Unlike fiat money, cryptocurrencies lack righteous central authorities and are issued in a different manner. They are either sold to the public as tokens during a company’s ICO or have to be mined out. ICO and IPO are pretty much the same but mining is different game.
But how is it different? Let’s find out.
A simple explanation on what mining is
Simply put, mining is the process of validating transactions (transfer of the coins between the two parties in that network) that take place within the network of the coin.
Cryptocurrencies are based on blockchain technology. As the name suggests, it’s a chain of a large number of blocks of transactions entered into in the network. In fact, it is a ledger of all the transactions entered into the network which is accessible to anyone provided that s/he has an internet connection.
For a block of transactions to be put into the network, it must at first be validated. Every block has a random set of numbers associated with it (also known as a string) which is generated by an algorithm with the help of a definite input. In order to validate the block, miners have to find out the string related to that particular block.
Mining can be done in different ways. While there are numerous ways for one to start mining, proof of work (PoW) and proof of stake (PoS) are the most commonly used methods in the present context.
How proof of work mining actually works
Proof of work is the process of validating the transactions. Since the validation process requires miners to find out the exact string related to a particular block, miners require computers with huge computing powers to generate the valid string.
But since these processes are based on cryptography, it is almost impossible to manipulate the strings and the only possible way to generate the string is by doing a lot of trial and error tests.
This is where mining rigs come into play. With their mammoth computing power, they are able to test hundreds of thousands of strings in a single second.
Pros and cons of using PoW
Using PoW system is fairly advantageous. Below are its two main benefits.
- First of all, the transactions are validated by mass consensus. Due to this, the chances of data being tampered are lowered.
- Second, the monopoly on the currency is completely removed which means that no one has a control over its issuance and utility.
But on the flip side, some cons can also be observed which include:
- High costs of operating mining rigs
- Gigantic consumption of energy
- Expensive hardware
As the analysis goes, algorithms used in the generation of the strings have an important role to play in PoW mining. Different algorithms have their own pros and cons and not all cryptocurrencies are based on a same algorithm.
Why different algorithms exist
Even through generating PoW is difficult, its verification is very easy. Once a valid PoW is generated, that particular block of transactions is added to the network and at the same time, the generator of the PoW is rewarded with a certain number of freshly issued coins.
The strings related to the blocks are auto-generated through the use algorithms which are system-based. For example, the SHA-256 algorithm is used in bitcoin and Scrypt in both Litecoin and Dogecoin but cryptocurrencies use different algorithms.
One important thing to note here is that the type of work is dependent upon the type of algorithm used. Some may require a huge computational power while the others might need a huge amount of memory. But irrespective of the type of the algorithm, the gist is to give the blocks a particular identity and make miners find it for their validation.
List of the best algorithms
With time, the horizon for algorithms has got wider. Algorithms with many pros and little cons are taking the market and here is the list of some of them.
The SHA-256 algorithm is the most famous algorithm probably because of its incorporation with the legendary bitcoin.
This algorithm can take an input of any size and convert it into an output of a fixed size. Taking data from the block, this algorithm generates a suitable string and then the miners have to find it out to validate that particular block.
Most of the SHA-256 miners are GPU miners. The block time of SHA-256 is about 8-10 minutes.
Scrypt is a passphrase-based hash function. The increased utility of Scrypt is due to its large memory requirements to conduct a brute-force attack. But in spite of the huge memory requirements, the electricity consumption by Scrypt mining is considerably low when compared to SHA-256.
GPU mining has completely engulfed the market of Scrypt mining. However, ASIC mining can be also used for Scrypt mining. It has a block time of about 30 seconds.
Litecoin and Dogecoin are both Scrypt-based cryptocurrencies.
Of the X-series algorithms, X11 is the most used one. Unlike, SHA-256 and Scrypt which use a single algorithm, X11 uses 11 different algorithms making it impossible to hack it.
X11 mining can be done by using GPUs and ASIC. It is currently being used by Darkcoin.
HEFTY is a unique algorithm when it comes to the mining hardware. While other algorithms tend to be feasible with new technologies to reduce the environmental hazards, HEFTY insists that should miners only use GPUs. This means that it is putting a complete restriction on ASIC mining.
Currently, it is used by Heavycoin.
Other less known algorithms include BLAKE, Cryptonight, and Quark.
Some cryptocurrencies (e.g. Litecoin) use a single algorithm while others (e.g. Neocoin) use a combination of two or more algorithms to make their network more secure.
Nevertheless, none of these algorithms have become a victim of hacking until now. So in terms of security, the algorithms seem to be doing a good job.
Word of caution
Recently, concerns have been forwarded regarding the energy consumption involved in mining cryptocurrencies as the consumption of electricity in mining process has reached enormous highs. So if ever you are planning to get into this mining business, you better take care of the legality and energy policies in your country. Good luck!