What, exactly, are you mining ?

[_l_]

I read quite a few articles about mining and many of them said they don't even really understand how it works. So what is actually being done, I mean, the GPU is running a small program but what is it trying to do, calculate a certain number and when it hit's that number you get a prize and you can convert that prize into cash or spend it at Newegg ?
The US dollar is backed by the US Treasury. What backs mining currency?

 

[Nebell]

From what I understand, mining is loaning your computer power.

 

[_l_]

From what I understand, mining is loaning your computer power.

to who and for what?

 

[Archaea]

Many different things based on the different crypto currency, but a large part of the mining process is actually validating/confirming transactions for that currency.

 

[Archaea]

Or cracking the American nuclear codes for the Motherland!

Here's your $3, thanks for participating...

 

[lilfiend]

I read quite a few articles about mining and many of them said they don't even really understand how it works. So what is actually being done, I mean, the GPU is running a small program but what is it trying to do, calculate a certain number and when it hit's that number you get a prize and you can convert that prize into cash or spend it at Newegg ?
The US dollar is backed by the US Treasury. What backs mining currency?

I'd recommend watching this video so you may understand what money is backed with today, note the video focuses more on where money comes from but does a decent job explaining it all imo.

Cryptocurrencies are fiat currencies just like the USD with nothing backing them but their perceived value (EG the US uses USD so if the US has say 1 trillion dollars total than it could be said that each dollar would be perceived as 1 trillionth of what the US is worth).

Thats all I'll go into on that to try to avoid politics.

Almost all cryptocurrencies work the same, I'm going to try for a simplified explanation of how bitcoin does it.

Bitcoin is a decentralized currency so you can't just start it with one guy having all the money and giving it to people. You can't have one person printing it and deciding who gets what or how its distributed. Bitcoin prints money through block rewards.

Bitcoin uses a sha256 of a sha256 to get a hash, guessing one of these per second would give you 1h/s. In the early days of bitcoin video cards did 170Mh/s to 300Mh/s depending on the model (even earlier it was CPU based but I wasn't around for that).

In bitcoin there is 1 block about every 10 minutes, bitcoin tries to moderate this by adapting its difficulty. The difficulty of a block is determined by how large the network is (hashes per second). If you have a network size of 10 hashes a second you have to make the target hash (to win the block) hard enough to only have 1 winner every 10 minutes.

Basically its all probability driven, if there is a 1 in 10 chance someone will guess the target hash then you will have 1 block being won every second in our 10 hash a second network.

bitcoin is only going to have something like 21.4 million bitcoin printed ever (probably wrong on the exact # here). The block rewards started at 50BTC per block, then halved to 25, I think they halved recently to 12.5 or are just about to, i've not kept on it too much tbh.

When you win a block you don't only get this reward though, you also get all the transaction fee's from everyone sending bitcoin. The whole system isn't just for printing bitcoin, but also for making it work. Without miners bitcoin wouldn't be distributed, it wouldn't run. Mining is what makes bitcoin work. When you send bitcoin from one address to another you have to pay a network fee so the miners will keep mining once bitcoin is done printing.

You could see here where the worth of bitcoin comes from. The more people there are mining the more bitcoin is used. The more people that use it, the more fee's there are, which means the miners get paid more, which makes it more profitable to mine, so more people mine. This means instead of having the US government and the US economy backing the USD you have the bitcoin miners and the bitcoin economy backing bitcoin.

With all of that said, there are two types of mining, solo mining, and pool mining. Solo mining means you're doing it on your own, you don't get any bitcoin until you win a block, but then you get it all. This is basically impossible to do now since bitcoin is so big unless you had some seriously large amounts of money to throw around. Pool mining is where a bunch of small time miners agree to split the block reward with eachother based off how much each of them worked.

Say you and I were in a pool together, I have 1Gh/s mining power and you have 3Gh/s mining power. When a block is found I'll get paid out 25% of it and you'll get paid out 75% of it. The issue here is someone needs to manage this pool, and he has to get paid because nobody works for free. So in reality the pool gets 1-2% and you get 75% of whats left and I get 25% of whats left.

Now if the total network is 10GH/s and we are 4Gh/s of it, we will win ~40% of all the blocks and thats OK. But if we had 5GH/s we'd own half of bitcoin, which leads us to one of the two ways I know how to kill bitcoin.

If one entity owns more than 50% of the network then they can make up bitcoin. To make trust in a trustless enviroment bitcoin gives everyone a copy of every transaction ever made. When someone spends bitcoin everyone can see that, and they all confirm it with eachother. If I try to spend money I don't have they can look at the history and see easily I'm trying to spend money I don't have. If I own more than 50% of the network, I can verify myself and convince the other half that I actually had that money. This is typically called a 51% attack.

The other way you could break bitcoin is if you broke encryption. Probability wise it can't happen, but it sounds like quantum computing may be able to do it. I've not really read up on this a lot but I know that quantum computing isn't even close to being able to do this yet.

Hopefully that makes it more clear to you what this program is doing. Bitcoin used a very simple but strong math problem that allowed them to make CPU's that were dedicated to it called ASICs. Basically these are physical versions of programs, so instead of an x86 cpu that can do a lot of different math problems it can do one. This is why you won't make any money GPU mining bitcoin today.

