Blockchain Mining Tutorial

Blockchain Mining

Last updated on 10th Oct 2020, Blog, Tutorials

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A blockchain is a secure, global, immutable public ledger that records every transaction, chronologically, on the network. The blockchain is the underlying technology upon which cryptocurrencies and DApps (more on them later) are built.

Blockchains update regularly, confirming transactions. Once a transaction has been confirmed and listed in the blockchain, it is impossible to change or tamper with. This makes blockchains extremely secure and highly resistant to fraudulent behavior or human error. Blockchain technology is set to disrupt industries all over the world in the coming years – especially industries where there are a high number of intermediary or third-party companies.

Some of the common terminologies of blockchain are as under:

  • Blocks – A collection of data containing multiple transactions over a given period of time on the blockchain network.
  • Chain – The cryptographic link which keeps blocks together using a ‘hash’ function.
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  • Blockchain – A blockchain is a secure, global, immutable public ledger that records every transaction, chronologically, on the network. It is a chain of blocks that contain information for the understanding of a common man. Members of the network are anonymous individuals called nodes. All communication inside the network takes advantage of cryptography to securely identify the sender and the receiver.
  • Peer-to-peer Network – every node of the network is a client as well as server, holding identical copies of the application state
  • Cryptography – use of public key cryptography and cryptographies hash functions: essential for transparency and privacy.
  • Game Theory – Nodes of P2P network validates transactions by consensus, following economic incentive mechanisms like Proof of Work or Proof of Stake etc.
  • Bitcoin – A Peer to Peer Electronic Cash System that would enable people to spend it directly without it going in a financial institution. Blockchain is the technology that runs Bitcoin.
  • Coin: A cryptocurrency ‘coin’ is seen as a means of payment. The purpose of a coin is to act like money – to allow transactions of products and services to occur. Depending on the coin, it is a store of value, unit of account or medium of transfer (exactly like fiat currencies – dollars, pounds, yen etc.).
  • Token: A means of payment, but with an added layer of functionality above it. Holders of tokens often get value from them beyond speculative returns, such as being able to vote on certain business decisions or technical changes, earn dividend payments for holding or staking tokens, or to get discounts on, or access to, services.
  • Decentralized: A system where no individual has ownership of the system and there is no central point of control. In the case of decentralized blockchains, the system is spread over the entire network of users. This makes it almost impossible to hack, tamper with or destroy.
  • Cryptocurrencies – The digital currencies that are secured using cryptography and built using blockchain technology.
  • DApps:DApps are ‘decentralized applications’. They are applications, like Bitcoin or Ethereum, that are built on a decentralized blockchain.
  • Hash: The result of applying an algorithmic function to data in order to convert them into a random string of numbers and letters. This acts as a digital fingerprint of that data, allowing it to be locked in place within the blockchain.
  • Digital Signature: A digital code generated by public key encryption that is attached to an electronically transmitted document to verify its contents and the sender’s identity
  • Public Address: The cryptographic hash of a public key. They act as email addresses that can be published anywhere, unlike private keys.
  • Private Key: A string of data that allows you to access the tokens in a specific wallet. They act as passwords that are kept hidden from anyone but the owner of the address.
  • Proof of Stake: A consensus distribution algorithm that rewards earnings based on the number of coins you own or hold. The more you invest in the coin, the more you gain by mining with this protocol.
  • Proof of Work: A consensus distribution algorithm that requires an active role in mining data blocks, often consuming resources, such as electricity. The more ‘work’ you do or the more computational power you provide, the more coins you are rewarded with.
  • Node: A copy of the ledger operated by a participant of the blockchain

What exactly is Blockchain mining?

A peer-to-peer computer process, Blockchain mining is used to secure and verify bitcoin transactions. Mining involves Blockchain miners who add bitcoin transaction data to Bitcoin’s global public ledger of past transactions. In the ledgers, blocks are secured by Blockchain miners and are connected to each other forming a chain.

When we talk in depth, as opposed to traditional financial services systems, Bitcoins have no central clearing house. Bitcoin transactions are generally verified in decentralized clearing systems wherein people contribute computing resources to verify the same. This process of verifying transactions in called mining. It is probably referred to as mining as it is analogous to mining of commodities like gold—mining gold requires a lot of effort and resources, but then there is a limited supply of gold; hence, the amount of gold which is mined every year remains roughly the same. In the same manner, a lot of computing power is consumed in the process of mining bitcoins. The number of bitcoins that are generated from mining dwindles over time. In words of Satoshi Nakamato, there’s a limited supply of bitcoins—only 21 million bitcoins will ever be created.

