Academy

Blockchain & Mining

Chapter 1 - Crypto

A cryptocurrency (or crypto) is a form of digital cash that allows individuals to transfer value in a digital environment.

You might be wondering how this type of system differs from PayPal or the digital banking app you have on your phone. They certainly seem to serve the same use cases on the surface - paying friends, making purchases from your favorite website - but under the hood, they couldn't be more different.

Cryptocurrency is unique for many reasons. However, its main function is to serve as an electronic point of sale system that is not owned by any party.

A good cryptocurrency willdecentralized. There is no central bank or subset of users who can change the rules without reaching consensus. Network participants (nodes) run software that connects them to other participants so that they can share information with each other.

On the left is what you would expect from something like a bench. Users must communicate through the central server. There is no hierarchy on the right side: nodes are interconnected and pass information between each other.

The decentralization of cryptocurrency networks makes them highly resistant to shutdowns or censorship. In contrast, to cripple a centralized network, all you have to do is disrupt the main server. If a bank wiped its database and there were no backups, it would be very difficult to determine users' balances.

In cryptocurrency, nodes store a copy of the database. Each effectively acts as its own server. Individual nodes can go offline, but their peers can still retrieve information from other nodes.

Cryptocurrencies are therefore functional 24 hours a day, 365 days a year. They allow the transfer of value anywhere in the world without the intervention of intermediaries. That's why we often refer to them as without permission: Anyone with an internet connection can transfer money.

There have been a handful of attempts at digital cash schemes over the years, but the first of the cryptocurrencies was Bitcoin, which was released in 2009. It was created by a person or group of people using the pseudonym Satoshi Nakamoto. To this day, their true identity remains unknown. Bitcoin spawned a large number of subsequent cryptocurrencies - some aimed to compete, and others attempting to incorporate features not available in Bitcoin. Today, many blockchains allow users not only to send and receive funds, but also to run decentralized applications using smart contracts. Ethereum is perhaps the most popular example of such a blockchain.

At first glance, cryptocurrencies and tokens appear identical. Both are traded on exchanges and can be sent between blockchain addresses. Cryptocurrencies are intended solely to serve as money, whether as a medium of exchange, a store of value, or both. Each unit is functionally fungible, meaning that a coin is worth just as much as another.Bitcoin and other early cryptocurrencies were conceived as currency, but later blockchains tried to do more. Ethereum, for example, doesn't just offer currency features. It allows developers to run code (smart contracts) on a distributed network and create tokens for a variety of decentralized applications.Token be able how cryptocurrencies are used, but they are more flexible. You can mint millions of identical ones or a few with unique properties. They can serve as anything from digital receipts representing ownership of a business to loyalty points. On a smart-contract-enabled protocol, the base currency (used to pay for transactions or applications) is separate from its tokens. For example, in Ethereum, the native currency is Ether (ETH) and it must be used to create and transfer tokens within the Ethereum network. These tokens are implemented according to standards such as ERC-20 or ERC-721.

Essentially, a cryptocurrency wallet is something that holds your private keys. It can be a specially designed device (a hardware wallet), an application on your PC or smartphone, or even a piece of paper. Wallets are the interface most users rely on to interact with a cryptocurrency network. Different types offer different types of functionality - obviously a paper wallet cannot sign transactions or display current prices in fiat currency. For the sake of simplicity, software wallets (e.g. Trust Wallet) can be considered superior for daily payments. For security reasons, hardware wallets are virtually unmatched in their ability to keep private keys away from prying eyes. Cryptocurrency users tend to keep funds in both types of wallets.

Chapter 2 - Blockchain

A blockchain is a special type of database in which data can only be added (and not removed or changed). Transactions are regularly added to a blockchain within what we blocks name (consisting of transaction information and other important metadata). We call the structure a chain because each block's metadata contains information linking it to the previous one. In particular, it contains a hash of the previous block, which you can think of as a unique digital fingerprint. The probability that two pieces of data will give you the same output from a hash function is infinitely small. Because of this, if someone tried to change an older block, its hash would be different, meaning the next block's hash would also be different, and so on. It is therefore obvious whether a block has been changed, since all blocks that come after it would also have to be changed.

