Cryptocurrency Miners: A New Breed of Agent

 

Cryptocurrency Miners: A New Breed of Agent

Miners are known to be very hard working people who are, in my opinion, heavily underpaid. In the digital world of cryptocurrency, miners play a very similar role, except in this case, they do the computationally-intensive work instead of digging piles of dirt. Unlike real miners, some cryptocurrency miners earned a small fortune over the past five years, but many others lost a fortune on this risky endeavour.

Miners are the core component of the system and their main purpose is to confirm the validity of each and every transaction requested by users.

In order to confirm the validity of your transaction (or a combination of several transactions requested by a few other users), miners will do two things.

First, they will rely on the fact that “everyone knows everything,” meaning that every transaction executed in the system is copied and available to any peer in the network. They will look into the history of your transactions to verify that you actually had 100 coins to begin with. Once your account balance is confirmed, they will generate a specific HASH value. This hash value must have a specific format; it must start with certain number of zeros.

There are two inputs for calculating this HASH value:

1. Transaction record data
2. Miner’s proof-of-work

Considering that even the smallest change in input data must produce a significant difference in output HASH value, miners have a very difficult task. They need to find a specific value for a proof-of-work variable that will produce a HASH beginning with zeros. If your system requires a minimum of 40 zeros in each validated transaction, the miner will need to calculate approximately 2^40 different HASH values in order to find the right proof-of-work.

Once a miner finds the proper value for proof-of-work, he or she is entitled to a transaction fee (the single coin you were willing to pay), which can be added as part of the validated transaction. Every validated transaction is transmitted to peers in the network and stored in a specific database format known as the Blockchain.

But what happens if the number of miners goes up, and their hardware becomes much more efficient? Bitcoin used to be mined on CPUs, then GPUs and FPGAs, but ultimately miners started designing their own ASIC chips, which were vastly more powerful than these early solutions. As the hash rate goes up, so does the mining difficulty, thus ensuring equilibrium. When more hashing power is introduced into the network, the difficulty goes up and vice versa; if many miners decide to pull the plug because their operation is no longer profitable, difficulty is readjusted to match the new hash rate.