Crypto Mining, Proof of Work, Blockchain Network Security

This text describes how the so-called mining of digital currencies works. You will learn what a blockchain is used for in this context, how it works and why, with increasing computing power and an increasing number of network participants, the network and thus the transactions it contains are becoming more and more secure.

Cryptocurrencies have a built-in, by design, security principle based on the decentralised data technology of the blockchain.

The security of the entire network formed by a large number of computers – and thus the security of the transactions it contains – increases with the number of network participants and with the computing power needed to verify the transactions. How does this come about?

Let’s first look at some basic properties of the system of a cryptocurrency

  • The number of currency units that can be calculated on average per day is defined in the software.
  • The software (protocol) also specifies how many currency units of a cryptocurrency there are. This makes it a finite commodity – just like gold, which becomes more valuable the more people are interested in it.

The mechanisms explained below generally apply to cryptocurrencies. Around the world and around the clock, people process payments via blockchain networks. In the process, all transactions of a certain period are collected by the participants of the network and combined in a list – a new data block is created within this blockchain.

The prominent role of blockchain technology

Blockchain technology is the technological basis for securing transactions and the resulting mining of new coins. First and foremost, it ensures that transactions cannot be manipulated.

This is achieved by chaining data blocks together in a fixed order that cannot be resolved. From the point of view of the miner (a network participant who provides computing power), this means that its “raw material” is the transactions from which it attempts to assemble a data package (block) and successfully chain it together.

In order to be able to accomplish this task, however, the miner must adhere to very specific rules – to rules and parameters that the respective cryptocurrency sets for its blockchain network.

This process can be pictured like a puzzle: The miner tries to put the picture together by fitting the pieces of the puzzle together. In doing so, he must not mix up any pieces of the puzzle; the network would not allow this.

In this way, the blockchain is created and grows – a long list of all irrevocably chained blocks that contain all transactions that have taken place so far. This account book (ledger) is now used to be able to trace all transactions ever made at any time.

Every network participant can carry out this check. This means that the blockchain can be viewed by every network participant. Every user can therefore see which transactions have been carried out. What is not visible is who carries out this transaction. Thus, the cryptocurrency is transparent and at the same time pseudo-anonymous.

The deal: Coin against hash

The task of the miners (or prospectors) is now to verify (confirm) transactions and enter them into the ledger. This is done when a so-called hash has been calculated that successfully connects the new data block to the existing blockchain as another link in the data chain.

But what exactly is a hash? Let’s take a closer look at the encrypted joining of data blocks. Once a block of transactions has been generated, the miners run this block through a certain process. They use the available information and, with the help of a mathematical formula, convert the transaction into something much shorter – a string of letters and numbers. This is also called a hash. The hash formed in this way is stored in the block at the end of the blockchain.

Hashes have some interesting properties

  • It is quite easy to create a hash from the information in the data block, but it is not possible to trace back what the hash was before.
  • In addition, each hash is unique: if even one character in the block is changed, the entire hash changes.
  • To generate a hash, the miners use not only the transaction data in the block, but also additional data. Part of the data is the hash in the previously linked data block of the blockchain.
  • Since each hash of a block uses the hash of the previous block, a kind of seal is created. This confirms that the current block and the block before it are valid.

If someone tried to manipulate a transaction by changing a block, they would also automatically change the hash. If someone then checked the authenticity of the block with the hashing function, they would immediately find that the hash did not match the one in the blockchain. The block would immediately be exposed as a forgery.

Mining is primarily used to verify transactions. New coins are mined “on the side”.

The purpose of mining is not to create new coins (this is more of a side effect), but to verify transactions. It is about making sure that all participants abide by the rules of the network and that no manipulation takes place.

Payment for provided computing power is made in coins, the units of the cryptocurrency

Mining is carried out by computers. The provision of the necessary computing power is remunerated with new coins. To ensure this, each data block contains a so-called Coinbase transaction in addition to the transactions.

This transaction contains coins that the miners can pay out to themselves – as a reward for their work or computing power. So if the miner manages to append another data packet to the existing blockchain, he is paid accordingly for his work performance (the transaction fee).

The individual miners are in competition with each other. Figuratively speaking, they are in a race to find the right piece of the puzzle by trying to find the right piece in a huge mountain of puzzle pieces. Whoever finds the puzzle piece first gets to add it, i.e. can add the block to the blockchain and receives his reward for doing so.

The more participants, the higher the computer performance. And the higher the security.

Since individual miners cannot search fast enough to have a real chance of success due to the increasing computing power required, they join together to form a pool. If they are successful, they share the payout fees and the Coinbase transactions (i.e. new coins) in proportion to the computing power they contribute.

One might think that with an increasing number of participants in a network, the blocks can be joined together more quickly. On the other hand, with an increasing number of participants (nodes, i.e. networked computers), the difficulty of solving the calculation task increases. To put it in a nutshell: With each new participant, the number of puzzle pieces that have to be searched increases.

However, the more participants there are, the more secure the network becomes. The aim is to generate blocks in a defined time interval, which is also mathematically proven. In order to guarantee this network performance, the effort is constantly increasing.

Proof of Work – jigsaw puzzles for safety

The consensus mechanism used to validate and generate new blocks on a blockchain is called “proof of work” – as explained, the participants are given a complex task that they have to solve using their hardware. These computing processes are expensive. The hardware is also very complex and limited. The regularities of this process lead to a constant increase in the security of the network.

  • The more the network is used, the more transaction fees are incurred. This also increases the incentive for attackers to attack the network.
  • The increasing incentive also allows miners to make higher profits if they succeed in chaining a block, as there is always the same amount of coins in the block, but their value has then increased.
  • This also increases the incentive to make the network more and more secure. The more expensive the cryptocurrency becomes and the more transactions take place on the network, the more secure it also becomes.