Each block's hash is contained in the next block. This forms the chain of blocks or blockchain.

The blockchain is fully downloaded by network participants. Remember how we said anyone can validate transactions and signatures using public-key cryptography? When a node receives a block, it performs a series of checks. If something is invalid, the block is rejected.

When a node receives a valid chunk, it makes its own copy of it and then passes that chunk to other nodes. They then do the same until the block has spread throughout the network. This process will also apply tounconfirmed transactionsperformed- that is, for transactions that are broadcast but not yet included in the blockchain.

The integrity of a blockchain is undermined when false financial information can be recorded. At the same time, there is no administrator or manager in the distributed system who manages the ledger - so how do we ensure that participants act honestly?

Satoshi proposed a proof-of-work system that allowed anyone to propose a block to attach to the blockchain. To advance a block, users must sacrifice computational power to guess a protocol challenge. Proof of Work is the most proven scheme to achieve consensus among users, but it is by no means the only one. Alternatives such as Proof of Stake are increasingly being explored, although they have yet to see proper implementation in their true form (although hybrid consensus mechanisms have been around for some time).

The above process is called Mining designated. If the miner finds a solution, the block they build would extend the chain. As a result, they would receive a reward denominated in the blockchain's native currency. The cryptographic puzzle that miners must solve involves repeatedly mashing up data to produce a number that falls below a certain value. Hashing with a one-way function means that given the output, it's virtually impossible to guess the input. But given the input, checking the output is trivial. This allows any participant to verify that the miner has created a "correct" block and reject those that are invalid. In this case, the miner gets no reward and has wasted resources trying to forge an invalid block. This leads to an interesting game theory that makes it expensive for an actor to try to cheat, but profitable for him, honestly to act. No malicious entity has the resources to attack a strong network indefinitely. As such, we expect those with resources to see a return on investment through proper participation.

As you can probably see, distributed networks are not very efficient. Unfortunately, cryptocurrencies can only be safe and censorship-resistant if all nodes can sync a copy of the blockchain. The lower the requirements to keep up, the easier it will be for people to join.

You can see why a blockchain that only adds a small block every ten minutes is preferable in this regard to one that adds a huge block every five minutes. The latter would require nodes to run high-performance computers to stay in sync, pushing lower-performing computers to go offline. This would lead to more centralization as there are fewer peers in the network.

But with smaller blocks we cannot achieve many transactions per second (TPS). This also means that during busy periods it can take a while for transactions to be added to the blockchain. It's inconvenient when you want to make a quick payment, but it's the price to pay for decentralization. We call this topic ascalability dilemma. A system that scales well is one that can easily adapt to increased throughput with minimal penalty. Blockchains don't scale well - as we've explained, simply sacrificing throughput with larger blocks undermines the entire purpose of the distributed network. To increase TPS in a way that doesn't hurt network decentralization, theOff-Chain-scaling to be a viable approach. This includes a wide range of solutions - centralized and decentralized - that allow transactions to be carried out without logging them on the blockchain.

Chapter 3 - Mining

Before you can start mining cryptocurrencies like bitcoin, you need to get the right foundation first. To do this, follow these steps:

Purchase / rental of hardware: The use of suitable, powerful and at the same time efficient hardware is essential for Bitcoin mining. Currently, ASIC miners (Application Specific Integrated Circuit) are primarily used for this purpose, which are designed precisely for such mining operations. Without this computing power, mining is no longer profitable today. These miners have to be bought or rented from specialized hosting providers.

Setup / hosting of the miners: Running a miner at home requires careful setup. At the same time, the environmental conditions have to be right - excessive humidity, a lot of dust in the air or poor ventilation can lead to performance losses or hardware failures. A popular option is therefore hosting in the data centers of various providers who take over the support and maintenance of the machines. 

