What is mining that supports virtual currency?Explanation of mechanism and method

What is mining that supports virtual currency?

“Minning” of virtual currencies such as Bitcoin (BTC) is to verify and approve the contents of new transaction records for fraud or tampering when adding new transaction records, and the virtual currency will be used as a reward. It is an act of acquiring.Mining means mining in Japanese. Miners are called miners, and the authenticity of cryptocurrency transactions is maintained by the miners. The content of mining differs slightly depending on the type of virtual currency, and NEM (NEM) calls this approval work harvesting instead of mining, and some virtual currencies such as Ripple (XRP) do not mine. Here, Bitcoin mining will be described.

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What is Bitcoin mining?

In Bitcoin, transactions (transaction data) performed all over the world in about 10 minutes are collected and stored in one block called “block”. Then, it is managed on a blockchain that connects all transaction histories by connecting them in chronological order with past blocks. When creating one new block, if it is verified and approved that all transactions including the past ones are correct, a new bitcoin will be issued for the verified one. This Bitcoin will be paid along with the transaction fee as a reward to the one miner who performed the block verification work earliest. This is Bitcoin mining. Since only one person is paid, transaction verification and approval calculation battles are held every day.

The mining reward is 6.25 BTC as of February 2021, and the reward per block is programmed to be halved at a pace of about once every four years. The number of Bitcoins issued is set at 21 million, and all Bitcoin issuance will end in 2140. After that, the incentive to verify the transaction (bitcoin reward) is only the transaction fee, so the incentive to verify the network is low. Therefore, there will be discussions on how to maintain the Bitcoin network in the future.

How mining works

What exactly are miners doing to generate blocks?

In one block, mainly “transaction data” that tells when, where, who sent how much, “hash value” that represents a summary of the previous block information, and a random value of a new block generated by the miner. A certain “nonce value” is written. The important thing is to find this “nonce value”. Since the miner does not know the correct answer of the nonce value, there is no choice but to put an appropriate 32-bit number in the block. Therefore, in mining, a computer dedicated to mining is used to compete in a huge amount of calculation to find the correct nonce value first, ahead of other miners. Block generation and reward acquisition are rights only given to the miner who finds the first nonce value.The nonce value is obtained by brute force various values ​​assigned to the hash function.

The role of the miner is to find the nonce value and connect a new block to the blockchain.
A hash function is a function that outputs a completely different character string (= hash value) based on the input data. SHA256 is adopted as the hash function of the Bitcoin blockchain. For example, the SHA256 hash value of “Coin Telegraph” is “6241397ea07c1b09c524fa6c84394817759288c8db45856e387d37173386a824”. If you change the input to “coin telekura”, the output will be “c3af60f47119d924d9a0ea5039279620a967521e2ee69c4a26bd709aafb27eba”, which is a completely different value.

In Bitcoin, in order to include a hash value in a block, there is a condition that a certain number of 0s or more are lined up at the beginning of the hash value. For example, the hash value of the 670,637th block generated at 7:58 am on February 15, 2009 is “000000000000000000022b7feae833431ff23d433fdf920af05f053b4de343e2”.

The miner finds the input value (= nonce value) for outputting the hash value satisfying this condition by brute force the numbers one by one into the hash function. The reason for having to brute force is that it is designed so that the input data cannot be calculated back from the hash value.

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The consensus algorithm in which Bitcoin rewards are paid to the person who first discovers the nonce value is called PoW (Proof of Work = proof of work), which requires a huge amount of calculation to obtain the nonce value. It is derived from putting it in.

Who is mining?

Bitcoin miners can be anyone who can provide the computing power of mining. In order to prevent hacking of Bitcoin blockchain called 51% attack and keep the network stronger, it is better to have a large number of miners, and it is desirable to be dispersed all over the world. However, Bitcoin mining consumes a lot of electricity, and mining in a country with a high electricity bill may cause a loss, so miners are unevenly distributed in countries / regions with low electricity bills and northern countries with high thermal efficiency.


