety nets in cryptocurrency. In transactions, there are two types of keys -- a private key and a public key. Those keys are specifically linked to one user, and the private key is only known by that user. To send a transaction, the private key 'stamps' the transaction which creates the public key.

That public key creates the address by which the transaction is sent. The sender signs the message with the signature and the key to the peer-to-peer public network for validation. The signature is mathematically unique and varies just as your own signature has slight differences each time you sign for a purchase at a store.

"In a physical signature, you'll typically affix, let's say, a sequence of characters representing your name or identity to a document," said Khan Academy's Zulfikar Ramzan. "This process effectively binds your identity to that document and more so by formulating the characters in your name, and maybe some particular to a unique or peculiar way that's unique to you.

The hope is that nobody will be able to forge your name on that document. Now in a digital signature scheme, it turns out you can achieve these kinds of properties mathematically."

Blockchain

It's the public ledger for all bitcoin transactions. It lets information get distributed for the sake of accountability but not copied. Fans of bitcoin call it the "backbone of a new type of internet.

" Think of it like a spreadsheet that anyone can get a copy of across a network of computers. This spreadsheet will update with recent transactions for everyone to see. That's a blockchain in a nutshell.

For many, blockchain technology is the most effective and useful thing to come out of cryptocurrencies. The database isn't stored in one centralized location, meaning there's no incentive for hackers as everyone has this information and can verify it.

The data is literally accessible to anyone with internet. Writers Don and Alex Tapscott said, "The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.

" Still want to know more about bitcoin and other cryptocurrencies? Check out Khan Academy's course on bitcoin. It's an excellent and free cryptocurrency primer.

Discover more articles on Interesting Engineering: https://interestingengineering.com/8-important-words-you-should-know-about-cryptocurrencies

By David Trilling


Bitcoin is no longer just for geeks in obscure corners of the internet. Today you can use the digital currency to fly to Britain, buy an apartment and enroll in the London Sushi Workshop. Fans like its libertarian footing, how it dodges government control and how – especially in this privacy-challenged era – it boosts anonymity.

But some detractors blast bitcoin and other cryptocurrencies as a “fraud,” while others argue that they fuel cybercrime.Unlike the American dollar or British pound – which are guaranteed by central banks that set interest ratesand print currency, stabilizing their value – bitcoin is decentralized.

No one controls it. In part for that reason, its value has yo-yoed wildly.

After more than quadrupling against the dollar between January and August 2017, bitcoin fell by a third in the first two weeks of September. Some blamed a crackdown on digital currencies in China and the “fraud” comments from J.P. Morgan Chase CEO Jamie Dimon, who comparedbitcoin to the Dutch tulip bubble of the 17th century.

Yet as Fortune magazine noted, bitcoin meltdowns have been a regular feature of its brief lifetime.This volatility makes it unlikely bitcoin (or another cryptocurrency, such as ethereum) will become an effective store of value (like gold) or a unit of account (like the dollar) anytime soon. You wouldn’t want to be paid in bitcoin, since your real (i.e., dollar-denominated) salary would fluctuate all over the place.

And you wouldn’t want to spend bitcoin today if you think it’d be worth a lot more tomorrow.In this explainer, we discuss what makes bitcoin different from the old-fashioned greenback and why some governments are trying to ban it. We describe how the blockchain technology behind the system could revolutionize many other industries.

And we look at how a bitcoin outgrowth known as initial coin offerings (ICOs) is testing regulators.How bitcoin worksAny bitcoin transaction – let’s say between a buyer (me) and a seller (the London Sushi Workshop) – creates a unique digital code that is stored in an online, open ledger known as a blockchain.

Everyone has access to the blockchain, but no one can see who those buyers and sellers are unless they wish to be identified. Each has a unique, pseudonymous address for the transaction.





The London Sushi Workshop’s balance, which has grown because I paid my tuition, is a series of codes, also known as personal keys. The sushi school can keep them in “cold storage” – offline on something like a USB stick – or print them out. Or the school can keep them in something called a “wallet,” which is run by an online third party and, just like your physical wallet, can be stolen (or in this case hacked).