Join mining pool: There is currently a wide range of mining pools for Bitcoin, in which several thousand miners bundle their computing power, validate transactions within the blockchain, create new blocks and receive “block rewards” as a reward. Create an account with one of the pools or have it configured by your mining provider to share in the profits there.

Get Bitcoins: Once all these points have been completed, the calculating machines start their work and take part in the digital competition for the coveted block rewards. All bitcoins and their shares are transferred directly to your set up bitcoin wallet of the respective pool after a successful block validation. 

Now the most important prerequisites for successful Bitcoin mining have been created and you can get started.

The term "mining pool" describes a combination of a large number or several thousand individual devices / miners to form a common network. The aim is to use the hash rate, i.e. the computing power, of the entire pool for crypto mining in this way in order to generate more frequent and higher block rewards.

These profits are then automatically distributed to the participants in the mining pool, usually according to the computing power they have contributed. This bundling of computing power also gives smaller miners the opportunity to at least partially generate certain profits. There are currently around a dozen relevant pools for currencies such as Bitcoin or Ethereum.

The hash rate is a common metric in the cryptocurrency space. Hashes are a combination of numbers and digits that can be used to encode and transfer data of all kinds in a unique way. This is done based on an algorithm – in the case of Bitcoin, the SHA-256 algorithm.

The hash rate (hash power) provides information about the computing power of systems and devices. It is calculated in hash per second (H/s). The greater the computing power in the system, the more calculations can be performed per second to create a hash that is identical to the specific "nonce" (number used once) of a block. The block is then considered validated.

The mining difficulty is a variable value that describes the computational effort and time that must be provided within a network to create an additional block and attach it to the blockchain. The higher the difficulty, the more computing power has to be invested for a block reward.

In order for the creation and validation of a block to remain at a constant level in terms of time, the mining difficulty must be continuously adjusted. This happens about every 2016 blocks or about every two weeks. This ensures that an increase in computing power (hash rate) in the network does not lead to a falsification of the values of the cryptocurrencies - for example, when large mining farms start operating to mine large amounts of coins in a short time.

With miner hosting (also: mining hosting), miners do not operate their devices themselves, but decide to use the capacities of a specialized provider for crypto mining. Such an industrial solution offers a number of advantages in practice:

Cheap electricity: The power consumption of the mining rigs is a major cost driver: For this reason, many mining hosting providers advertise with particularly favorable conditions per kilowatt hour consumed. Depending on the hardware, these cost savings can pay off after a short time.

Secure infrastructure: For safe operation of the miners, it must be ensured that they can work in a well-ventilated environment with a constant temperature without any humidity. For this, miner hosting providers typically operate their rigs in large halls that are very similar to server farms in terms of structure.

Regular maintenance: If a miner has a defect or a complete failure, this can result in significant financial losses. For this reason, mostly experienced electrical engineers work on site, who ensure high availability of all hardware in the respective data centers.

How are hosting costs calculated?

The hosting costs at Blockmine are made up of three components: the total performance of all hosted devices per customer (in kW/h), the one-time installation of the device / devices and a deposit.

Up to a total hardware output of 50 kW, electricity costs of 0.088 euros / kWh are incurred. From a consumption of 50 - 250 kW, the electricity costs drop to 0.083 euros / kWh. For all other categories from 250 kW or from 1 MW we offer our own offers on request.

Exemplary calculation for the operation of an Antminer S19 Pro

costs per hour: 3.25 kW/h * 0.088 euros / kWh = 0.286 euros / hour

Cost per day: 3.25 kW/h * 0.088 Euro / kWh * 24 = 6.864 Euro / Tag

Costs per month: 3.25 kW/h * 0.088 euros / kWh * 24 * 30 = 205.92 euros / month

With the use of our all-in tariffs, all costs for maintenance work are already included in the total price.

