Pirates of the Internet Age: Part I. What is cryptomining?

What is mining

Nowadays probably each of the Internet users can take part in cryptocurrencies mining. Sometimes we do it without even knowing about it. In this case, cryptocurrencies do not go to income at all. What is mining, and what is stealth mining (or cryptojacking) and how to avoid it? In Part I of our article we tell about cryptomining in simple words.

Cryptocurrency is the new black (in tech)

Cryptocurrency is a trend-setting technology over the last decade. It quietly entered our life and firmly settled in. The words “[crypto]mining”, “mining farms”, “Bitcoin”, “ASIK”, “Blockchain”, “token”, “crypto wallet”, “cryptocurrency exchange”, “transactions” confidently took their place in the lexicon of any language, conquering the information space. A new type of money and a relatively easy way to earn it quickly transformed from a geeks’ feature into a global hype.

While certified economists and financiers tried to determine the economic value of cryptocurrencies, adventurers and risk-takers leap at the chance and dug into mining. Many of them succeeded. But others, who entered this market later, faced more challenging conditions for earning and were forced to devise ways to make it easier. Someone focused on improving the equipment; someone came up with an alternative cryptocurrency — the fresher the project, the easier the extraction and higher earnings. But someone preferred to look for a way to profit from other people’s resources as buccaneers did.

Distributed computing let the cryptocurrency genie out of the bottle, and new cryptocurrencies appear almost every day. The cryptocurrency exchange as a phenomenon has become no less popular than the stock and precious metals exchange. Now in the world, there are more than 4000 cryptocurrencies; the majority, however, are considered as junk, shitcoins, with the value that is calculated in billions of fractions of the Bitcoin value. But a non-zero probability of suddenly boosting and pick the top by one of them always exists. It all depends on demand.

Cryptomining is a quite profitable business for some people, but at the same time is a huge headache for others. Moreover, the head does not hurt because of the lack of video cards for sale. But for what reason? And how does mining work, what's its point? We'll go into the matter.

What is cryptomining — in simple words

Cryptomining is the embodiment of humanity's eternal dream of how to make money without doing anything. More precisely, not money, but cryptocurrency: a conditional settlement system, not provided with a material base, based on distributed computing using cryptography functions.

The principle of cryptocurrencies is based on a fundamentally different value concept of money that is familiar to us. Quite often, cryptocurrencies are mistakenly called electronic money (which have a material equivalent), although the virtual nature of cryptocurrencies is more correctly described by the term “digital money”. In the Journal of Systems Integration in January 2018, the Czech economist Jan Lansky described the difference between these terms and formulated six criteria to define cryptocurrency:

  • decentralization: the system is not controlled from the center and is supported by distributed consensus, based on p2p architecture;
  • control of system participants: the system keeps track of all cryptocurrency units and their owners;
  • creation of new coins and its conditions: the system determines the possibility of creating new cryptocurrency units; if there is an opportunity, the system determines the conditions for their creation and the way to determine their owners;
  • unique ownership: ownership of cryptocurrency units is proved exclusively by cryptographic means;
  • secure transfer of funds: the system allows transactions to change ownership of cryptocurrency units; Only a person whose ownership of these cryptocurrency units has been proven can carry out such a transaction;
  • impossibility of ownership duplication: if two requests for a transaction are made simultaneously to different users of the same cryptographic units, the system will execute only one of them.

In other words, cryptocurrency is digital money that exists in the virtual space, maintains conditional anonymity of the owners, provides security through the Proof-of-Stake (PoS) and Proof-of-Work (PoW) consensus algorithms, is generated and controlled decentralized due to computer equipment capacities of Internet users. The cryptocurrency creating process is called mining, and is a continuous calculation of the values ​​of cryptographically encrypted information blocks in the Blockchain. These calculations are aimed at finding specific numerical data that will close the block, a hash or hash sums. Each of cryptocurrencies uses its own encryption algorithm, which miners decrypt: Scrypt, CryptoNight, DaggerHashimoto, SHA256 and others.

The fee for a successful search for a hash amount is one coin or a part of it. It seems to be nothing complicated, especially since the processor is engaged in these calculations in the background, and human participation is not required. All you need are a powerful computer, the processor with good performance, the stable Internet connection and electricity. Simply, the essence of mining is to provide your computer capabilities for network computing data using specific algorithms and get a reward for this.

In fact, Blockchain works thanks to cryptominers, so cryptocurrency fees are paid to mining process participants for their presence ensures the Blockchain system existence and stability.

Cryptomining equipment evolution

In 2009 some mystic person (or persons) hidden by the pseudonym Satoshi Nakamoto completed the protocol development and shared on the Internet the open code of the new payment system based on distributed computing. This way Bitcoin (BTC), the first cryptocurrency based on the SHA256 encryption algorithm, was launched. It had no competition for a long time. However, the specificity of the Bitcoin algorithm is such that the mining of each subsequent coin becomes more complicated, respectively, requires more power. Therefore, the cryptomining equipment began to evolve to more complex forms. At the same time, new types of cryptocurrencies were created — Litecoin (LTC), Ethereum (ETH), Namecoin with many other BTC, ETH and LTC forks, etc. They differ in hashing algorithms, but the principle of mining is the same — the sooner you get involved, the higher the fee, so, the faster you will pay off and begin to make a profit.

