Since I don’t believe in wonders, I am here to bring facts about the process behind a cryptocurrency transaction. If you are new to crypto, it would be good to know the Matrix behind the revolutionary innovation.
So, are you ready to take a red pill?
I’ve already showcased the history of crypto. There, you can read about DigiCash and B-money. These companies were trying to solve the security of online transactions until the end of the 90s. All of a sudden, at the end of 2008, an anonymous guy behind Bitcoin settled it all.
Of course, there are claims that the code doesn’t look as written by one person. I have to admit, I’m not a software expert, but reading Satoshi Nakamoto’s emails gave me a sense of something larger than life.
It is because of the feeling that he might change how our economy works.
Let’s see some cryptocurrency examples, find out what is a cryptocurrency mining rig, and how the change in economy might come.
Maybe this would make you a supporter. Otherwise, you might find out what is the best cryptocurrency to invest in now.
How Does Bitcoin Work?
Bitcoin code is open-source software, available to anyone willing to develop a new cryptocurrency. Of course, this stands for those that want to copy and improve the initial functionalities of Bitcoin.
This functionality is actually the blockchain, which is the most secure record of transactions. At this point, blockchain is a distributed ledger of transactions that is removing the possibility of double payments.
Let’s take an example of a person X who wants to transfer some Bitcoin to a person Y.
First, person X would need a crypto wallet with a sufficient Bitcoin amount. This wallet has a private key, the one that is signing the transaction.
To transfer Bitcoin, X enters the amount followed by Y’s public address. Similar to a bank account, this public address is a set of numbers. Besides numbers, QR code is also available and quite convenient when using a wallet app. And that’s it.
However, there is a catch. The payment is not happening instantly. It is because there is a need to store the data in the blockchain.
In the case of Bitcoin, the entire network of computers needs to approve this transaction. Therefore, after the announcement of the new transfer, one specific process called mining is taking place.
At this point, it is crucial to explain that not all cryptocurrencies include mining.
For those that do, mining is a process of using computing power to fit stringent cryptographic rules. By doing so, miners are approving pending transactions and adding them as new blocks into the blockchain.
In the case of Bitcoin, miners get Bitcoins for completing “blocks” of transactions verified, later added to the blockchain. Approving a megabyte of bitcoin transactions makes a miner eligible to receive a reward in a specified number of Bitcoins. At first, that reward was 50 Bitcoin!
After four years, as Satoshi specified, the reward “shrunk” by 50% due to a so-called “halving.”
Then came another halving, and for this reason, the current bonus is 12,5 Bitcoin.
But, this year, we expect another halving, third in a total of 32 planned. Does “now” sound like an excellent time to get on board?
However, mining is not that simple.
First of all, as mentioned, verifying one megabyte is making a miner eligible, yet it doesn’t guarantee the reward.
Confirming the megabyte of transactions is the first step. The second is solving a computing problem that brings a Bitcoin prize. This problem is not more than guessing the 64-digit hexadecimal number, closest to the target hash.As this model involves computing power, the name for this model is Proof of Work (PoW).
Modern Challenges for Cryptocurrencies
As a result of the rising number of transactions, PoW is getting more complicated. Therefore, more and more miners and computing power are needed to approve transactions.
Moreover, a massive amount of electricity nowadays goes into mining. Finally, in case of low Bitcoin prices, mining is unprofitable, making operations even slower.
In seeking of a solution that will exclude mining, some cryptocurrencies invented Proof of Stake (PoS).
Unlike mining, PoS gives rewards to those staking their own coins while approving transactions. Owning more coins means a higher possibility for a reward. Thus, the incentive is quite clear. Still, if an individual has nothing to lose, there is a possibility to create duplicate blocks.
In the initial idea, this wasn’t possible. It is because blocks are never consecutive, so no individual nor a group can replace any part of the blockchain. Thus, blockchain is tamperproof, making changes irreversible. For this reason, PoW is safer but more costly and slow.
The Best Cryptocurrency to Mine or Buy
Seemingly, many are interested in solving issues of speed and security.
When some solution makes this 2-hit combo, the crypto world would know it. Besides the fact that it would be a breakthrough, it might be an answer which crypto to buy or mine.
Because of this, it is wise to follow the news on cryptocurrency transaction improvements. If a trader, you would know that an increase in transaction speed would skyrocket the price of certain cryptocurrency.
On the other hand, the success of implementing a new PoS protocol to existing cryptocurrency is hard to predict. Even though following this news requires a bit of technical knowledge, being a member of the community would be enough.
Face it, so many times, people that didn’t know the matter believed more than experts supporting it. Usually, experts tend to question, and blind followers go for the sentiment and the vision. Yet, this shouldn’t be the case, and everyone should have critical thinking.
When I first read Satoshi’s whitepaper, I was questioning it. A few years later, I did it again. As circumstances can also change, even a genius may sound vague at times.
In one of the mentioned emails, Satoshi wrote: “Even if Bitcoin grows at crazy adoption rates, I think computer speeds will stay ahead of the number of transactions.”
Thereby, my final advice would be to learn the ins-and-outs of blockchain and, from time to time, check out all innovative concepts.
Because the situation will change, and some creative solutions may come up.