At its core, the term ‘Blockchain mining’ is used to describe the process of adding transaction records to the bitcoin blockchain. This process of adding blocks to the blockchain is how transactions are processed and how money moves around securely on Bitcoins. This process of Blockchain mining is performed by a community of people around the world called ‘Blockchain miners.’

Anyone can apply to become a Blockchain miner. These Blockchain miners install and run a special Blockchain mining software that enables their computers to communicate securely with one another. Once a computer installs the software, joins the network and begins mining bitcoins, it becomes what is called a ‘node.’ Together, all these nodes communicate with one another and process transactions to add new blocks to the blockchain which is commonly known as the bitcoin network. This bitcoin network runs throughout the day. It processes equivalent to millions of dollars in bitcoin transactions and has never been hacked or experienced a downtime since its launch in 2009.

How can you mine bitcoins?

You can buy and trade for bitcoins, or you can mine them. For mining bitcoins, users are rewarded in bitcoins. This mechanism forms the pivot around which the bitcoin economy revolves. While the cost and difficulty of mining bitcoins individually continues to increase, several cloud-based mining services have gradually emerged. These services allow individual users to lease the processing power of mining equipment and mine bitcoins remotely. However, you can mine bitcoins in person too.

There are two ways to mine bitcoins.

  • Mining bitcoins on cloud
  • Mining bitcoins on your own

Mining Bitcoins on Cloud

  • Obtain a bitcoin wallet: Bitcoins are stored in digital wallets in an encrypted manner. This will keep your bitcoins safe.
  • Secure the wallet: Since there is no ownership on bitcoins, anyone who gains access to your wallet can use it without any restriction. So, enable two-factor authentication and store the wallet on a computer that does not have access to the Internet or store it in an external device.
  • Choose a cloud mining service provider: Cloud mining service providers allow users to rent processing or hashing power to mine bitcoins remotely. Popular cloud mining service providers are Genesis Mining and HashFlare.
  • Choose a cloud mining package: To choose a package, you will need to decide on how much you are willing to pay and keep your eyes open to the hashing power the package will offer. Cloud mining companies will mostly envisage the Return on Investment (ROI) based on the current market value of Bitcoins.
  • Pick a mining pool: This is the best shot you can get to earn bitcoins easily. There are many mining pools which charge a mere 2 percent of your total earnings. Over here, you will have to create workers which are basically subaccounts that can be used to track your contributions to the pool.
  • Put your earnings in your own secure wallet: Whenever you witness an ROI, simply withdraw your earnings and put them in your own secure wallet.

Mining Bitcoins on your own:

  • Purchase a custom mining hardware: You need to purchase an Application-specific Integrated Circuit (ASIC) miner to mine bitcoins. While purchasing an ASIC Blockchain miner, you should consider its efficacy in hashing power and take a note of its pricing policies.
  • Purchase a power supply: Blockchain miners consume a lot of power. So, get a dependable power supply which is compatible with the ASIC miner that you purchase.
  • Obtain a bitcoin wallet: Bitcoins are stored in digital wallets in an encrypted manner. This will keep your bitcoins safe.
  • Secure the wallet: Since there is no ownership on bitcoins, anyone who gains access to your wallet can use it without any restriction. So, enable two-factor authentication and store the wallet on a computer that does not have access to the Internet or store it in an external device.
  • Pick a mining pool: This is the best shot you can get to earn bitcoins easily. There are many mining pools which charge a mere 2 percent of your total earnings. Over here, you will have to create workers which are basically subaccounts that can be used to track your contributions to the pool.
  • Put your earnings in your own secure wallet: Whenever you witness an ROI, simply withdraw your earnings and put them in your own secure wallet.

What are Blockchain smart contracts with respect to Bitcoins?

