Blockchain: Mining

This was, without a question, the most confusing aspect of blockchain to me when I first tried to learn it. Maybe it was because all the buzz around BitCoin mining. I usually find that when a topic becomes popular, misinformation spreads just as fast, if not faster, than actual information.

In an attempt to explain this topic I am going to be using BitCoin as my primary example. I am doing this mainly because I am sure that is where most of you first heard of the term blockchain mining. I will however, begin with a more generic explanation.

First off, let us separate blockchain mining from the idea of financial reward. Yes, in BitCoin, the miner who successfully mines a block is rewarded with BitCoin, but that is not a required part of a blockchain environment.

Mining, at its simplest form, just means successfully adding a new block to the blockchain.

So why can’t you just add a new block like you add a new element to a list or array in any other programming language? This has to do with the decentralized nature of blockchain. Since there is no centralized authority, blockchains rely on group consensus to verify that a new block added to the chain is valid. Keep in mind, this group is made up of anonymous nodes all over the world who do not know each other, and have no good reason to trust one another.

So, if you were to add a new block to the chain, the rest of the chain would need a mechanism in place that gives them time to update their copy of the chain and verify the block you added is good. So effectively we need a pause button.

How do we do that fairly and in a random manner that doesn’t allow for gaming of the system? We force anyone wishing to add a new block to show what is known as proof of work. Proof of work is proof that the person wishing to add the new block has completed a complex mathematical puzzle that required some level of resource allocation on their end. This effectively means they have skin in the game. There is a “cost” associated on their end. This “cost” deters the typical denial of service or blasting type attachk.

In BitCoin the mining process goes like this:

  1. Bob wants to buy a guitar from Philip. They agree on a price of .2 BitCoin and through what is known as their BitCoin wallet a transaction is sent out to the BitCoin universe. A BitCoin wallet is a software client that the person trading with BitCoin uses. From the end user’s point of view, it is a lot like a Paypal type interaction.
  2. Once the transaction is out in the ether, nodes (computers) known as BitCoin miners verify the transaction using a set of established rules built into the BitCoin software they are all running. These rules verify sender and receiver public keys, timestamps, etc. Once verified, the transaction is put into a queue.
  3. Next the bitcoin miners build a new block. The goal is to make their new block the next block in the chain. This block with contain the following items:
    1. Block number – just the next number in the line
    2. Previous Hash – this the hash value of the current last block in the chain
    3. Transactions – they will fill the block with verified transactions from the queue
    4. A timestamp
    5. The Nonce

On a side note – BitCoin only releases a block every 10 minutes. This is a design decision made by the makers of BitCoin, this is not a requirement of Blockchain

Once they have all of that information, they pass their block into a hashing algorithm and get a hash for their new block – This is where mining gets interesting

You see, not any old hash will do. In order for the block to be added to the chain, the hash must be less than the target hash.

The target hash is established by the initial creator of the blockchain. It can be whatever they chose. In the case of BitCoin, the target hash is actually programmed to drop lower and lower every couple thousand blocks.

Okay, so what is the big deal about trying to get below the hash?

Let’s consider this problem using a 6 digit number. (keep in mind that sha256 uses a 64 digit hexadecimal number – much bigger).

So we all agree that a hash is nothing more than creating a random number. Sure it looks funny in hexadecimal, but it can be converted to a base 10 number we all understand.

So, when I pass anything into my imaginary 6 digit hashing function, I can expect 1 million results, (if I only consider positive numbers) – 000,000 to 999,999

Now, let’s set a target for our hash. Let’s say that in order for a hash to be under the target, it must have a first digit of 0. I know what you are thinking – big deal!  Well, actually, it kind of is. We have just gone from 1 million possible hashes to 100,000.  We have effectively made 9 out of 10 available hashes invalid. We can now only accept 000,000 – 099,999. Now, let’s make the first 3 digits of our target 0.  So now we have gone from 1 million possible hashes to 1000. 1000/1,000,000 = .001. So every time you run a hashing function, you now have a 0.1% chance of getting a valid hash.

Now think about our 64 digit hexadecimal number. It has a maximum value of 18,446,744,073,709,551,615 when converted to base 10. So If I made a requirement for the first 6 digits to be 0, we are now looking at: 99,999,999,999,999/18,446,744,073,709,551,615

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Every time you run your hashing function, you have a 0.00054% chance of getting one below the target. So as you can see, in order to get a hash below the target, you will most likely have to use a brute force approach.

And that is what miners do. In fact the current difficultly related to finding a hash below the target in BitCoin has led to hundreds of thousands of nodes teaming up together to find a good hash in a brute force manner.

The way they find the hash is through the Nonce. You see, if you pass the word “dog” through my imaginary hash, you will get 123456. If you pass it to my hash 1 million times, you will get 123456 1 million times. So how it working in Blockchain, is we add the nonce to the hash, so dog+1 will give us 879602 and dog+2 will give us 258665. We will repeat this, enumerating the nonce until we get a good hash: dog+28549 gives us 000587. The nonce that gave us that hash 28549 – is called the golden nonce.

And in the world of BitCoin, once you have a golden nonce, you have your proof of work. You can now place your block on the chain.

It is called a proof of work, because other nodes on the blockchain  can very quickly verify your work. They just pass your block with your golden nonce and they will get a hash of 000587, which is below the target. When enough nodes have verified your proof of work ( a consensus), your block becomes locked into the chain, it can no longer be changed or removed.

Okay, so what about the reward BitCoin miners get? Well, built into the BitCoin algorithm, each block mined with worth an ever decreasing number of BitCoin. At the time of this writing, I believe a mined block is worth 12.5 BitCoins. On top of that, the miners also get transaction fees from the people wishing to buy something with BitCoin. In the example above, Bob might offer up .1 BitCoin as a transaction fee as encouragement for some miner to put their transaction into the Blockchain. Keep in mind, there is no bank here, no centralized entity. So the transaction fee is the fee you pay help encourage total strangers to use their time and electricity to verify and move your transaction into the blockchain.

I promise to create another lesson diving deeper into transaction fees, until then, I hope this offers up at basic understanding of how mining works.

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