In the last alt coins blog entry we discussed what they are, how they work, and how one earns them. You should read that first.
We’ll be talking about Bitcoin specifically, but most alt coin networks function similarly to Bitcoin and we know Bitcoin will still be around when this blog is published.
Let’s talk a little bit more about mining.
Mining is the backbone of any solid coin network. Miners are people lending the processing power of their computers to the network to process the transactions users are making. Miners are rewarded by block rewards from blocks they helped to create and add to the block chain. Blocks make up the ledger data for transactions, once a block is added it’s propagated across the network and becomes part of the chain. Blocks cannot be edited or deleted once they are in the block chain and propagated. Small fees are charged by the network for every transaction made, these fees are used to generate the block rewards and pay the miners for lending their hashing power. Hashing power is measured in hashes, kilohashes, megahashes, gigahashes, and terahashes. They measure up as you’d expect, a kilohash is 1000 hashes, a megahash is 1000 kilohashes, and so on.
As coins become older and networks more robust, the difficulty of processing transactions grows. Difficulty increase causes the value of the coin to increase because the coins become harder to generate and it’s easier to buy one than to mine one. When bitcoin was first released it could be mined easily using 10-40 hashes, which just about any computer could handle with the CPU built in. Now there’s no point in trying to mine bitcoin without specialized hardware. Even with 100ghs you’d spend around five YEARS mining before you were able to generate a block on your own. This is where mining pools come into play.
A mining pool is a group of people with lower hashrates pooling their resources together and splitting the rewards. When 20 people pool their 100ghs each you get 2000ghs, or 2ths. If we do the math and say that 100ghs earns 25 coins in five years, 2ths would earn 25 bitcoins in roughly 3 months. Then you split those bitcoins up amongst the 20 members of the pool, everybody scored 1.25 bitcoins in 3 months instead of waiting YEARS for a big pay off.
Bitcoin is the extreme in difficulty right now, but every coin will be subject to difficulty increase. If they’re lucky anyway, most coins won’t survive the day they’re launched!
In the next entry we’ll talk about how a coin lives through it’s launch and goes on to become something worth holding on to. We’ll also look at what makes a coin junk and not worth your time.
Image modified from http://www.greatnorthernprepper.com/litecoin-mining-101-part-2-hardware-installation/