On an evening when Nick Szabo was wondering about the purpose of security around bitcoins, he thought of incorporating software-based protocols to facilitate, verify, and enforce the negotiation or performance of a contract. These software models later were referred to as ‘blockchain smart contracts.’ The basic purpose behind the inception of Blockchain smart contracts was to allow the performance of credible transactions without involving third parties. Although these transactions are trackable, they are irreversible. The aim of blockchain smart contracts is to provide security that is superior to the traditional contract law and in the meanwhile reduce other transaction costs that are associated with contracting.

Szabo defined blockchain smart contracts as computerized transaction protocols that execute terms of a contract. He further wanted to extend the functionality of electronic transaction methods, such as POS to the digital landscape.

In 2018, a US Senate report said: ‘While smart contracts blockchain might sound new, the concept is rooted in basic contract law. Usually, the judicial system adjudicates contractual disputes and enforces terms, but it is also common to have another arbitration method, especially for international transactions. With smart contracts blockchain, a program enforces the contract built into the code.’

Considering the flexibility, cost-effectiveness, and robustness that smart contracts blockchain have introduced in the realm of bitcoins, they are undoubtedly at the epitome of their adaptability and popularity.

Byzantine fault-tolerant algorithms are the algorithms that allow digital security through decentralization to form smart contracts blockchain. Certain programming languages with various degrees of Turing completeness as a built-in feature of some blockchains make the creation of custom sophisticated logic possible. Some notable implementations of smart contracts blockchain are:

  • For Bitcoins: This cryptocurrency provides a Turing incomplete script language that allows to customize the creation of situation-specific smart contracts blockchain.
  • For Ethereum: Ethereum implements a nearly Turing-complete language on its blockchain as a prominent smart contract framework.
  • For Ripple: Ripple’s Codius was another smart contract framework the development of which got halted in late 2015.

There are several types of blockchain smart contracts. They are listed as follows:

  • Assurance Contracts: These contracts assure both sending and receiving parties guaranteed returns on their respective investments.
  • Smart Properties: With smart properties, ownership is controlled by the blockchain and a smart contract. They can be leveraged for digital properties like company shares and ‘access rights’ to an online service.
  • Transferable Virtual Properties: These properties have single ownership at a time. They cannot be controlled by a central authority.
  • Autonomous Agents: Autonomous agents reduce costs by cutting out any middle man. They also discard human interactions and the liabilities that tag along with these interactions.
  • Distributed Markets: These are used for trading securities like stocks and bonds with no centralized clearinghouse.

A Concluding Note on Blockchain smart contracts

In a paper that he published in 1994, Szabo proposed the execution of a contract for synthetic assets including derivatives and bonds. He referred to the sale and purchase of derivatives with complex terms.

‘These new securities are formed by combining securities and derivatives in a wide variety of ways. Very complex term structures for payments can now be built into standardized contracts and traded with low transaction costs, due to computerized analysis of these complex term structures,’ he wrote.

Further, check our online Blockchain course for certification and prepare yourself with our free Blockchain interview questions listed by the experts.

Introduction to Bitcoin Economics

Now that we know what Bitcoins are and how to mine them, let’s move forward and understand the economics of Bitcoins and its benefits along with going into the depths of solo and pooled mining techniques and more.

Economics of Bitcoin:

  • Only after each of the Block creation, which is at a reducing and settled rate, the Bitcoins are stamped.
  • Roughly after every four years or for every 210,000 blocks, the money issuance rate is decreased by half in Bitcoin ecosystem.
  • During the first four years of Bitcoin operation of the system, each and every block contains 50 new Bitcoins.
  • The rate of new Bitcoins decreases exponentially more than 64 halvings when it reaches the base cash unit of 1 satoshi, which is until the block that were mined roughly in year 2140, that is, block 13,230,000.
  • At once approximately 13.44 million blocks are mined. By 2140, approxiamtely 2,099,999,997,690,000 satoshis, or almost 21 million Bitcoins will be present in the network.
  • After that there will be no new Bitcoins in the block. The miners will still be rewarded but only through transaction fees.

Ethereum Blockchain

An open-source, public, and blockchain-based distributed computing platform and operating system featuring a smart contract functionality, Ethereum enables distributed applications to be built and executed without any downtime, fraud, control, or interference from a third-party entity. Ethereum is not just a platform but also a Turing-complete programming language running on a Blockchain that helps developers publish distributed applications.

