Disclaimer: the stories shared on this blog are mine, they aren’t financial advice, endorsement, counseling of any kind. Cryptocurrencies are highly volatile and speculative assets plagued by gambling addiction and fraud. Do your own research, never EVER take loans to acquire crypto, never communicate your private keys or mnemonic seed words to anyone, and never invest what you can’t afford to loose.
Many cryptocurrencies rely on a Proof-of-Work principle to secure their blockchain and reward participants.
In a nutshell: each block on the blockchain poses a cryptographic problem, in technical terms a reverse-hash bruteforcing. While generating a hash from input data is extremely fast for a computer (like multiplying two large numbers), finding the input data from the hash is extremely hard (like dividing two very large numbers). Whichever computer finds the solution broadcasts it to the network as proof, along with a new block containing transactions conducted meanwhile, and a new hash to “crack” for all participating computers. Should the proof be valid, the computer receives a reward for the effort.
This process takes a huge portion of calculation power from a Central Processing Unit, Graphics Processing Unit, or Application-Specific Integrated Circuits. Whichever works better for a specific algorithm depends.
One big advantage of Proof-of-Work blockchain security is that it can scale formidably, the network adjusting the calculation difficulty in realtime to stabilize the required duration for a solution to a block being found. And it’s zero-trust: all participating computers of the network validate the proposed solution by running the hashing function and comparing the digest. Any wrong solution is immediately spotted and discarded.
But also: the hashing algorithm is often very common and well documented in the computer industry, such as SHA256 or Scrypt. Which means general public hardware is able to perform the calculations (the “mining”), preferably with graphics card since they contain a great quantity of processing units (individually much slower than CPU cores, but it’s commonplace for a graphics card to contain 256 or 512 of them or even more, great for parallelized work!). This was by design from Satoshi Nakamoto, who envisioned everyone being able to “mine” Bitcoin at home and participate in the securing of the network, making it effectively robust against takeover attempts by adverse governments or companies.
No wonder many “old” cryptocurrencies rely on Proof-of-Work models:
- Ethereum (at time of writing)
- Bitcoin Cash
- Bitcoin Satoshi Vision
- Bitcoin Diamond
Cryptocurrencies in general and Bitcoin in particular soon reached a popularity Satoshi Nakamoto probably didn’t anticipate. Many participants started pouring processing power into the network, and before long the probability for a solo miner to validate one single block got pushed to weeks, then months, and further. So, people gathered in “pools”, putting processing power in common and then sharing the rewards proportionally to participation. Sure one single miner didn’t receive the 50 Bitcoin reward, but instead got a steady ~0.1 Bitcoin reward per day (at the time I started GPU mining in a pool too).
This worked for a while, although rocked by the arrival of Application-Specific Integrated Circuits (ASIC). Machines custom-built to dedicate the maximum amount of power to the mining process (needless to say their operating system wasn’t Windows). But computer chips evolving very fast, and ASICs being so incredibly expensive, the mining shifted back to GPU and scaled up dramatically. Farm scale.
So much so operating a mining facility requires a significant initial investment, access to warehouse-buildings and cheap electricity. But it’s doable, and makes gamers absolutely furious by buying off all available graphics cards they’d need to upgrade their gaming rig.
That’s the four major issues about Proof-of-Work mining now:
- industrial facility, thus only the richest companies get to contribute to the blockchain security, instead of basic people with home computers
- graphics card shortages for gamers, modellers, graph artists, neural network engineers, scientists..
- concentration where electricity is cheap and political regime not democratic (until recently China, now shifting to Kazakhstan)
- gargantuan electricity consumption and heat dissipation, during a time where all efforts should be on solutions to limit global climate change
Sadly, due to the deflationary nature of many cryptocurrencies (especially Bitcoin and Ethereum), their exchange prices might continue to rise, further incentivizing the opening of mining farms. Sure, cryptocurrency mining still represents a droplet in the bucket of energy loss, heat emissions and fossil fuel burning. But it’s a serious thorn in the foot and very valid argument for cryptocurrency-banning legislation.
Also, technologically wise, the two behemoths Bitcoin and Ethereum lack practical foundations for use as transaction networks (40–80 minutes to validate a transaction on Bitcoin network? Hefty ~5 USD fee to hope getting a transaction go through on Ethereum chain? Neither are practical to pay for a loaf of bread at your local bakery).
I actually hope that Bitcoin and Ethereum end up giving way to better cryptocurrencies in the marketcap ranking. Cardano and Ripple show strength, good old Stellar is running fast, and I have some interest for Polkadot, Solana and Polygon. Tezos gets some institutional support, and Cosmos enjoys a flourishing ecosystem. Oh btw: all those have either a specific validator node infrastructure, or rely on Proof-of-Stake validation. That’s for the next post 😉