Photo by Joshua Woroniecki on Unsplash
Apologies if this post turns the concept of blogging on its head. Usually, bloggers share their knowledge or their artistic creations. In this post, I will be asking questions about cryptocurrencies and hope the experts can provide some answers. Maybe I should call this "Reverse Blogging".
The more I research cryptocurrencies, the more complicated they appear to get. These are the questions I'll be asking in more detail below:
Mining (minting new coins and verifying transactions) is highly complex, so I apologise if I make any incorrect statements here.
The process of verifying a transaction depends on hashing. Hashing scrambles inputs so that the original input cannot be derived. It takes a piece of information and passes it through a function or algorithm that performs mathematical operations on plaintext. This function is called the hash function, and the output is called the hash value. It is a 64-character (hexadecimal) number.
The SHA-256 algorithm is one of the most widely used hash algorithms.
The mining machine compiles some data with the following components:
Data = (Previous block’s Hash) + (Block of new transactions) + Nonce
Using the previous block’s hash links all blocks together (a “blockchain”).
Nonce stands for “Number Once”. It is an arbitrary number used only once in a cryptographic communication. They are often random or pseudo-random numbers.
The mining machine then takes the above data and feeds it into a Hash Generator:
Data > [Hash Generator] > Hash > Matches Expected Pattern?
If the Hash matches the expected pattern of the data, the miner gets a reward. If not, the whole process is repeated with another random number (nonce).
I don't know how big a random number a nonce is, but if it is large, I would have thought that some transactions wouldn’t get processed.
But this is not the case because the target processing time is 10 minutes!
I understand that the process can reduce the difficulty, but would this be sufficient and happen quickly enough to verify the transaction in a reasonable time?
Can any of Medium’s cryptocurrency experts help me understand this apparent paradox?
Bitcoin provides a reward for each successfully mined block. The reward halves every 210,000 blocks (approximately every four years). The reward has been 6.25 BTC since 11 May 2020 and will halve in May 2024. In 2140, the limit of 21 million bitcoins will have been reached, and this reward will be removed.
Transaction fees will now be the only way miners can earn rewards. If the fees are too low, will miners stop verifying transactions? If the fee is too high, will Bitcoin collapse?
This question isn’t helped by the term “mining” being associated with fossil fuel extraction.
In 2021, Tesla stopped taking Bitcoin for electric vehicle purchases because of concern about the environmental toll of mining new units.
The computers that mint new Bitcoin use a tremendous amount of electricity - often generated by fossil fuels. The real-world cost of electricity is one factor that gives real-world value to the digital currency, currently trading at around $26,900.
Regardless of the source of electricity, mining is central to Bitcoin’s existence as a decentralised currency.
What do you think about the environmental impact of cryptocurrencies?
With its faster payments and lower transaction fees, Bitcoin Cash has become very popular for peer-to-peer (P2P) transactions. But does this mean it is less secure? I would be interested in reading your thoughts.
Written with the assistance of material published by:
