Cryptocurrency and Miners
If one discards all the opinions that tend to float about in the air regarding cryptocurrencies and reduces it to a simple definition, one finds that it basically relates to limited entries in a database that nobody can change without fulfilling certain conditions. This may seem ordinary, but believe it or not: one can define a currency exactly like that. Take the money on your bank account: Is it anything more than a database entry that can only be changed under certain conditions? One can even take up physical coins and notes. They are nothing more than limited entries in a public physical database that can only be changed if the condition matches the coins and notes one physically owns. Money is all about a verified entry of accounts, balances and transactions in some kind of database.
How miners mine for coins and facilitate transactions
Let’s look at the mechanism that governs the cryptocurrencies databases. A cryptocurrency such as Bitcoin is a network of colleagues. Each peer has a history of all transactions and therefore of the balance of each account. A transaction is a file that says ” Bob gives Alice X Bitcoin ” and signs with the private key of Bob. It’s fundamental public key encryption, nothing special at all. After signing, a transaction is transmitted from one peer to every other peer in the network. This is fundamental p2p technology. Nothing at all special, again. The transaction is almost immediately known throughout the network. But it is only confirmed after a certain amount of time. Confirmation in cryptocurrencies is a critical concept. You could say that all cryptocurrencies are confirmation. Unless a transaction is confirmed, the transaction is pending and can be forged. It is set in stone when a transaction is confirmed. It can not be forged anymore and is part of an immutable record of historic transactions: the so-called blockchain. Transactions can only be confirmed by miners. This is their job in a network of cryptocurrencies. They take transactions, legitimise them and spread them through the network. After a miner has confirmed a transaction, each node must be added to its database. It’s part of the blockchain. For this work, miners are rewarded with a cryptocurrency token, e.g. Bitcoins.
What do miners essentially do?
Basically everyone can be a miner. Since a decentralized network does not have the power to delegate this task, a cryptocurrency needs some sort of mechanism to prevent an abusive ruling party. Imagine someone creating thousands of colleagues and forging transactions. The system would immediately break. Satoshi therefore laid down the rule that miners must invest some work on their computers in order to qualify for this job. In fact, they must find a hash that connects the new block with its predecessor, a product of a cryptographic function. This is called the Work Proof. It is based in Bitcoin on the SHA 256 Hash algorithm. You don’t need to understand SHA 256 details. It is only important that you know that the miners can solve a cryptological puzzle. Once a solution has been found, a miner can build and add a block to the blockchain. He has the right to add a so-called coinbase transaction that gives him a certain number of Bitcoins as an incentive. Creating valid Bitcoins is the only way. Bitcoins can only be created if cryptographic puzzles are solved by miners. Since the difficulty of this puzzle increases the amount of computer power that the entire miner invests, only a certain amount of cryptocurrency token can be created within a certain amount of time. That is part of the consensus that no peer can break in the network.