How Cryptocurrencies Are Created

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This course covers the fundamentals of cryptocurrencies, including what they are, their origins, their economic impact, and the future of crypto.

Transcript

This is something that was entering the Cryptocurrency ecosystem, wish to understand. How are cryptocurrencies created? Following which they want to know whether it's possible for them to start creating their own cryptocurrencies. In this lecture, we're going to focus down on a specific cryptocurrencies creation. That Cryptocurrency will be Bitcoin, this will ensure you understand how the process works. So, Bitcoin is compared to gold for many reasons. The main comparison being made between them is that they're both a store of value, or be it Bitcoin being a digital store of value. However, the similarities go further than that. It actually starts right back in the creation process. Both assets are created for a process known as mining. However, that mining process couldn't be any more different. Gold mining is far more physical. On the other hand, Bitcoin mining is more digital in its approach. This mining process is a decentralized process, which will be explained in more detail later in the course. It's a very competitive task, for which dedicated hardware is needed. The more miners that join the network, the more difficult it becomes for each to mine a block, hence profit from their operations. The Bitcoin protocol was constructed in such a way, where new Bitcoins are created at a fixed rate. Hence why the mining process is such a competitive process. Let me dive a little deeper here. So, approximately every 10 minutes these mining machines collect the pending transactions in the network, and work on solving the mathematical puzzle that is presented. The first Bitcoin miner to find that solution, then broadcasts out to the network from where other miners verify whether the mathematical solution has been correctly solved. If approved, that block is then added onto the Blockchain and the miner is granted the freshly minted Bitcoin as a reward. Which currently stands at 12.5 Bitcoins, and halves approximately every four years. On top of that, they are granted all the transaction fees. By the way the mathematical puzzle mentioned is by no means easy to solve for the mining hardware. It takes billions, if not trillions of guesses for the hardware to find a match, which naturally makes it resource intensive. But as you'll be able to tell, the creation of new Bitcoins is incentivized. In order for fresh Bitcoins to be minted and distributed into the ecosystem via miners, they must process transactions in the network in order to do so. Let's dive further now and specifically talk about what the purpose and function of mining is. Mining is the process of adding transaction records to Bitcoin's public ledger of past transactions. And the term Blockchain comes from this, as it's the ledger of previous Bitcoin transactions, which is a chain of blocks. On top of that, it's the process in which Bitcoins are added into the network, and as mentioned the current reward is 12.5 Bitcoins for solving a block, which halves every four years. As a process, mining Bitcoins is extremely intensive, hence can't be managed by your home computer anymore. It requires specialized mining equipment known as ASICs machines. But back to the blocks in the Blockchain for a moment. These blocks must contain a proof of work in order to be valid, and to ensure they are valid it is checked by other nodes in the network. Mining ensures Bitcoin nodes reach a secure tamper resistant consensus. The mining algorithm Bitcoin uses is SHA- 256. Now in order to successfully mine Bitcoins using this algorithm, you often need hash rates well into the giga hashes per second and generally higher. Hence why it's impossible to mine Bitcoins profitably using your home computer. The serious miners nowadays as mentioned use dedicated ASIC mining machines, which are set up to do one thing and one thing only, that's mine Bitcoins. Let me highlight the four most popular mining hardwares for you now, that will help you grasp why some hardwares previously used for mining are now obsolute. The first piece of hardware you need to be aware of is CPU hardware. So when Bitcoin was starting out, CPU hardware was the only time you could use to mine Bitcoin. Of course mining has moved on pretty fast, so CPU hardware is now very unheard of to put it to use. Let me put it like this, you could mine for decades on your laptop without landing a single Bitcoin. Next up we have GPU hardware, this was created about a year and a half after Bitcoin started. So, about a year and a half after Bitcoin started then GPU hardware came along. And GPU simply stands for graphical processing unit. So miners found these graphics cards to mine effectively. To put it in perspective, GPUs allowed for 50-100 times increasing mining power, with less power usage overall. So, as it stands, GPU mining is still an option, but once again it's not the best out there to mine with. Moving on from those two we have FPGA mining, which stands for Field Programmable Gate Array. At this stage we started seeing hardware manufactured specifically for Bitcoin mining. When FPGAs came along, it allowed these so called Bitcoin mining farms to be started at a profit. Now in regards to power increase, FPGAs were about five times more powerful than GPUs, and on top of that they were more efficient and easy to use. Let's move forward to this day now where we have ASICs, which stands for Application-Specific Integrated Circuit miners. ASICs are designed for one thing and one thing only, that's mining. One purpose, there's a huge hashing rate increase of like 100 times with ASICs, and they use less power, so you can see their advantage very clearly. So, if you ever wanted to make your own Bitcoin mining profitable, this is the machine for you. Now they aren't cheap, but they do have a good period of life well over two years if maintained. But if you're a hobbyist, Bitcoin and generally Cryptocurrency mining for profitability isn't the most smart thing to do simply because you won't have the specific ASIC mining machines. So, it more than likely won't be profitable if you don't use them. You see unless you're planning on building out of full scale operation, unfortunately mining won't be profitable for you. Reason being, is just so resource intensive at the currently difficulty level. This is especially true of the case with Bitcoin. Now in the early days of Bitcoin it was possible to mine Bitcoin using nothing but your laptop. But Bitcoin has the difficulty level of mining hard wired in, hence laptop mining just couldn't keep up. You could set up a laptop Bitcoin miner and not gain anything in return for your lifetime. Now if you wanted to start mining Bitcoin now, and have any chance of solving a block. As mentioned you do need to invest in a ASIC machine. Which let me tell you as I've already mentioned but I want to make it clear, isn't cheap it's a significant up front investment. And on top of purchasing the ASIC machine, you then have to power it and cool it, which is going to consume a large amount of electricity as they need to be running 24/7. Genesis mining, are estimated to spend $1 million plus on electricity alone. Of course Genesis mining is a huge huge, huge operation, but it does help picture, and put into context the costs involved. Bitcoin mining really isn't for hobbyists anymore. It's for those who have significant funds to invest in setup, of a large scale. Naturally it tends to be companies setting up large firms. Of course, there are other coins you mine such as Ethereum. These can be mined using GPUs not the more expensive ASIC machines. But then again you need to factor in your electricity costs, to see where your break even point is. A great site to use for these calculations is whattomine.com. Naturally there are other similar sites out there as well. These calculator sites, will help you assess your profitability, before you invest in such expensive hardware. So, that's everything on Cryptocurrency at creation. As you can see it's not as black and white as it initially seems. Our next lecture is all about what gives cryptocurrencies value. See you there.

 

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Ravinder is an expert instructor in the field of cryptocurrencies and blockchain, having helped thousands of people learn about the subject. He's also the founder of B21 Block, an online cryptocurrency and blockchain school.