Chapter 1 - Crypto
A cryptocurrency (or crypto) is a form of digital cash that allows individuals to transfer value in a digital environment.
You may be wondering how this type of system is different 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 cash register 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. The network participants (nodes) run software that connects them to other participants so that they can exchange information with each other.
On the left is what you would expect from something like a bank. Users must communicate through the central server. On the right, there is no hierarchy: nodes are connected and pass information between each other.
The decentralization of cryptocurrency networks makes them very resistant to shutdowns or censorship. In contrast, to cripple a centralized network, you only need to disrupt the main server. If a bank deleted 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 enable 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 programs over the years, but the first of the cryptocurrencies was Bitcoin, 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 to not only send and receive funds, but also 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 to function solely as money, be it as a medium of exchange, a store of value, or both. Each unit is functionally fungible, meaning that a coin is worth as much as another.Bitcoin and other early cryptocurrencies were designed as currencies, but later blockchains tried to do more. Ethereum for example, offers more than just currency features. It allows developers to run code (smart contracts) on a distributed network and create tokens for a variety of decentralized applications.Tokens can how cryptocurrencies are used, but they are more flexible. You can mint millions of identical ones or a few with unique characteristics. They can serve as anything from digital receipts representing a stake in a company to loyalty points. On a smart contract-enabled protocol, the base currency (used to pay for transactions or applications) is separate from its tokens. In Ethereum, for example, 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 contains 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 that most users rely on to interact with a cryptocurrency network. Different types offer different types of features - obviously a paper wallet cannot sign transactions or display current prices in fiat currency. For convenience, software wallets (e.g. Trust Wallet) may be considered superior for daily payments. From a security standpoint, 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 (consisting of transaction information and other important metadata). We call the structure a chain because the metadata of each block contains information that links it to the previous one. Specifically, 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 infinitesimal. Because of this, if someone tried to modify 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 because all blocks that come after it would also have to be changed.
The hash of each block 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 with public key cryptography? When a node receives a block, it performs a series of checks. If something is invalid, the block will be rejected.
When a node receives a valid block, it creates its own copy of it and then distributes that block to other nodes. They then do the same until the block has spread across the entire network. This process is also used forunconfirmed transactionscarried out- 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 leader in the distributed system to manage 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 append to the blockchain. To advance a block, users must sacrifice computing power to guess a challenge to the protocol. Proof of Work is the most proven scheme for reaching 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 not yet seen 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 he built 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 crunching data to produce a number that falls below a certain value. Hashing with a one-way function means that it is virtually impossible to guess the input given the output. But given the input, checking the output is trivial. This allows each participant to verify that the miner has created a "correct" block and reject those that are invalid. In this case, the miner receives 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. Therefore, we expect those with resources to achieve a return on investment through correct participation.
As you can probably tell, distributed networks are not very efficient. Unfortunately, cryptocurrencies can only be secure and censorship-resistant if all nodes can synchronize a copy of the blockchain. The lower the requirements are 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, forcing lower-performance 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 times it may take a while for transactions to be added to the blockchain. It is inconvenient if you want to make a quick payment, but it is the price that must be paid for decentralization. We call this issue 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 harm the decentralization of the network, theOff-Chain-Scaling seems 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 first need to lay the right foundation. Please note the following steps:
Purchase / rental of hardware: The use of suitable, powerful and 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 these days. These miners must be purchased or can be rented from specialized hosting providers.
Setup / hosting of the miners: In order to operate a miner at home, careful setup is required. At the same time, the environmental conditions must be right - excessive humidity, a lot of dust in the air or poor ventilation can lead to reduced performance or hardware failures. A popular option is therefore hosting in various providers' own data centers, which provide support and maintenance of the machines.
Join mining pool: There is currently a wide range of mining pools for Bitcoin, in each of which several thousand miners pool 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 in order to share in the profits.
Get Bitcoins: Once all of these points have been completed, the computing machines begin their work and take part in the digital competition for the coveted block rewards. After successful block validation, all Bitcoins and their shares will be transferred directly to your set up Bitcoin wallet for the respective pool.
