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Author Topic: Blockchain Know-how | Mining: A Way of Digging Gold in the Blockchain World  (Read 514 times)

CoinEx

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When hearing the word “mining”, most people first think of digging mineral resources, such as coal, gold, and diamond, from the ground. By the same token, mining in the blockchain world refers to “digging” cryptos.

Do you remember the analogy we made in Consensus: The Law of the Blockchain World?

Suppose there is a school where the students are asked to check class attendance by themselves because the teachers are too busy, and the student who keeps the attendance record for a day is rewarded with more credits. Tempted by the reward, students compete with each other for the record-keeping right by solving problems (PoW), drawing lots (PoS), or guessing the answer (PoC).

If the credits are a type of cryptocurrency in the above example, then we can analyze the process by which “credit coins” are generated. To produce credit coins, students must first record their daily attendance, which means that they’ll need to win the record-keeping right via different races. In chronological order, students first win the record-keeping right, then record the daily attendance, and generate credit coins at last. In particular, winning the record-keeping right and recording the daily attendance are the means of generating credit coins. In other words, these acts are what we call “mining”.

In The Features of Blockchain: How Blockchain Reshapes the World, we covered the blockchain structure of blockchain networks.

In a so-called blockchain structure, data recorded within a certain period is packaged into a block, and blocks are then strung together in chronological order. When recording data, a blockchain system first uses certain cryptographic methods to encrypt the content and then have it recorded into blocks. On a blockchain, each block contains the content of the previous block.

That is to say, if a blockchain is regarded as a general ledger, the blocks are the small ledgers that make up the general ledger. In particular, the act of packaging data into a block is often referred to as “block generation”. The speed of block generation of each blockchain system is generally fixed, and the specific speed is often stated at its birth and built into the consensus layer.

In the case of Bitcoin, the PoW (Proof-of-Work) consensus mechanism is used, which means that “students” have to solve “problems” to win the record-keeping right. There is a problem with this model: As more people join the network, the problem will be solved within an increasingly shorter period. This makes block generation excessively fast, which hinders system operation.

To address this concern, Satoshi Nakamoto designed a difficulty-adjusting mechanism. In the Bitcoin network, after the generation of every 2,016 blocks (about two weeks), the difficulty of the math problems will be adjusted according to the hashing time and hashrate of the previous 2,016 blocks. By increasing or reducing the difficulty of the math problems, the block time will be controlled to about 10 minutes/block, and the difficulty of the math problems is called Bitcoin’s “network difficulty”.

As its name implies, block rewards are the reward given to miners for producing a single block. Like block time, the block reward is also determined by the designer of a blockchain system. The only slight difference is that the block reward mechanism is built into the incentive layer.

If we were to rank the most popular blockchain concepts, then the list would feature “halving”, which refers to the halving of Bitcoin’s block rewards.

When it was designed, the Bitcoin system stipulated that the total supply of Bitcoin should never go above 21 million, which would be mined in multiple cycles. Every 210,000 blocks constitute a cycle, which would last about 4 years at a rate of 10 minutes/block. During the first cycle, the block reward was 50 BTC, which was halved to 25 BTC in the second cycle and further halved to 12.5 BTC in the third cycle, and so forth. On May 12, 2020, Bitcoin completed the third halving and entered the fourth cycle, and the block reward was cut from the 12.5 BTC to 6.25 BTC.

In real life, we often have to pay a transaction fee for cross-border transfers through the banking system. Likewise, when transacting on the blockchain, we also need to pay the miner fee.

Each transaction on the blockchain needs to be recorded by miners, who package these transactions into blocks and broadcast them to the entire network to complete the transactions. As the process of packaging, broadcasting, and transmitting transactions consumes certain resources, such as hashrate and electricity, users must pay miners for their work, and this fee is called the miner fee.

Here, the miner fee can be compared to the shipping fee in the real world, and miners differ from delivery workers in that they carry transaction information instead of cargo.

For example, when 10 people need “shipping services”, miners may choose which order they’d like to take first. Generally speaking, miners would first pick the most cost-effective order. That said, if you are in a hurry and would like miners to move your “cargo” as soon as possible, then you could pay a higher miner fee as an incentive.

In addition, the heavier the cargo (the more bytes a transaction occupies), the higher the shipping fee (miner fee). However, unlike the shipping fee, the miner fee is not fixed. Instead, it is completely determined by the market. In most cases, the miner fee increases when the network is congested (too many cargos to be efficiently moved) and decreases if the network stays smooth.

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