When the London Sushi Workshop wants to convert bitcoins to dollars or pounds, it can make the transaction through an online exchange (also third parties, which have likewise been hacked, resulting in losses for individuals) and transfer the cash to a bank account.This decentralization puts bitcoin beyond the reach of regulators, but also creates risks.

Third parties in the “wallet” or “exchange” businesses do not offer the kind of insurance you get at a bank. And, like with cash, if you print your bitcoin codes and stash them under your bed, you run the risk of losing all in a fire or robbery.

Blockchain and miningAn anonymous programmer calling himself Satoshi Nakamoto introduced bitcoin in a 2008 paper. The widely cited paper may be best remembered for something else, though: Nakamoto also introduced the first working blockchain, the technology underpinning bitcoin.

Blockchain is an online ledger of all transactions that’s available for anyone to view and copy, but that no one individual controls. Instead, it lives on many computers, where it is constantly updating itself. This decentralization and openness ensure a transaction can’t be faked – because that transaction wouldn’t appear on all the other copies of the ledger.

If one copy of the ledger does not match the rest, that copy will stand out. Thus blockchain is sometimes called a “distributed ledger” or “distributed ledger technology” (including by J.P. Morgan Chase, which is researching how to use it).For the bitcoin blockchain, powerful computer networks called “miners” validate the most recent transfers, ensuring someone doesn’t send money they don’t have.

These miners’ computers compete with one another to verify and then lock the transfers onto the ledger, where they never can be changed, adding a new block of confirmed transactions about every 10 minutes.

As an incentive for constantly checking and verifying bitcoin transactions, the miner that succeeds in creating a new block is rewarded in new bitcoins that he has created. These days, the reward is 12.5 bitcoins and there are about 16.5 million bitcoins in circulation (worth, as of this writing, about $65 billion in U.S. dollars). By design, the reward drops by half about every four years until, sometime a few decades from now, the miners have created 21 million bitcoins.

The creator artificially capped bitcoin at that number, ensuring the currency cannot be debased by oversupply; the coins can, of course, be divided into smaller and smaller units.Because the database is distributed across such a broad network, hacking it would require enormous computing power. Any would-be fraudsters with that much computing muscle would find it more profitable to mine the blockchain and create new bitcoins.

The blockchain solves the “double-spending problem” that plagued earlier cryptocurrencies, whereby someone could spend the same money in two places (or counterfeit it). Today, sending the same bitcoins to two different sellers would create a “fork” in the blockchain, immediately rendering one of the transactions invalid.

Likewise, it’s not possible to alter a transaction record. To go back and change a link in the chain, you’d have to change all the links that follow. That would require more computer power than all the computers that are managing the blockchain put together. The altered chain wouldn’t match; it would be a clear counterfeit.

These days, miners often work with specialized computer farms that use loads of electricity; sometimes they share resources to form “mining pools.” You could run a mining application in the background of your work computer, but it likely wouldn’t net you anything besides a slower computer.

(Check out this Quartz feature on a farm using subsidized, coal-powered electricity in China, which is home to 58 percent of the world’s major mining pools, according to a University of Cambridge study; the U.S., the second-largest host, has 16 percent.)  

The promise of blockchain

Some researchers see blockchain as having revolutionary applications beyond bitcoin, such as trading stocks, safely storing data and managing supply chains, all without a middleman. It is a “foundational” technology, argues a 2017 paper by two Harvard Business School professors, with the potential – perhaps in decades – to render accountants, traders and even contract lawyers superfluous.

Blockchain “has the potential to become the system of record for all transactions. If that happens, the economy will once again undergo a radical shift, as new, blockchain-based sources of influence and control emerge.”Initial coin offeringsA new trend in cryptocurrencies is the “initial coin offering,” or ICO.

ICOs raised $2.2 billion in the first nine months of 2017, according to one industry estimate. These are not bitcoins, but essentially a new digital currency used to fund a specific product.ICOs work like this: A company raises capital by selling virtual coins or tokens. Perhaps these coins could be used later to participate in the project, or they offer some other future reward.