One of the big projects around Ethereum is Microsoft’s partnership with ConsenSys which offers Ethereum Blockchain as a Service (EBaaS) on Microsoft Azure to empower enterprise clients and developers with a single click cloud-based blockchain developer environment.

Ethereum Blockchain Size depends solely on implementation. While Parity has an Ethereum Blockchain Size of about 6 GB, Geth is about 11 GB in size. Though total Ethereum Blockchain Size might be 60GB+, in all originality.

Ripple Blockchain

Developed by the US-based technology company Ripple Blockchain Labs Inc. in 2012, Ripple Blockchain is a real-time gross settlement system (RTGS), currency exchange, and remittance network. The most distinguishing feature of Ripple Blockchain is its build schematics. Mounted on top of a distributed open-source protocol, Ripple Blockchain supports tokens that represent fiat currency, cryptocurrency, commodities, and other units of value such as frequent flyer miles and mobile minutes. This system aims at the enablement of secure, instant, and nearly free global financial transactions of any size with no transaction charges.

EOS Blockchain Protocol

EOS blockchain or EOS.IO is a blockchain protocol which is powered by its native cryptocurrency EOS. The protocol emulates almost every attribute of a real computer including CPUs, GPUs, local memories like RAM, and hard disk storages with computing resources that are distributed equally among EOS cryptocurrency

 possessors. Operating as a smart contract platform, EOS.IO is a decentralized operating system that aims at the deployment of industry-scale decentralized applications through a decentralized autonomous corporation model. In simple words, with its infrastructure, EOS.IO aims at eliminating transaction fees and having the ability to conduct millions of transactions per second.

Create your own ‘Private Blockchain’

Here’s a use case of blockchains. Being case-specific, this use case will help you understand how Blockchains can revolutionize all verticals in the marketplace. The use case centers around devising lightweight financial systems using blockchains.

What are the applications of blockchains?

Blockchains are basically decentralized permission-less databases whose primary utility is to remove the need for trusted middlemen. In addition, they lower operational costs, speed up traditional processes and systems, and further offer added benefits of accuracy through logic-driven execution and automatic backup of transaction records. There are several concepts and applications that are ripe for reinvention using blockchain technology.

   Applications of Blockchains:

  1. 1. Banking
  2. 2. Healthcare
  3. 3. Real Estate and IoT
  4. 4. Supply Chain
  5. 5. Government
  6. 6. CyberSecurity
  7. 7. Social Media 
  8. 8. AI

Understanding Hyperledger Blockchain

Hyperledger is an open-standard, decentralized public ledger based on Blockchain technology to advance worldwide business. It is a cross-industry collaborative effort to create Blockchain based open standard for the distributed ledger for globally conducted business transactions.

The goals of Hyperledger is to –

  • To make endeavor review bases to help business exchanges.
  • For, giving unbiased, open& community-driven infrastructures
  • To build technical communities
  • Educate the public about Blockchain technology
  • Advance the network of networks with numerous stages and systems.
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Hyperledger Framework and tools:

Infrastructure :

The specialized, legitimate, showcasing, hierarchical environment quickens open improvement and business selection. These include Cloud Foundry, Node.js, Hyperledger and Open Container Initiative.

Frameworks :

Built by a growing community of communities who built differentiated approaches to business Blockchain frameworks such as Hyperledger Indy, Iroha, Sawtooth, and Burrow.

Tools :

Ordinarily worked for one structure, and through normal permit and network of networks approach, ported to different systems. The apparatuses incorporate Hyperledger Composer, Explorer, and Cello.

Working of Hyperledger :

  1. 1. Submitting a proposal by Application 1 to another Peer Application 2
  2. 2. Execution of chain code to simulate proposal in Peer
  3. 3. Send proposal response back to the Application 1
  4. 4. Submit transactions like Read, Write.
  5. 5. Ordering service creates batch/block of transactions
  6. 6. Receive batch/block of transactions from ordering service.
  7. 7. Validate each transaction and commit batch/block

Components of Hyperledger :

  • Peer: A Peer manages event hub and delivers events to subscribers to a node on the network, it maintains the state of the ledger and used in managing chain codes.
  • Ledger: A transaction log that contains the details of Blocks.
  • Channel: A data partitioning mechanism to control transaction visibility only to stakeholders.
  • Membership Service Provider: It provides the identity provider abstraction, governing of the applications, ordering and endorsing of identities.

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