At the very beginning of the cryptocurrency mining project, an ordinary PC was enough to effective cryptomining without any frills. But after a year and a half, bitcoin mining required the power of several processors to compensate for equipment costs in a couple of weeks of mining and get a plus. Once, a brilliant idea flashed into somebody’s mind — to use graphics processors in a video card for mining in SLI or Crossfire mode. Then someone else thought of combining several video cards on one platform — such way GPU mining farms appeared. What are mining farms for? Let's explain in simple words — the larger the farm, the higher the profitability of mining. Use one processor for mining bitcoin is long, less profitable, and less efficient in comparison with the same operation performed by at least three to five processors (CPUs or GPUs) at the same time. But if the number of GPUs comes to dozens, mining efficiency is extremely higher. At the same time, costs are also growing significantly: farm power and cooling processors consume a lot of electricity, and the investment in the purchase of the equipment itself is also quite large.

Farm Mining Example
Typical personal mining farm. Source: YouTube video

In some more time, the application-specific integrated circuit (aka ASIC), used in phones, MP3 players, navigation devices, Wi-Fi and Bluetooth devices, was developed specifically for mining. ASIC chips advantage for mining over universal CPUs and GPUs lies precisely in a narrow specialization — ASIC can be used only for one task, its power should not be dispersed to many tasks. Therefore, ASICs are much smaller and more economical in electricity consumption. Thus, the hashrate (i.e.,  the measure of miner's performance) is higher, and hence more profit. That is the reason why ASICs cryptominers fly off the shelf. For example, presented on June 18, 2019, cheap China-made ASIC Antminer S9 Special Edition, performed the hashrate of 16 TH/s (1 trillion hashes per second) and the energy efficiency of 80 J/TH, was sold out in a few hours. It is understandable: an ASIC with such parameters costs much less than a mining farm, and productivity gives much more. Besides, his cooling system has been strengthened, and energy costs are lower, so do not be surprised that ASICs are so trendy.

All this causes righteous indignation among farm owners and single miners because the profitability of their mining method is rapidly falling. The natural consequence was the formation of mining pools — cryptominers associations, both “solo” and “farmers”. The pool equipment capacities consolidation allows you to quickly achieve the Blockchain calculations result, therefore, accelerate the receipt of the fee, which is shared between all participants in the pool in accordance with the capacities provided by them. In general, various pools have many more additional services. One of the most interesting is coin hopping — switching between cryptocurrencies. When the pool determines the most favorable conditions for mining, probably, LTC, it involves pool participants to this process; when Dogecoin has a higher rate, the pool mines it; if right now it is more profitable to get Monero — the pool switches to it; and so on, depending on the current situation. Also, a cryptocurrency exchange can be integrated into the pool; or you can bind to a crypto wallet a credit or debit card, to withdraw funds mined; and add other functions useful to the pool participants. So, the modern mining pool can rightfully be called the heir of the medieval guild handicraft.

Cloud mining and VDS mining

Specific area — cloud mining and VDS mining, both are based on using virtual capacities for cryptomining. So many offers on the Internet targeted to the audience who considers classical mining is too expensive but want money very much. The offer is — you give us a bit of commission and rents for resources, we provide you with cloud resources for mining, you get a fee. No headache, no costs for equipment and electricity, almost pure profit in cryptocurrency coins.

BTW, some users still sure that cloud and virtual dedicated server are the same things. But they are mistaken. Read, please, our article VPS or a Cloud – a matter to know why do they do.

You can just rent a virtual server deployed on provider’s equipment and install there your software for cryptomining. Or you can rent capacities and special software directly in the remote datacenter. Anyway, the play is the same — you connect to the cryptomining system via the cloud and both get a fee for its stability while earning a fee for closing the cryptoblock in the Blockchain. This kind of a mining model is also attracted by its low entry threshold, compared to classic mining: instead of thousands of dollars for equipment purchasing, you pay cloud-mining provider a couple of tens (or even less) dollars for rent and commissions. You spend your time as you used to, without much labor and investment, but you earn income, and can even gamble on cryptocurrency exchanges. It seems to be looking good.

So, what’s the catch? It’s too risky. First, cloud mining and VDS mining have a lack of transparency. You don’t know all the important details. You don’t know exactly how much you actually earn — cryptomining takes place without your participation, you don’t control the process. You don’t know if the company you trusted really mines for you — and doesn’t scam you forwarding your money to a ponzi. Secondly, even if everything is not so scary, and mining works in your favor, you are completely unaware of how much you really mined. A cloud mining provider may well conceal part of the profit from you without risking being caught - you don’t even know about it, because the calculator on the site where you select the mining conditions for yourself contains deviations from real numbers. Third, cloud mining providers often use hidden charges but “forget” mention them in the tariffs when concluding the contract. Or those commissions noticed in the contract, or GTC but hidden so deep that you don’t know how much you owe the cloud mining provider until you get a bill.

One more aspect – virtual servers are often mistakenly called clouds. And this is to the advantage of not too decent providers. Taking money from you for cloud mining, the provider actually runs its software on VDS, a virtual server, raised on a standard bare-metal server. VPS is cheaper than the cloud, and unscrupulous cloud mining providers use it. As a rule, the physical server allows to deploy are several virtual machines. If cloud mining is based on one of them, it applies the physical resource of the bare-metal server, depriving it of a certain share of other clients. It's not good, just like in the case when for cloud mining, a company rents resources in a public cloud. Such actions do not always violate the law, but moral standards and conditions of an agreement with a bona fide cloud provider — always do.

In Part II of our article we’ll disclosure the stealth mining (aka cryptojacking) theme, and tell how to fight against it. To be continued…

Аuthor: Alisa Kandieieva

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