But they do not offer the same rights demanded by a venture capitalist or shareholder. Indeed, though they sound suspiciously similar, an ICO is not an IPO – initial public offering (which is when a company begins selling shares to the public and becomes listed somewhere like the New York Stock Exchange).

Rather, an ICO happens well outside the regulated banking industry.The Securities and Exchange Commission (SEC) – the regulator of U.S. financial assets – has warned investors that some ICOs may constitute fraud, and that some coins may in fact function like securities and need to be regulated as such.

Canada’s securities regulator has issued a similar statement.Government responseGovernments don’t like bitcoin much. Its anonymity allows users to operate in the shadows, sell narcotics, capitalize on ransomware (software that hijacks a computer until the owner pays a ransom in a cryptocurrency) and maybe, some fear, finance terrorists.

Plus, there are tax implications. In most countries, citizens are required to pay taxes on earnings. But the taxman can’t peer into your bitcoin holdings the way he can look at your Bank of America statement (though, by law, Americans are required to pay taxes on bitcoin profits).

And finally, cryptocurrencies undermine government authority. North Korea may be using bitcoin to evade sanctions.

In September 2017, China took steps to ban cryptocurrency transactions shortly after banning new ICOs. After both announcements, bitcoin’s value tumbled.

Bitcoin supporters argue that the community can regulate itself. But Tim Swanson, a scholar of cryptocurrencies at the Singapore University of Social Sciences, wrote on his blog in September 2017 that the idea the cryptocurrency community can police itself ignores its users’ self-interested motivations.

Some users, trying to drum up demand, discount the threat posed by hackers (who exploit weaknesses in third-party systems used to store bitcoin). Others lobby against regulations because “much of the original bitcoin infrastructure was set up and co-opted by bitcoiners themselves, some of whom were bad actors from day one.

”A cat-and-mouse game between regulators and bitcoiners seems likely to occupy both communities, as well as scholars and governments, for the foreseeable future. Proposals for an outright ban are unlikely to end the conversation, since, to work, any ban would require harsh punishments, says a 2017 paper in the Journal of Economic Behavior and Organization.One potential solution is for governments to issue their own cryptocurrencies.

A September 2017 reportfrom the Bank for International Settlements – the Basel-based arbiter for central banks – describes some projects in the works. Sweden, for example, is thinking about using blockchain technology in some of its central bank’s currency-trading infrastructure.

In America, some have proposed “Fedcoin” as a government-backed crypto-dollar. Though Fedcoin may attract users, it is unlikely, suggests one American central banker, to satisfy diehard bitcoiners.

Other resourcesBecause there is no official organization or bank behind bitcoin, this explainer referenced a number of community forums for data, such as bitcoin.org and the Bitcoin Foundation, which the Washington Post once described as the “closest thing the anarchic bitcoin community has to an official public face.

”The Initiative for Cryptocurrencies and Contracts at Cornell University publishes some of the most cutting-edge research.This blogpost by freeCodeCamp is a fun and easy-to-follow bitcoin explanation.Oh and, by the way, the bitcoin blockchain occasionally splits. Fortune explains. Fortune’s blockchain reporter, Jeff John Roberts, also has an intriguing look at what happens to your bitcoins when you die.

A good overview of bitcoin, who uses it, who mines it and where, is this 2017 paper from the University of Cambridge Center for Alternative Finance.Selected studies:

• On bitcoin volatility:
  • Bitcoin is up to 30 times more volatile than the dollar;
  • How mining and economics affect bitcoin’s price;
  • “Bitcoin is a poor hedge and is suitable for diversification purposes only.”

• On security:
  • Bitcoin exchanges would be safer if they demonstrated solvency;
  • Cryptocurrencies like bitcoin risk routing attacks;
  • What would be needed to trace a bitcoin transaction.

• On blockchain:
  • Using blockchain to manage inventories;
  • Some blockchain security concerns;
  • Which industries and companies could benefit and be hurt by the technology.

Last updated: September 28, 2017  We welcome feedback. Please contact us here. 


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