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James Burtt and Paul Abercrombie explore and define mining in this week’s show. They break down the process, the challenges, and the new trends. You will understand why mining Bitcoin is so difficult as well as the pros and cons of proof of stake.

Defining Mining

Mining is the process used by Bitcoin and several other cryptocurrencies to generate new coins and to verify new transactions, James explains. “It involves vast, decentralized networks of computers around the world that verify and secure blockchains – the virtual ledgers that document cryptocurrency transactions. In return for contributing their processing power, computers on the network are rewarded with new coins,” he cites. “It’s a virtuous circle: the miners maintain and secure the blockchain, the blockchain awards the coins, the coins provide an incentive for the miners to maintain the blockchain.” He briefly lists the three main ways of obtaining Bitcoin and other cryptocurrencies, and describes how to virtually mine Bitcoin. [Listen from 1:50]

How Do You Mine?

Previously, the necessities for mining were basic; practically anyone with a decent home computer could participate. However, you now need specialized computers to successfully mine Bitcoin, as the blockchain has grown to the point where the computational power required to maintain it has drastically increased. “Bitcoin was designed to work as a decentralized currency… that was not connected to a major financial institution, Federal reserve, or bank in any way,” Paul shares. In order for it to work, computer power was necessary; if a sole server was set up to operate Bitcoin, it would betray the ethos of its design. Bitcoin’s code was written and downloaded on computers, which worked in the background to form the networks that verified the transactions. People would volunteer their computer power onto the Bitcoin network, and their computers would race to solve the complex calculation which made up the block; the winner would be rewarded with Bitcoin in return. [Listen from 2:31]

The Downsides

The cost to compete with specialized companies to mine Bitcoin is almost impossible to match, Paul claims. Most miners are now using GPU machines, which are plugged into the internet connection and operate on other cryptocurrency networks or blockchains. These machines receive the rewards in the native currency of that blockchain. The smart thing to do would be to swap that currency out for alternative crypto assets like Bitcoin or Ethereum, he adds. Mining Bitcoin also uses huge amounts of electricity, which is something to be considered. Large data centers used as mining centers are popping up, consuming huge volumes of electricity and other resources. Due to this concern, there has been a new trend called proof of stake, where you effectively lock your crypto assets into the network and then that provides the consensus mechanism. This new method is not without its pros and cons, which Paul describes. [Listen from 7:00]

Proof of Stake

Ethereum has launched a completely new blockchain, according to Paul. The original Ethereum is Ethereum Classic, and Ethereum 2 works on proof of stake. This has been talked about since 2016, which goes to show how long this shift to proof of stake will take, if it’s taken roughly 6 years for a currency as large as Etheruem to switch. Paul assures miners that while there is a concern that proof of stake will kill mining Ethereum, other currencies still exist. Additionally, the development of decentralized file storage allows your files to live on the blockchain. This frees you from being beholden to Big Tech, he affirms, and reduces costs.  [Listen from 12:30]

Key Takeaways

• Mining is a virtuous cycle of being rewarded for the security and maintenance of a blockchain, which acts as an incentive to secure and maintain.
• The development of decentralized file storage reduces costs and allows your files to live on the blockchain.

Resources

James Burtt on Twitter | LinkedIn | Instagram | Clubhouse

Paul Abercrombie on Website | Twitter | LinkedIn | Instagram

What is mining?