Chapter 4 - FAQ

Very few countries prohibit the buying, selling and storing of cryptocurrency. In the vast majority of the world, bitcoin and other virtual currencies are perfectly legal. But before you start using them, you should check if your jurisdiction allows it.

It is important to remember that each country has a different approach to regulating cryptocurrency activities. Make sure you're not breaking any rules related to taxes or compliance.

In financial systems, value is a shared belief. Just like anything of value, the value is not inherent in the cryptocurrency itself - it is assigned by humans. In other words, something has value when people believe it does. This is true regardless of whether the object of value is a precious metal, a piece of paper, or some items in a database.

With all that said, some are considering cryptocurrencies and bitcoin, something resembling a scarce digital commodity. Because of its predictable issuance rate and monetary policy, some argue that bitcoin could act as a store of value in the future, much like gold. Since Bitcoin has only been around for a little over a decade, it remains to be seen if it will stand the test of time in this regard.

no You may have heard that many nation states and central banks are working to create their own versions of the digital currency. However, these are just that - digital currencies. In fact, they are often collectively referred to ascentral bank digital currencies (CBDCs)These are essentially digital versions of fiat money, and they don't enjoy most of the advantages of cryptocurrencies. Issued by a central government and declared legal tender, they typically don't use a distributed ledger like a blockchain to record transactions. You may also have heard of Facebook Libra, another type of digital currency. On the plus side, it plans to be built on top of an open-source blockchain system. However, it would not be permissionless like Bitcoin or Ethereum, meaning participants would need more than a basic internet connection to use it. Furthermore, the project and the activity based on it would be carried out and managed by an association composed of a few selected members. So, despite CBDCs and other forms of digital money using blockchain or cryptography, they differ significantly from cryptocurrencies like Bitcoin .

When you look at the price of a cryptocurrency, you only see part of the picture. An equally important metric is how many individual units of that cryptocurrency exist, i.e. thatoffer.More specifically, to assess the rating of a cryptocurrency network, you need to know how many individual unitscurrentlyexist. This is called called circulating supply. Different cryptocurrencies can adopt different issuance plans, so it is important to understand how issuance works with each network.

Market capitalization (or market capitalization) is the price of a single unit multiplied by the circulating supply.


Market Capitalization = Circulating Supply*Price


As you can imagine, the market cap of a cryptocurrency network is a more accurate representation of the value on the network than the price of a single unit. A network with a cheaper coin but higher circulating supply might have a higher overall rating (market cap) than one with a more expensive coin but lower circulating supply. And the opposite could also be true in certain cases.

However, it's worth noting that market cap does not represent how much money has entered a given market. For example, a common misconception among newcomers is that Bitcoin market cap represents the total amount of money invested in Bitcoin. But that doesn't make sense because market cap depends on price and supply.

If you send a bitcoin to a different address, you will find that the address receives slightly less than what you sent. That's because you pay a small fee to reward miners for adding your transaction to the blockchain. Many cryptocurrencies use a similar mechanism to encourage users to secure the network. InProof-of-Work-Systems typically charge transaction fees with freshly minted coins (theBlocksubvention)bundled, athe block reward to build.

You can adjust the fee depending on the urgency of your transaction. Rational miners will always try to generate as much revenue as possible, so they prioritize transactions with higher fees. You can look at the current pending transactions to get an idea of the average fee and set your own accordingly.

What the future of cryptocurrency will hold depends entirely on who you ask. Some believe bitcoin will rise to replace gold in the digital age and disrupt the existing financial system. Others argue that cryptocurrencies will always be a secondary system that exists as a niche market. We also have those who believe that Ethereum will become a distributed computing that will serve as the backbone of a new internet. Skeptics predict the industry will eventually collapse, while enthusiasts are content with cryptocurrencies remaining niche money systems. There are many possible outcomes - it's just too early to say for sure what will happen even a year from now. But we can't deny that there is huge potential for growth.

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