creation of new coins is regulated by an algorithm which adjusts the difficulty of the problem that the mining nodes are attempting to solve. The issuance of new coins is dependent on how quickly blocks are solved within a specific timeframe by miners. The difficulty rises and falls because the blockchain’s algorithm is making sure it is not too easy or too difficult for miners to gain new bitcoins.
Confirm transactions
Miners play a very important role in the processing and confirmation of transactions. A transaction is when you send a cryptocurrency from one address to another and confirmation occurs for your transaction when a miner includes your transaction in the block they are making. Your transaction is only secure and complete once it has been included in a block.
Securing the blockchain
Miners secure their blockchain network by making it difficult for corrupt individuals to attack, modify or stop the network from functioning. The more miners who operate the system, the more secure the blockchain is considered. This is because the more independent nodes that are physically distant from each other, the more challenging it is to compromise them. An attacker would need to gain control of over 51% of the network before they could do any real damage. Distribution and independence keep blockchains secure and safe.
A 51% attack allows a bad actor to spend the same coins multiple times and to stop the transactions of other users.
The reason this type of attack is not more common is that there is a high monetary cost. The attacker would need to own enough equipment and burn enough electricity to overcome all the other mining nodes on the network. When there are not enough nodes a 51% attack becomes much easier and if that blockchain’s cryptocurrency is trading at a higher price than what it would cost to overcome the network, then it is simply a matter of time before the blockchain will be compromised.
Mining’s drive to efficiency
Bitcoin miners must always improve the efficiency of the equipment they are using. They are fighting a constant battle to lower the cost of power their equipment consumes to generate new bitcoins. Miners are fighting a never-ending battle of speed, since in order to stay competitive in the network they need to have the fastest machines.
Since Bitcoin’s release in 2009, mining hardware has evolved quickly as those with the most efficient equipment will gain a majority of the bitcoins at the lowest cost. It used to be possible to mine using your computer’s CPUs or graphic cards. However, the competition for new bitcoins has now become so intense, that in order to have a chance at winning any bitcoin, you will need specialized equipment. The computers that mine bitcoin currently use ASICs chips (Application-Specific Integrated Circuit). ASIC mining chips and the hardware architecture are under continuous pressure to develop. Because electricity is traveling across a switch within the chip, the smaller the distance the faster the chip. When you stack ASICs closer together, they get even faster. With this in mind, bitcoin mining with Yifu Guo’s Avalon was 128 nm in 2013, whilst currently ASICs are being taped out for BTC mining closer to the 7nm. New chips become obsolete almost immediately as new faster chips are created, but the promise of easy and lucrative rewards keeps people buying and upgrading their equipment.
Equipment becomes obsolete quickly for two main reasons. The blockchain itself has rules that increase the difficulty of mining if more computers enter the network. These rules act as a stabilizing force and help protect the integrity of the blockchain history.
Mining cryptocurrency is a cannibalistic arms race. In order to obtain the most cryptocurrency miners need to have the most efficient mining operations. Miners with the newest equipment and cheapest electricity win the most blocks. However, the consensus algorithms for each blockchain are striving to maintain a constant rate of transaction clearing and generation of its cryptocurrency. The consensus algorithms adjust the difficulty rate to match the hash power generated by the miners. The more efficient the miners become, the more difficult the blockchain algorithms become.
Figure 14 The fastest nodes win cryptocurrency.
New distributed network structures
Blockchains are distributed ledgers. They create a nearly unchangeable history of transaction records that are maintained by a decentralized network. All records secured in the blockchain have been approved by an agreed-on rule set called consensus. But not all distributed ledgers are blockchains.
The very public nature of blockchain technology and structure has gained the attention of most governments, banks and businesses. The security that the system offers and the ability to confidently transact with a counterparty directly is fascinating. Many institutions are exploring blockchain technology to create improvements and efficiency in their operations.
But the very public nature of their records is off putting. Many institutions need to keep their records private for a variety of reasons. And because blockchains are often subject to attack and down times that would crash an economy if everyone switched to using a blockchain system, it is unappealing for a country’s critical systems such as to operate based upon blockchain without complete assurance. Large institutions have been picking apart the elements of blockchain they like best. Many institutions see the benefit of having a shared distributed ledger.
Distributed ledger technology, or DLT as it is often called, is a network of known parties collaborating in the creation and balances of a shared record. DLT does not have miners, because everyone who has the ledger and the ability to edit has incentives to maintain its integrity. Because DLT has no mining, it has no cryptocurrency. But oddly enough it can be used to issue a token that can operate like a cryptocurrency.
DLT networks are not decentralized. Whoever creates a distributed ledger has complete control. They manage the structure, purpose and how the network functions. In normal practice there is more than one instance of a ledger’s history stored across many servers, and more than one node works to update and confirm new information. The nodes will communicate with one another to ensure that the most accurate and up-to-date record of transactions is maintained. These types of networks rely on similar principles of consensus just like traditional blockchains. They have rules that help ensure all the nodes are acting correctly, which is important even when all the parties are known.
2.5 Summary
In this chapter, you learned more about the history and evolution of technology that led to the creation of blockchains and cryptocurrencies. This chapter has explored the slow evolution of encryption, from the early Roman techniques to the revolution of public-key encryption that allowed for modern conveniences such as email. You discovered how hashes are created and the purpose they serve in blockchain technology.
This chapter is fundamental as it uncovers the core technologies that are used to create a blockchain. Having an understanding of how these different technologies work and are used demystifies blockchain technology. It reveals its limitations and vulnerabilities.
After reading this chapter you will be better prepared to lead projects that look to utilize blockchain technology. Your understanding of the limitations and the core functions of the different parts of a blockchain will enable you to make more informed choices when choosing technology and designing your systems.
2.6 Test your knowledge
1. What is cryptography?
A. Cryptography is
