Math and expenses of Cryptocurrency mining.
One of the biggest issues with ASIC hardware and the reason why there are so many controversies surrounding ASIC cards is the issue of centralization. One of the main ideas behind blockchain technology and blockchain networks is the idea of freedom, free will and decentralization.
Users are free to participate in transactions or not participate. Users are also in charge of deciding what fee they include or not include with a transaction, be it purely financial transactions on networks such as Bitcoin or contracts for storage on a network like Sia.
When it comes to ASIC cards, many users are afraid that because of the high price of an ASIC card, only very few miners will be able to afford the cards and this will lead to centralization of blockchain networks especially with small networks such as Sia.
This is not where the developers of Sia stand. They believe that GPU-based mining makes blockchain networks much more vulnerable to attacks compared to miners using ASIC cards. Because the Bitcoin network does have ASIC cards that work with the Bitcoin network, it can serve as an example of why the ASIC approach works.
The real breakthrough of the blockchain technology and the Bitcoin network was that they were able to solve the issue of double spending, or transaction finality. Before Bitcoin, software developers could not figure out how to prevent users on a digital financial network from sending funds to several recipients at the same time. This is not a problem with centralized currencies that have central banks in charge of issuing the currency and very strict regulations, monitoring and enforcement of what banks can and cannot do. This does become a problem on a purely digital network without a centralized authority where users are free to do whatever they want to and there is nothing preventing a user from trying to send the same funds to several users at the same time.
With Bitcoin, users feel confident buying Bitcoins and transacting in Bitcoins because all the transactions become a part of the Bitcoin blockchain and changing information about these transactions would require creation of an alternative history.
When miners on the Bitcoin network compile transactions into blocks of Bitcoin blockchain, they seal them with hashes that need to correspond to the level of difficulty of the network.
In practical terms this means that miners need to first compile transactions that are occurring on the network into a block of data, then add a number to this data and create a hash for this combination of data and the number. If the hash is less than the target hash, the miner wins the right to create the block and get a reward from the Bitcoin network. One of the properties of cryptography hashes is that hashes for even very similar sets of data are very different. This means that if someone were to change even one digit about one transaction on the Bitcoin blockchain, the hash for that block would be different from the existing hash. Then, this new block would not fit into the existing blockchain because blocks of the blockchain contain information about previous blocks. In turn, this means that if someone were to try and change the information about transactions on the Bitcoin network, they would need to create an alternate history.
As the Bitcoin network has been growing popular in the recent years, the difficulty of mining has been increasing, which means that target hashes on the network start with a lot of zeros. For example, the winning hash for the block #525078 is 00000000000000000008217cc388cb62c916003d876bda2523c4e30e5e381f88.
People feel confident about Bitcoin because they know that the only way they would lose money if someone were to create alternate history in which their transactions didn’t exist.
Because of the high level of difficulty, mining on the Bitcoin network is really expensive. The expense of mining includes buying the right hardware and paying for electricity. According to an article in the Guardian, in 2017 Bitcoin miners worldwide have burned more electricity than the entire country of Ireland.
These expenses are what connects digital currencies to the real world. Yes, digital money exists only on the computer and there is no central bank in charge of it, but if someone wants to obtain some cryptocurrency, they either have to buy it with fiat money, earn it, or mine it, which means that just like with regular money getting digital money means investing either a different form of currency, spending time doing to the work, or using hardware and electricity, which also cost money.
For these reasons, if someone were to try and change the history on a blockchain network, they would need to spend at least the same amount of work that the miners have spent already. With Bitcoin, creation of a block in 2017 costs tens of thousands of dollars. Miners are still willing to participate in the creation of the blocks on the Bitcoin network because for each block a miner creates the miner gets 12.5 bitcoins as a reward. At $7,000 per coin 12.5 bitcoins is $87,500, so even at tens of thousands of dollars per block miners do end up making money mining Bitcoins.
While obviously not every miner on the network, be it Bitcoin, Ethereum, Sia or any other network, wins the right to create a block every time (otherwise there wouldn’t be multiple miners competing for the right to win the right to create a block), the system is open, honest, truly random and transparent. It is similar to an honest lottery with a good chance of winning. In such a lottery, you know that if you play long enough, you will win. You can also do the math and figure out how much you need to spend and make sure that you stay profitable. This is exactly what happens on blockchain networks. Miners calculate the costs of equipment, equipment maintenance, including storage and cooling systems, and costs of electricity. This math is one of the reasons why you will typically see many miners in a specific country or area of the country – it is simply more economically sound to be there. Obviously, factors such as the economic development of countries also play a role. A country may have cheap electricity, but won’t have many miners because there is no good infrastructure to get the equipment there and to keep it there.
According to an article in Bitcoinist, as of March of 2018, Africa had the cheapest electricity, followed by North America, Middle East, Asia and Europe.