Types of mining

There are three types of mining: “solo mining,” “pool mining,” and “cloud mining.”

Solo mining

Solo mining refers to mining alone. When Bitcoin was just born, it was possible to mine even on a PC that you would use at home, but with the advent of mining machines equipped with “ASIC (Application Specific Integrated Circuit)” that was made for mining at high speed and low power consumption. Due to the increase in the difficulty level (difficulty) of mining calculation and mining calculation, it is almost impossible to expect to earn rewards on home PCs. Even with the latest ASICs, it is likely that it will take more than a dozen years for an individual to succeed in mining, and it will cost only electricity and will be in the red.

Pool mining

Pool mining is currently the mainstream method and refers to team mining. Each person provides computing power through the Internet, and mining rewards earned by someone in the team are distributed to all members according to the computing power provided. Even if you can’t actually mine, you can get rewards and expect more stable income than solo mining, but you need a high-performance GPU or ASIC to make a profit even with pool mining. The group that performs mining is called a mining pool, and typical Bitcoin mining pools include F2Pool, Polin, and AntPool. To participate in the mining pool, you need to pay a few percent of the reward to the mining pool administrator as a commission.

Cloud mining

Cloud mining is a method of paying a mining company to perform mining on your behalf. Solo mining and pool mining require you to prepare and manage mining machines yourself, but in cloud mining, mining companies do all of that work. Therefore, the initial cost is suppressed and no knowledge about managing mining machines is required. The user receives a distribution of mining rewards according to the amount paid and the hash power (calculation amount) purchased. It’s more like an investment than mining yourself. Typical cloud mining companies include Genesis Mining and HashFlare. It is easy to get started, but the fees are high, and since many contracts are for one year, there is a risk that the market will be bad and you will not be able to stop mining even if you are in the red, or the company will go bankrupt.

How to mine

Mining is an important element that supports the cryptocurrency network. Therefore, if you are interested in technology or want to support cryptocurrencies other than for reward purposes, please give it a try.

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Tools needed for mining

The tools you need to mine at home are:

  • Mining machine with ASIC for mining or graphic board (GPU)
  • computer
  • Mining software
  • Cryptocurrency wallet

ASIC-equipped mining machine Antminer S19 Pro

ASIC-equipped mining machine Antminer S19 Pro Source: BITMAIN

There are usually multiple currencies that can be mined, whether it is a mining machine equipped with a mining ASIC or a graphic board. For example, if the mining algorithm is SHA256, it is possible to mine Bitcoin, Bitcoin Cash, Bitcoin SV, etc. Most ASIC mining machines cost 300,000 to 700,000 yen each, but ASIC is generally suitable for bitcoin mining.
If you can’t buy an ASIC but have a graphic board at home, check out the currencies that can be mined with that graphic board. There will be some currencies that can be monetized. Ethereum is more active in GPU mining than Bitcoin.

PCs and software are used to connect mining machines to the Bitcoin network and monitor mining status. As for mining software, NiceHash, a hash power trading service, is easy to use with a beginner-friendly interface. You can earn mining rewards according to the hash power you provide, and it will automatically select the currency you can earn efficiently.

A cryptocurrency wallet is required to receive mining rewards, and the address used on the exchange can be used instead.

Knowledge required for mining

The knowledge required for mining is as follows.

  • Hash rate
  • Difficulty
  • Knowledge of mining software and equipment setup

The hash rate is a numerical value that indicates the mining speed of mining.It is used to measure the mining efficiency of mining equipment and the mining speed of virtual currencies such as Bitcoin. If the hash rate of the mining machine is displayed as 110 Th / s (tera hash second), it means that the calculation to calculate the nonce value can be performed 110 trillion times per second. You can check the hash rate of the entire currency on sites such as Blockchain.com, and the hash rate of Bitcoin in February 2021 is 158 EH / s (Exa Hash Second, 1 Exa = 100 Kyo), which is the highest ever.

