Cryptocurrency network has been considered robust, the reason why it has garnered support so far. To understand the same, let’s understand how cryptocurrencies operate.
Cryptocurrencies work on blockchains – imagine a virtual chain of blocks placed one after the other, where the blocks represent the transactions. Blockchains maintain a ledger of transactions that cannot be seen by any human, but only the system knows it. Traditionally, all digital transactions have suffered from the dangers of hacking and online theft. To prevent the same, the blockchain uses Digital Signatures. A public key allows you to receive cryptocurrency, a private key which is an astronomically large number that allows you to send cryptocurrency. While a public key is generated from the private key, it’s practically impossible to reverse-engineer and generate the private key from a public key. This makes the digital signing process robust.
When you own a cryptocurrency, in reality, you own the private key to it which allows you open and spend it. Your digital wallet contains the private keys to the cryptocurrency blockchains. The blocks store the public key of the owner and only with its matching private key, the person can spend it i.e. transfer the ownership. The ownership can easily be verified when you provide the public key. When you spend cryptocurrency the network sends an encrypted message containing the public key of another person and signed with your private key, which is verified by the network system and stored as ‘mempool’. The new mempool contains the public key of the new owner and can only be spent when the matching private key is provided.
Several transactions combined to form a new block. When the maximum capacity of the block is reached the block is processed and verified which is known as ‘hashing’ and when completed, a new block is added to the blockchain. Each block in the chain is also given an exact timestamp of when it was added to the blockchain. Thus, the blockchain contains details of all previous owners and are linked i.e. the private key signed while creating a new block should match with the public key in the previous block, and thus, a hacker cannot insert any blocks in between to gain ownership of the cryptocurrency. The only way a hacker can take away your cryptocurrencies is by gaining access to your private keys. Thus, the choice of a digital wallet is of prime importance while buying cryptocurrencies. These private keys can also be stored offline in hard disks or such storage devices.
The blockchain concept takes care of the system’s integrity and the conduct of transactions. However, the blockchain being a computing concept would require someone to take care of it, or rather a large group of such someones. These participants are known as ‘Miners’. The task of the miners is simple – they have to provide the cryptocurrency network with the infrastructure to perform transactions. If the miners are gone, you will still own the cryptocurrencies, however, cannot perform transactions. For the network to survive, it would require a certain number of miners in proportion to the transactions occurring which as a date is sufficiently available, thanks to the skilful contribution of China and other countries like Iceland, Georgia, Canada, United States, Russia, Venezuela, etc. However, the system is not dependent on any miner in particular and the miners can enter or exit the system any time they like.
The task of cryptocurrency miners is to be the auditors of the blockchain and verify the blocks being added to the blockchain. Each time a transaction occurs, the encrypted details are circulated in the entire network and stored on the ‘nodes’ i.e. the mining computers. When a block is completed, the hashing process begins and the miners get to work. The details of the blocks are converted into a hash by a mathematical function. The hash is always unique, of the same size irrespective of input and can never be reversed engineered to find the input. The task of the miners is to find the hash for the block and only when they find the accurate hash or the closest answer, the block is considered authenticated and verified and added to the blockchain. It’s a game of permutations and combinations to ‘guess’ the closest answer to the 64-digit hash!
Imagine your friend, selects a number 25 from a choice between 1 to 100 and others have been asked to make the best guess. There are only 100 possibilities here and if three people guess 15, 21 and 26, the person guessing 21 wins as it is lower than the selected number and closest to it. However, guessing a 64-digit hash would require advanced computing devices which is essentially the infrastructure that the miners are providing the blockchain. The first miner to come up with a 64-digit hexadecimal number (hash) which is lesser or equal to the target hash, is a winner and automatically receives a reward or fee when they mine 1 megabyte worth of such transactions, for their work while helping the blockchain verify transactions. You can watch the movie ‘The Imitation Game’ to understand this concept, as the movie depicts Alan Turing, a British mathematician, who tries to decipher the encrypted messages during the World War and finds success in forming a device which considered as the beginning of the computing era.
For mining one megabyte block, the miner earns is 6.25 bitcoins. These bitcoins are new bitcoins added to the global supply. This reward is reduced by half every 2,10,000 blocks or four years. When bitcoin was first mined in 2009, mining one block would give 50 bitcoins. In 2012, this was halved to 25 bitcoins, and 12.5 bitcoins in 2016. This process acts as an adjustment of inflation as it happens with the fiat currency. To date, approximately 18.5 million bitcoins have been mined or ‘minted’ – as in Gold was mined and later fiat currencies were printed. There is no surety if all gold mines have been found, and no trust that the Government won’t print additional currency, however, the bitcoin software contains a protocol to allow only 21 million bitcoins in supply – that’s the cap. This means 88% is already mined and the balance will be mined over the years. While the milestone seems near, the reward is halved every 4 years, which makes it challenging and it is predicted that the last bitcoin will only be mined in 2140.
Apart from receiving new bitcoins as rewards, miners also receive the transaction fee attached to the bitcoin transactions. A person spending the bitcoin has to pay the Bitcoin network’s miners a fee to get the transactions accepted. However, there’s more to it. If you attach a higher fee to your transaction, the transaction will get be completed faster because miners have more incentive and encourage them. Senders who are in a hurry usually pay a surcharge to push their transaction in front of the queue while lower fees will generally take between 10 and 30 minutes. When all the bitcoins are mined, the transaction fee will continue to be an incentive.
Each time a transaction happens, the details travels through the network to all the nodes (i.e. the miners) who maintain their version of the blockchain and is updated when a new block is added. In simpler terms, these nodes are sync with each other, updating details as and when the processing is completed. Thereby, it is pertinent that sometimes there may be a conflict in the transaction chain based on different user opinions about transaction history. These are called ‘Bitcoin Fork’. The splits create a new version of Bitcoin currency, and a natural phenomenon of the blockchain system, as it operates without a central authority.
The interesting thing about ‘Bitcoin forks’ i.e. glitch resolution and software upgrades, which although sounds technical is also the part of the network where bitcoin miners get a right to say. The bitcoin forks introduce changes to the cryptocurrency network, following a set of rules known as the ‘Consensus Rules’. These consensus rules require 95% of the miners to upgrade the changes for being introduced – something which is written in core protocols of the cryptocurrency network. Thus, the miners have a special influence over how the cryptocurrency network operates and what changes can be brought while the users or owners of the cryptocurrency do not enjoy any such rights.