Mining Cryptocurrency – Creation Of New Coins
Now, you might be wondering how exactly these cryptocurrencies like Bitcoin are created and how they are controlled. This process is a fairly difficult one to understand, so we are going to do our best to explain it in as simple of terms as possible. So, with a centralized monetary system, there is a central authority which controls the creation of a certain currency, such as the US Federal Reserve controls how much money in printed, how much is in circulation, and how much each person legitimately has. This way, there are no disputes about the amount of a specific currency in a system, who owns how much of it, and who has the right to spend a certain amount of it. Of course, because cryptocurrencies like Bitcoin do not share this feature of a centralized authority, it cannot work this way. Mining cryptocurrency is the only way to create new coins.
New amounts of any cryptocurrency such as Bitcoin are created through a process called mining. Mining Cryptocurrency is how new crypto-coins are created. Since there is no central authority like the US Federal Reserve which controls the creation and the value of crypto-coins, these actions are performed by the very same people using the cryptocurrencies. These people are known as the miners. Mining cryptocurrency is a very interesting yet complicated process, so let’s try and make this easy for you. Like we have mentioned before, since there is no central authority, the creation and regulation of cryptocurrencies, as well as their transactions, is monitored by the entirety of the cryptocurrency community.
The first thing you need to know is that all cryptocurrency creation and transactions are stored on an online ledger, which is also known as the blockchain. First off, about every 10 minutes or so, special mining computers will collect data from the latest Bitcoin or cryptocurrency transactions. This grouping of data is known as a singular block and it is turned into something of a mathematical puzzle. Miners try to find the solution to this puzzle and the first to do so will announce it to the whole network or community.
Other miners will then check this solution to see if the sender did indeed have the right to spend the money and if the solution to this puzzle is correct. If enough of the other miners approve this, the block of transaction info is then added to the ledger, also known as the blockchain, hence why it is called a block chain, or an ever growing chain of block of crypto transaction data. The first miner to find the solution to this puzzle will be awarded a certain amount of crypto-coins, 25 coins as is the case with Bitcoin specifically (after 99 more blocks have been added to the blockchain).
This whole cryptocurrency mining system is protected by a form of cryptography, or in other words, a special way of encrypting messages and transactions so that only the people with the corresponding key or cipher can view them. There are various ways of encrypting these transaction so not everybody can see them, but the main takeaway is that you need to have the proper cipher as supplied by the encrypting party in order to decipher the transactions and info on the block.
A Problem With Cryptocurrency Mining – Consolidation
There is a problem with cryptocurrency mining though and it is that of consolidation. You see, mining Bitcoin and other cryptocurrencies requires a huge amount of processing power. You need a whole lot of high speed computers, excellent servers, big servers, the right hardware, and the right software. This all ends up being extremely expensive. In fact, one of the biggest costs associated with Bitcoin mining is the ridiculous amount of electricity required to do it. The problem is that there are various larger Bitcoin and crypto-miners who have a lot of processing power to increase their chances of being profitable.
In theory, if a certain miner or group of miners can pool their resources and control more than 51% of the mining process, they would effectively control the currency itself. They would have an unfair advantage in terms of controlling the value of the coins, who can mine them, and they can increase their own chances of winning the reward for solving the puzzle. This has not yet happened, but the chances are always there. In fact, there are an increasing amount of big time Bitcoin miners in China and other parts of Asia, the reason for this being because electricity in those areas is astoundingly cheap, thus making it very cost effective for people in those areas to mine Bitcoin and other cryptocurrencies in very high volumes. This is almost like creating a monopoly over certain cryptocurrencies.