Mining: An Overview of How Digital Currencies Stay Decentralized

With the increase in the public’s awareness of digital currencies, digital currency mining became a common term in recent times. Featured across headlines – and subject to massive investments on the part of companies like Samsung and Bitmain – digital currency mining plays an important role in the industry.

As a result, understanding digital currency mining and its applications could be beneficial for investors looking to contextualize or otherwise better understand the digital currency industry.

What is digital currency mining?

Digital currency mining is a process utilized by many of the popular digital currencies that exist today. In this process, devices complete automated tasks in order to validate transactions on the network – proving they are legitimate – in a way that does not require a central third party like a bank.

JOIN OUR WEEKLY NEWSLETTER

The process has a strong relationship with blockchain technology, since blockchain serves as a distributed ledger, dividing information across the network’s nodes (participating devices).

Blockchain technology is a heightened form of accounting for digital currencies like Bitcoin, which employ the technology to create public records of every transaction that occurred since the network’s launch. All transactions are stored on an electronic ledger so both internal and external parties can easily check for fraudulent transactions and trace spending chronologically.

To add transactions to this ledger, however, a method had to be conceived to ensure that transactions are legitimate, without relying on a central party. In exchange for monetary reward, participants are incentivized to donate their computer’s resources for as long as they see fit. Their resources are then used to confirm pending transactions.

The process involves these mining devices engaging in an automated process where they attempt to solve complex mathematical equations. The first device to solve the equation is awarded a set block reward and any transaction fees associated with the block, and the now-verified transaction is added to the blockchain.

Those who operate devices for this purpose are referred to as digital currency ‘miners’ and are rewarded when solutions are found. More powerful devices have a higher chance of discovering solutions, meaning they tend to yield higher rewards over time.

Digital currency mining is a key tool for decentralization

Outside of the world of digital currencies, traditional payment methods – like bank remittances – use a central authority in order to determine which transactions are legitimate. As an example, when someone attempts to carry out a payment using a debit card, the bank verifies that the user has the amount of funds needed to complete the transaction.

Blockchain technology is an instrument for replicating this system but removing the need for a central party to validate the transaction. Several digital currencies differ in their approach to using blockchain technology, but Bitcoin and many others use digital currency mining as a way of ensuring that pending transactions are legitimate before adding them to the blockchain.

Effectively, this is able to eliminate issues like double spending while holding true to a framework where all users have equal authority, and decisions are made democratically through consensus.

Mining on a grand scale, with millions at stake

In the early days of Bitcoin, mining was considered profitable from the average computer. For currencies like Bitcoin and Litecoin, the difficulty of discovering solutions increases over time in order to limit the maximum supply of both currencies. It is up to the coin’s developers to decide the frequency at which these adjustments take place. For Bitcoin and Litecoin, the difficulty is adjusted every 2,016 blocks. For Ethereum, on the other hand, the difficulty increases each round.

In today’s landscape, the majority of mining is facilitated by companies which leverage hundreds of devices to maximize their mining rewards. In order to maximize their profits, these companies often establish ‘mining farms’ in areas which offer cheap electricity.

These mining farms use thousands of machines to simultaneously mine digital currencies, and catering to these farms has become an industry of its own. Earlier in 2018, news broke that Samsung is set to begin producing chips for the digital currency mining market.

Further, Canada continues to uphold a significant relationship with digital currency mining. There are many large digital currency mining companies now operating in Canada.

In addition to the country’s number of Canadian digital currency mining farm operators, Hydro-Québec previously invited international mining farms to relocate to the province in order to leverage leftover energy. However, the popularity of digital currency mining attracted enough interest for the public utility to rescind its offer, as it was unable to accommodate the demand.

Since then, Québec’s relationship with cryptocurrency mining has been somewhat unpredictable. Premier Philippe Couillard said the province was not interested in providing cheap electricity to Bitcoin miners in March 2018. However, the government reportedly indicated that it does not want to miss the boat on digital currency mining a few months later.  

In a broader sense, digital currency mining has led to charitable pursuits like UNICEF’s Game Chaingers, collaborative efforts to unite resources to maximize profits such as mining pools, and ultimately entire businesses catering to a market that did not exist a few years ago.

Buy Bitcoin, Ethereum, and other digital currencies on Coinsquare, Canada’s most secure trading platform.

Buy Digital Currencies on Coinsquare