Mining Digital Currency - Part 1 - Introduction

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precioustosin
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Mining Digital Currency - Part 1 - Introduction

Postby precioustosin » Fri Jan 06, 2017 5:20 pm

During the past year, the volume of digital currency assets traded has proven that indeed cryptocurrency is the next big thing. This has created a rush to take advantage of numerous advantages digital currency offers. One of them is cryptocurrency mining. In this article we'll talk about mining digital currency in general while in the second part, we shall demonstrate using Bitcoin Laboratory as an example of how you can invest your bitcoins in a cloud mining service and get reasonable yields on your investments.

What is cryptocurrency (digital currency) mining?
Digital currency mining is a process of solving complex cryptographic puzzles called hashes through which miners are providing "proof of work" that is rewarded with digital currency. Transactions carried out at an instant of time are arranged in containers called blocks and are combined with other blocks to form a blockchain - a public decentralized database record of all transactions that have occurred with a given cryptocurrency. To avoid double spending problem (spending a particular currency more than once) common with exchange, blocks of transactions have to be verified and confirmed as quick as possible. This requires a lot of processing power that one computer system cannot provide, hence the idea of a distributed system where individual miners contribute their processing power.

By solving these complex cryptographic puzzles, miners not only verify transactions, but also create new currency. They present their solutions to the currency issuer which verifies the hash and the work done in solving it upon which the miners are paid a given number of coins. They also receive a portion of the transaction fees for each transaction they verify. This form of mining is called a "proof of work" system. There is another system called "proof of stake". It is used in combination with "proof of work". Here miners earn an income proportional to the amount invested in the currency in addition to proceeds from the "proof of work" system.

There are two "proof of work" algorithms used today and they are:
- SHA-256
- Scrypt

A algorithm is a procedure or formula for solving a particular problem (in this case - complex cryptographic puzzles) based on a sequence of specified actions.

SHA-256 algorithm requires large energy and CPU power, making it very difficult to mine individually. This is as a result of difficulty level in obtaining the currency thus requiring specialized processors known as Application Specific Integrated Chips (ASICS) to mine it. Bitcoin uses this algorithm.

Scrypt algorithm on the other hand uses less energy, time and CPU resources. It uses a large amount of RAM though but is popular for its parallel processing capability which makes mining quicker. Litecoin uses this algorithm.

Because of the costs associated with bitcoin mining arising from costly equipment and power usage, individual mining is usually less profitable. A solution that has been devised is to create mining pools. A mining pool is a way for currency miners to pool their resources together (i.e. share their processing power) over a network and then share the rewards equally according to the amount of contribution of each miner in solving a block. A share of the rewards is handed out to each miner after presenting valid "proof of work".

Another common approach to mining is cloud mining which is the process of utilizing a "remote" data-center with shared processing power for digital currency mining. cloud mining help miners take advantage of dedicated "physical mining servers" or "private virtual servers (virtual machines)" depending on costs and computing requirements. Some cloud mining sites sell hashing (processing) power in GigaHash/seconds (GH/s) for a specific period of time. With other mining sites, you just need to invest your cryptocurrency (bitcoin) and get a return on your investment at a rate determined by the site for a specific period of time.

Advantages of cloud mining include:
- no need to buy and manage mining equipment
- low electricity usage
- ability to purchase as much processing capacity available

Disadvantages include:
- high management cost - many mining sites charge high maintenance fee per day
- inability to choose which mining pool you want to belong to

What we have learned so far is that digital income can be obtained from mining through verifying transactions, getting a portion of the transaction fees and mining new coins. It can be a time and energy consuming process with little returns when done on an individual basis. Yet other options like Pool mining and Cloud mining makes mining feasible and easier.

In the next part, we shall demonstrate how investing in a cloud mining site could yield rewards and helpful tips so as not to fall victim to fraudsters.

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