Why Mining?

In short: to provide security to the network and solve coin distribution. But to take back a few steps let’s first go through what “mining” means. No pickaxes or shovels are required in this context. One only needs computer hardware to take part in cryptocurrency mining. Hardware has only one job in this context –  to be the fastest in the network to find a solution to a calculation. The calculation is made so that you can only do it by guessing, so the advantage of increasing computing power only increases the probability of finding the solution faster and not finding it fastest every time.

A bit of history. Originally Cynthia Dwork and Moni Naor introduced Proof of Work (PoW) as a mechanism to require computation to access resources. The idea was to prevent unnecessary access or make it harder to do email spam. A bit later Adam Back came up with a similar idea called “hashcash”. In short, the idea was to require computation as a payment to send an email. Later on, anonymous Satoshi Nakamoto published the Bitcoin white paper where PoW was used as a security mechanism and as a way to release new bitcoin into circulation. The term “mining” was popularised as the mechanism was assimilated in the white paper with gold mining: “The steady addition of a constant of amount of new coins is analogous to gold miners expending resources to add gold to circulation”.

You can try out yourself what the hardware does. Here is one example:

1. Go to this website: SHA256 Online (An online SHA256 hash generator website. By https://github.com/emn178 ) 
2. Type in your name (or anything else) and a number at the end. (This number is called a “nonce” in cryptography and should be a random number)
3. Then increase the number at the end until the hash below starts with a 0.

For example, my name’s first solution is “Heikki Hiltunen25”. You can verify that my solution is correct by typing it in (without quotes and capital letters included) and checking that the hash below really starts with a 0.

The method for miners is the same but the difficulty is much higher. Currently, Bitcoin miners require 19 zeros at the beginning of the hash for the answer to be valid.

It takes a huge amount of computation to come up with the answer but once solved others can verify the answer easily.

Digital welding

Instead of hashing their name, the cryptocurrency miners hash specific data: the hash of the previous block, new transactions, and a nonce. The miner who solves a valid hash first gets to add the next block into the chain of blocks and is rewarded with new coins. Every miner then starts over and tries to be the first to create the next block. The difficulty (amount of zeros required at the beginning) scales based on the time between blocks. This is how for example Ethereum can have approximately 15 seconds between every block even though the computing power of the network changes over time.

The security comes from the inclusion of the previous block’s hash in every block. Hashes work so that the result changes completely even if just a single bit is changed in the information that is being hashed. This makes it so that if any information is changed in the past blocks, every block after that gets invalidated as they no longer have the required amount of zeros at the beginning of the hash. So if an attacker would like to change a past transaction they would have to mine every block again that comes after the change they made.

Even though Bitcoin miners have more computing power compared to Ethereum miners they can not attack Ethereum blockchain even if they wanted to. This is because the specialized hardware called ASICs, that are used for Bitcoin mining, are created to only solve the SHA256 hash algorithm. Ethereum uses its own Ethash algorithm that is designed to be solved with graphic cards. This made it easier for anyone to take part in the security of Ethereum with widely-available consumer hardware. Nowadays companies have created Ethash specialized ASIC machines but consumer graphic cards are still competitive in Ethereum mining.

Fair share

Coins are required for the usage of a public blockchain to prioritize what data gets in it. But how to fairly distribute the coins to the users? Proof of Work (PoW) is one of the used mechanisms for this. In PoW the amount of coins received is proportional to the amount of security provided to the network. The security is measured by the amount of work, meaning computation power, that is provided by the user. On a large scale, PoW forces these security providers to sell some of their coins to cover the costs of their operation. This enables the users of the blockchain – who want to use coins but not take part in security – to buy them from the ones that provide security. 

Would some other method of coin distribution be better?

One way would be to give an even amount of coins to everyone. The problem is that someone could create multiple identities to gain an unfair advantage. One way to prevent this would be to require proof of identity from everyone. This would then require a trusted third party to validate the identities of everyone. This would create centralization into the system which public blockchains usually try to minimize. Another way to reduce the use of multiple identities is to do the distribution suddenly. For example, a decentralized finance project called Uniswap managed to distribute their initial supply of tokens to the users of their platform using this method.

Similarly to PoW, Proof of Stake (PoS) distributes new coins proportionally to the amount of security provided to the network. In PoS this security is measured by the number of coins put at stake by the user. In theory, if there were only a few users at the beginning and they were not willing to give out coins to anyone else. No one else would be able to provide security or get new coins in this blockchain. This is why the initial distribution of coins is critical in a public PoS-based blockchain. Many projects default to selling the initial coins to investors. This is not always very decentralized since in many cases there are limits on who can participate in these early sales of the coins.