Other cryptocurrencies use different algorithms to negate this. As far as I'm aware only two have ASICs, sha256 (bitcoin) and scrypt (litecoin). Note other altcoins use sha256 and scrypt but they are usually very unstable and here today/gone tomorrow type coins.


I'll leave the rest for someone else to explain or for you to research on your own. If you're looking to get into mining but find it too difficult I'd recommend starting over at minergate.com since its a super simple pool to use and they have a silly simple gui for mining tonnes of different coins. Just beware that you get paid in what coin you mine so if you want bitcoin but are mining etherum or some other coin you need to send it to an exchange (like poloniex) and convert them. Nicehash is also recommended since it pays out in bitcoin, but you technically are selling your hashrate so you might not earn quite as much, at least that was my understanding.

 

[Archaea]

^

 

[Khahhblaab]

Cryptocurrencies are fiat currencies just like the USD with nothing backing them but their perceived value (EG the US uses USD so if the US has say 1 trillion dollars total than it could be said that each dollar would be perceived as 1 trillionth of what the US is worth).

Thank you for your scholarly understanding of it all. I am still, like the original poster, somewhat not getting it. It starts with "fiat currency". Its not quite accurate to say that the dollar isnt based on a commodity. The commodity is america. The value of all of its holdings, island's, territories etc, even its holdings of commodities. If I have stuff that I can make some type of profit on, and I am a country, I can say that you can trust this dollar because look at all of the stuff thatI have that I can use to back up why its worth a dollar. Crypto currencies dont seem to have any "real estate"<used in the sense of an exchangeable something> that backs it. What backs it? It seems to be backed on the fact that some can say that its another fiat currency. Ok another way to make money. Gonna view the video so one day I also will be able to post an understanding of it all.

Out of the ether comes cash is all that I see now.

Nice one archaea:

 

[RevMen]

If I have stuff that I can make some type of profit on, and I am a country, I can say that you can trust this dollar because look at all of the stuff thatI have that I can use to back up why its worth a dollar.

This doesn't seem logical to me. It's not like I can go claim Guam because the USD slipped against the Euro. Fiat currencies are worth as much as we all agree they're worth on the open market.

And look at how many fiat currencies have flat out failed, despite being backed by a government and all the stuff within the government's domain.

 

[Archaea]

Currency value is a function of trust, confidence, acceptance, and usability of the object/idea the currency represents.

It doesn't have to have be backed by a large corporate or government entity.

Think of all the types of currency over the years.

Chickens, spice, workable and precious metals, water, horses, weapons, etc etc etc.

If people have confidence they can barter with it, they will use it, and the more people that use it with confidence the greater the value.

 

[quiktake]

Cryptocurremcy has more in common with stocks than fiat currency. Most people are buying to speculate not to use as a payment for goods or services.

 

[Archaea]

Cryptocurremcy has more in common with stocks than fiat currency. Most people are buying to speculate not to use as a payment for goods or services.

In Europe you can use it at vending machines. Worldwide you are starting to be able to make transactions with it. Some surprising places take it in lieu of traditional currency i.e. Microsoft, Steam etc.

 

[lilfiend]

Thank you for your scholarly understanding of it all. I am still, like the original poster, somewhat not getting it. It starts with "fiat currency". Its not quite accurate to say that the dollar isnt based on a commodity. The commodity is america. The value of all of its holdings, island's, territories etc, even its holdings of commodities. If I have stuff that I can make some type of profit on, and I am a country, I can say that you can trust this dollar because look at all of the stuff thatI have that I can use to back up why its worth a dollar. Crypto currencies dont seem to have any "real estate"<used in the sense of an exchangeable something> that backs it. What backs it? It seems to be backed on the fact that some can say that its another fiat currency. Ok another way to make money. Gonna view the video so one day I also will be able to post an understanding of it all.

Out of the ether comes cash is all that I see now.

That isn't to say the USD is based on nothing, just that a fiat currency doesn't inherently have worth. The USD isn't backed by its economy and all who use it though, not directly at least. It is speculation of it all that determines the worth. Something like the US credit rating falling can reduce what our economy seems to be worth without changing how much the economy produces. People will speculate that our government and/or economy is weaker and the USD will become worth less. This is an especially large issue since nearly all modern currencies run on credit/debt. You should really watch that video since it does a better job explaining it than I do, even if its tone is a bit doom and gloom and its focus is a bit more on who controls our money.

Sorry if I wasn't that clear, see what I previously posted here also:

You could see here where the worth of bitcoin comes from. The more people there are mining the more bitcoin is used. The more people that use it, the more fee's there are, which means the miners get paid more, which makes it more profitable to mine, so more people mine. This means instead of having the US government and the US economy backing the USD you have the bitcoin miners and the bitcoin economy backing bitcoin.

Its still all speculation based though. If there were news that bitcoin may seriously become illegal the value would drop a lot, because a lot of a fiat currency's value is speculation. Its also a good time to point out that bitcoin is very young and not very well understood so its more affected than other currencies would be.