What Value does mining provide?
After reading the O'Reilly book and perusing online resources, I'm still confused about the value that the actual mathematical mining provides to Network (I understand it does provide value, but not clear how). It seems like once a miner has verified transactions, the really valuable work for the network has been done. And when it starts hashing to win a competition for 25 btc, it's just playing a game that has the sole purpose of adding currency to the network (which I understand is important, no central govt. etc). I don't see how this hashing to find a value less than the difficulty actually provides a real service to the network such as verifying transactions. Before I jumped into learning about bitcoin, I just assumed the math problems the miners were solving related to detangling or decrypting transactions, but I see now that's not the case. If the competition was a race to verify transactions, that too would make more sense. Can anyone explain the value of this mathematical race?
As you mentioned, bringing coins into the network is one of the main purposes of mining. But this reward is just an incentive to do the other more important part of mining: ‘processing’ transactions.
As detailed here, when a block has been solved, not a single bit can be changed without invalidating it.
This means that all of the transactions in the block have been processed, and are ‘final’ in the sense that they are in the blockchain and will not change (assuming that block is a part of the best/longest blockchain). Imagine how bad it would be if you could change the transaction ledger to mark someone no longer being paid, or not being paid the amount that you said you paid them.
Requiring billions of mathematical steps to be taken to solve a block means that it is very hard to accomplish. Honest miners that mine on the tip of the blockchain get rewarded for this in the form of bitcoins. But attackers who try to go back in history and replace old blocks with new blocks are at a disadvantage because doing so requires an enormous amount of hash power.
While the attacker was going back and trying to re-mine old blocks, the rest of the network continued mining on the tip of the blockchain, making it even harder for the attacker to catch up. Hence, for someone to create blocks faster than the rest of the network they have to be in control of >50% of the network hash power. This would take millions of dollars, currently.
This is the beauty of Satoshi’s dream. And unless you can see it completely and holistically you really can’t see it at all. Mining is to the value of Bitcoin as mothers are to the human race. Bitcoin is worth what it’s worth because of 9 years of collecting massive computing power. If that computing power was directed towards another crypto coin tomorrow, the value of Bitcoin would be drained into that new currency as investors left. That’s why you get compensated with equal amounts of coin when there’s a fork. Who would stay with a coin that could not make transactions? Mining “is” the worth of the currency because it makes the network or currency possible. But on the other hand, when you get right down to it, mining new coins into existence is inflationary but to a diminishing degree with time. But in the case of Bitcoin it is far outweighed by investor’s thirst for this store of assets.
I may be wrong but i think all the mining does is advertisement. That’s why you see many well known cryptocurrencies drop mining profitability after a while when they get momentum. All the advanced securing, finding coins or making transactions in mining an other mambo jambo technical terms that no one really understands is nonsense – way more efficient ways could exist to do the same. A cryptocurrency is very often willing to pay a hefty price to miners in hopes to get as much media coverage as possible. This attracts investors. The rewards for mining gives a false impression about it’s value and it actually drives the price of cryptocurrency down, because many miners will convert it to money instead of keeping it – this are people that get money from the cryptocurrency’s value without investing actual money in it. On other hand having investors fooled that mining is useful for the cryptocurency gives a strong impression that it’s value in the future is secure and stable.
If anyone let’s say had 50 billions right now and wanted to create a new cryptocurrency and gave 2x-3x rewards for mining compared to other cryptocurrencies, first – all the miners would leave other cryptocurencies and it would arguably become #1 cryptocurrency shortly after because of the media coverage and investors, not because mining actually does anything to it’s value.
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