Changes in Bitcoin hash rate

Difficulty is the difficulty of mining calculation.Bitcoin is set to find the nonce value once every 10 minutes. However, as the hash rate increases and the computing power increases, the nonce value will be found earlier. Therefore, this Difficulty is automatically adjusted about once every two weeks. The fact that Bitcoin blocks are generated at a pace of 1 in 10 minutes does not mean that 10 minutes of transaction data are mechanically aggregated to generate blocks, but to be exact, it is about a calculation to find a nonce value. It will take 10 minutes. This Difficulty is also a useful indicator to know the competitive rate of mining.

Changes in Bitcoin's Difficulty

It also requires knowledge of mining software and equipment setup. Since the machine has heat when mining, it is necessary to manage it by considering the cooling efficiency and adjusting the operating speed and power consumption of the mining machine with software. If you are not familiar with personal computers to some extent, you may have a hard time mining.


Is mining profitable?

Let’s calculate how much you can make by mining based on the F2Pool site. (February 2009 BTC = 4,848,000 yen, ETH = 185,000 yen, MONA = 269 yen Calculated at 29.58 yen per 1kWh based on TEPCO’s rate plan)

ASIC

Antminer S19 Pro (for Bitcoin and other algorithms SHA256 adopted currencies)

When mining Bitcoin
Specifications: Hash rate 110Th / s, power consumption 3250W, released in May 2008
Revenue 3481 yen-Electricity bill 2294 yen = Profit 1187 yen / day

If it operates 24 hours a day, the profit will be about 35,000 yen in one month. The official website price of Antminer S19 Pro is about 400,000 yen (excluding customs duty and shipping fee), and it will take almost a year just to pay the yuan. While the Bitcoin price is soaring, it seems that it is difficult to obtain the same model, and it is sold at 700,000 to 1 million yen on each overseas mail order site. Since this is the result of Bitcoin that is not ASIC resistant, it is almost difficult to monetize when mining with a normal graphic board.

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GPU

NVIDIA GeForce GTX 1080 Ti (algorithms such as Ethereum Ethash, algorithms such as MonaCoin for Lyra2REv2 adopted currencies)

When mining Ethereum
Specifications: Hash rate 440Mh / s, power consumption 2150W, released in December 2017
Revenue 5083 yen-Electricity bill 1518 yen = Profit 3565 yen / day

If it operates 24 hours a day, the monthly profit will be about 107,000 yen. A graphic board that uses the GPU of NVIDIA GeForce GTX 1080 Ti is as high as 100,000 yen. There are also many second-hand goods. Especially if you have a spare graphic board at home, you can try Ethereum mining.

When mining MonaCoin
Specifications: Hash rate 512Mh / s, power consumption 2150W
Revenue 8.47 yen-Electricity bill 1518 yen = Gain / loss 1509 yen / day

If it operates 24 hours a day, the profit and loss for one month will be about 45,000 yen. Choosing a different GPU or a mining pool focused on MonaCoin could give better results.

Hash rates, deficiencies, and cryptocurrency prices are constantly changing, so mining returns are also volatile.Please note that the calculations here do not take those fluctuations into account, and that mining revenues were calculated in February 2009, the highest level ever.

Taxes on mining revenue

There is a tax on the virtual currency obtained by mining. One thing to keep in mind when calculating mining income is that it calculates revenue twice, once when you receive the mined cryptocurrency and when you sell the mined cryptocurrency.

For example, when 1BTC = 1 million yen, if you mine 0.1BTC, 100,000 yen will be the profit (first profit calculation). If you sell 0.1 BTC when the price rises to 1 BTC = 1.2 million yen, 120,000 yen (after the price increase)-100,000 yen (price at the time of acquisition) = 20,000 yen will be the gain on sale (second income) Calculation).
The tax is levied on a total of 120,000 yen, which is the sum of the profit of 100,000 yen at the time of mining and the gain of 20,000 yen on sale, minus the expenses (mining machine and electricity bill).

Similar to cryptocurrency transactions, mining income is classified as miscellaneous income. It is necessary to calculate the total income by adding it to other income such as salary income.

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