How Does Blockchain Mining Work? An Overview

The blockchain is a string of blocks. Hundreds of individual transactions are stored in these blocks. This means that a blockchain is a long chain of blocks, each of which contains transactions. However, such a block cannot be generated simply as one knows it from IT, i.e. “File -> New” and, bang, one has e.g. a new Word document. To generate a new block, the miners have to solve a cryptographic puzzle. They have to guess a certain result, which can only be determined by pure trial and error. Miners insert an arbitrary number into a given hash function, hoping to come across the requested result. If this is not the case, they simply choose another random number. In the process, the miners try out countless numbers according to the try & error principle.

The miner who is the first to solve this puzzle receives a reward. In the Bitcoin blockchain, it is currently 6.25 Bitcoin. In addition, he receives all transaction fees of the transactions deposited in the block. Due to this high reward, all miners have the great incentive to be the first to generate the block. Because there is a big reward waiting for the node in the network that generates the block.

Keep going despite frequent defeats

In the prospect of the big reward, a large number of miner nodes are in constant competition. However, of these thousands and thousands of miners, only one can ever receive the reward for generating a block. All miners invest a great deal of computational effort, only to see another node collect the reward in the vast majority of cases. Someone was faster. All that effort was for free. Not free at all, because the power costs quite a bit. But it was in vain.

We can apply this scenario to all areas of our lives. We invest time and money and put a lot of energy into a project, a plan or an idea. And at the end we realize: It was useless. All the effort was for nothing. No results were achieved and the return on investment is zero. In such a situation, most of us think of giving up. “There’s no point in all this. I have tried to quit smoking 17 times now. It will never work again. Or: “I’ve already tried the third business idea. Somehow nothing works for me. I’m going to give it up and sit in front of the TV again, as I have done all my life. And so we resign ourselves. We have no hope of achieving anything in life.

But what about the miners? At some point, the big moment will come! At some point, the time comes: yes, after the countless moments of defeat where someone else has reaped the rewards, you are the one. Yeeeahh, your own miner node was the first to solve the cryptographic puzzle! The other nodes quickly confirm the correctness and now, yes, you are richer by 6.25 Bitcoin + all transaction fees!

What do we learn from this analogy to blocker creation? If we keep at it long enough and focus all energy on our goal, we will eventually achieve it. I love this idea: In physics, energy and matter are closely related. This means matter is bundled energy. If we now bundle energy long enough, this materializes. For us this means, if we put energy intensively into our project, it will sooner or later lead to success. So are the laws of the physics!

Team – Together Everyone Achieves More

Let me draw another thought from the mining process. It takes a very, very long time for a single node to be in the fortunate position of being the first to generate a block. This can lead to major financial challenges for the miner. Because if he doesn’t collect a reward for the first few years, he still has to pay the electricity costs and maintain the hardware.

In order for an individual miner to still have a regular cash flow and generate a steady income, the vast majority of nodes join together in so-called pools. These are associations of miner nodes. In these pools, a node may not keep the reward if it generates a block. The reward is divided proportionally among all members of this pool. Conversely, the node also always receives shares of the reward that are actually due to other miner nodes. This ensures that all nodes have regular income and are not financially struggling.

Transferred to “real life”, it can take a very long time to generate a result as a lone fighter. There is also the danger that you are too slow in the dynamic market and that others overtake you. Here I would like to point out the enormous synergy effects that are created by good teams. If each individual puts in his effort, it often leads to faster results. I’m thinking right now about the development of an app. As a single developer, it takes much longer than when a project team develops the app together. Then everyone has to take responsibility for their own part of the project. Of course, the profits from the app are then divided among all team members. As a lone warrior, you can enjoy them completely yourself. But due to the faster success and often higher results in the team, the return on investment is also faster and often higher.

With this statement I don’t want to offend solopreneurs at all. Because when you get right down to it, they are often not lone fighters either. They hire other freelancers for individual tasks and outsource many areas of their business. They then concentrate on their core business. Of course, this approach also promises success. What I want to say is that cooperation with other people is much more promising than going it completely alone. So, use the potential of synergy effects.

Let me summarize the two core ideas of this post:

• Focus your energy on one goal long enough, and you will achieve it
• Use synergy effects that result from teamwork

Dennis Streichert is an IT consultant and blogger. His german blockchain blog aims to share deep and broad knowledge about blockchain. This is an absolutely fascinating technology. It’s a fascinating technology that will shape our future immensely.