Now the most important requirements 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 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 contribute. This bundling of computing power also gives smaller miners the opportunity to make at least some profits. There are currently around a dozen relevant pools for currencies such as Bitcoin or Ethereum.
Hashrate is a common metric in the cryptocurrency space. “Hashes” represent a combination of numbers and digits that can be used to uniquely encode and transfer all types of data. This happens 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. The calculation is done in hash per second (H/s). The greater the computing power in the system, the more calculations can be carried out 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 and time effort that must be provided within a network in order 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.
To ensure that the creation and validation of a block remains at a constant level, the mining difficulty must be continually adjusted. This happens approximately every 2016 blocks or approximately 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 operations in order to mine large quantities of coins in a short time.
With miner hosting (also: mining hosting), miners do not operate their devices themselves, but instead decide to use the capacities of a specialized crypto mining provider. Such an industrial solution offers a number of advantages in practice:
Cheap electricity: The electricity consumption of mining rigs is a key cost driver: For this reason, many mining hosting providers specifically advertise particularly favorable conditions per kilowatt hour consumed. Depending on the hardware, these cost savings can pay off after just a short period of time.
Secure infrastructure: For miners to operate safely, it must be ensured that they can work in a well-ventilated environment with a constant temperature and without any humidity. Miner hosting providers typically operate their rigs in large halls that are very similar in structure to server farms.
Regular maintenance: If a miner suffers a defect or a complete failure, this can result in significant financial losses. For this reason, experienced electrical engineers usually work on site to 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(s) 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 1 MW, we offer our own offers upon 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
When you use our all-in tariffs, all costs for maintenance work are already included in the total price.
Chapter 4 - FAQ
Very few countries ban the buying, selling and storing of cryptocurrency. In the vast majority of the world, Bitcoin and other virtual currencies are completely legal. But before you start using them, you should check whether your jurisdiction allows it.
It is important to remember that each country takes a different approach to regulating cryptocurrency activities. Make sure you don't break any rules related to taxes or compliance.
In financial systems, value is a shared belief. Just like anything valuable, value is not inherent in the cryptocurrency itself - it is assigned by people. In other words, something has value if people believe it does. This applies regardless of whether the object of value is a precious metal, a piece of paper, or some parts in a database.
With all that said, some are looking at cryptocurrencies and Bitcoin, something that resembles a scarce digital commodity. Due to its predictable issuance rate and monetary policy, some argue that Bitcoin could act as a store of value in the future, similar to gold. Since Bitcoin has only been around for a little over a decade, it remains to be seen whether it will stand the test of time in this regard.
No. You may have heard that many nation states and central banks are working on creating their own versions of digital currency. However, these are just that - digital currencies. In fact, they are often referred to collectively ascentral bank digital currencies (CBDCs)These are essentially digital versions of fiat money, and they do not enjoy most of the benefits of cryptocurrencies. They are issued by a central government and declared legal tender and typically do not 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 positive side, it is planned to be built on an open source blockchain system. However, it would not be permissionless like Bitcoin or Ethereum, meaning participants would need more than a simple internet connection to use it. Furthermore, the project and the activity on it would be implemented and managed by an association composed of a few selected members. So, despite CBDCs and other forms of digital money that use blockchain or cryptography, they are significantly different from cryptocurrencies such as 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 this cryptocurrency exist, i.e. thatOffer.More specifically, to evaluate the valuation 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 in the network than the price of a single unit. A network with a cheaper coin but a higher circulating supply could have a higher overall valuation (market cap) than one with a more expensive coin but a lower circulating supply. And the opposite could also be true in certain cases.
However, it is worth noting that market capitalization does not represent how much money has entered a particular market. For example, it is a common misconception among newcomers that Bitcoin market capitalization represents the total amount of money invested in Bitcoin. But that doesn't make sense because market capitalization depends on price and supply.
If you send a Bitcoin to another address you will notice that the address will receive 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 incentivize users to secure the network. InProof-of-Work-Systems typically charge transaction fees using freshly minted coins (theBlocksubvention)bundled, onethe 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 current pending transactions to get an idea of the average fee and set your own accordingly.
What the future of cryptocurrency will look like depends entirely on who you ask. Some believe that 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 computer 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 cannot deny that there is huge potential for growth.