If you’re not asking the question, you haven’t given blockchain technology enough thought for the long term. Part of the cryptocurrency basics is knowing the “product” – and the health of a product largely depends on how it is being maintained and/or on the protocols devised to automate its maintenance.
In the case of crypto, it all starts with the blockchain.
Cryptocurrency basics: The blockchain
Its principles are simple enough. There is a network of computers (called nodes) of equal status. They all compete to record transactions and solve a mathematical problem consisting of finding a very large number of set length. This problem can only be solved by a computer, not a person, and all computers of equal CPU (or GPU, rather, or ASIC, if you want to get into that) stand equal chances of finding the solution. The more CPU/GPU, the more chances of arriving at the solution. Once it’s found, it goes, together with the transactions, into a block of data. Also, very importantly, each block of data must needs include a timestamp and a hash of the previous block.
Once the transactions are recorded and the mathematical problem is solved, the successful node broadcasts the solution to the network, which checks the solution, the transactions, the timestamps and hash of previous block. To signal its acceptance of the block, the network simply hashes it into the next block. For the Bitcoin blockchain, each new block takes about 10 minutes to create. For Litecoin, the execution takes about 2.5 minutes, and Ethereum takes about 15 seconds to add a new block. (It falls way beyond the realm of cryptocurrency basics, but there is an ongoing discussion about block sizes and blockchain transaction speed.)
How can the network stick to the ten minutes and not vary widely? Well, in the case of bitcoin, by the instructions initially set in the blockchain, the difficulty of mining a new block is adjusted every 2016 blocks so that there is always a 10-minute execution time for the creation of a new block. The same principle, with variations, applies to all blockchains: there is no central authority dictating, verifying or monitoring transactions; the rules were set in place at the beginning, and the network maintains itself by ensuring that blocks are continuously mined.
How the rewards system works
Why do people mine these blocks? For a reward, of course. Mining requires computer power and electricity, so, depending on where you live, it doesn’t come cheap. The reward for participating in the blockchain is the cryptocurrency which that blockchain promotes. The principles are pretty much the same across all crypto blockchains, and they are derived from the mother of all crypto: Bitcoin.
When he devised the initial blockchain, Satoshi Nakamoto also created the protocol for block creation and rewards. Not necessarily as part of cryptocurrency basics, you can skip this – although it is fascinating that the mysterious Nakamoto was so economically and psychologically sound. His basic insight was: People don’t do something for nothing. In the case of crypto, mining is rewarded with blockchain coins. Right now, there is a set store of 21,000,000 that can ever be mined. The reward for one block started at 50 bitcoins. Every 210,000 blocks, the reward halves. At a rate of 10 minutes per blockchain, i.e. 144 blocks per day, there is an estimated four-year span between halvenings. This is an approximation, as the first halvening (from 50 to 25 bitcoins per block) occurred in November 2012, and the second one was in July 2016. We’re sitting at 12.5 bitcoins now, and we’ve got until May 2020 for the next halvening.
At the moment, there are well over 17,000,000 bitcoins in circulation. While the 10-minute block execution time won’t change, the reward will continue to halve on. The expectation of to the community is that, as the reward per block decreases, the price of bitcoin rises, which will preserve some sort of balance and keep the miners interested in mining on.
However, another source of income for miners is the transaction fees that will keep accumulating. While they are infinitesimal compared to banking fees, they are significant enough in the long run to compensate for the decreased bitcoin reward.
The same system pretty much applies across all blockchains supporting cryptocurrencies, of course.
What if miners lose interest in mining?
It is almost impossible to anticipate such a massive abandonment. While there are bitcoins to be mined, and rewards to be gained, chances are that the community will retain interest. Even if everyone were to be de-incentivized by low crypto mining returns, there would still be transaction fees to be collected.
Crypto beginners learn in Cryptocurrency Basics 101 that cryptocurrencies have to make economic sense. Not in the sense that you can buy coffee with them, but in the sense that they need to “do” something for the user. If that is the case, the coin will retain value and miners will retain interest in mining.
On the other hand, there is another direction in which mining could go. Even as we speak, the rewards system and the need to offset heavy mining expenses has led to the creation of mining farms. These are, in fact, nothing more than stacked GPU or ASIC units connected to the blockchain, that do nothing but mine. No individual miner at home can compete with them.
What if there is a 51% attack?
Speaking of cryptocurrency basics, another issue crypto noobs would do better to acquaint themselves with is that, however secure this innovative technology is, there are still hacking risks associated to the blockchain. The fear some have expressed, then, is this: would it not be possible for such an enterprise as these mining farms, or for a number of enterprises operating jointly, to use their resources to launch a 51% attack? If 51% of the nodes are working together, they could conceivably make a grab for the resources available on the blockchain, alter blocks, modify or reverse transactions etc.
This is absolutely possible, especially of proof-of-work blockchains, where only computer power and electricity are needed. In practice, there is little incentive for such a large-scale operation. First of all, the resources needed in computing power and electricity would be truly gigantic. Secondly, it would de-incentivize participation and therefore mean that, in the long run, there is little reason for anyone to stay on the platform and little to grab. Thirdly, even a 51% attack doesn’t allow the attacker to do just anything; it could, however, allow for the last few blocks to be deleted or overwritten, permitting double and triple spending at will.
These attacks do happen, nevertheless, and increasingly so in the past few months. Ironically, they could be made easier by renting hashing power from a blockchain company. To understand the risks, there is, in fact, a way of computing the cost of a 51% attack for most important currencies. As you can imagine, it is considerably easier to attack smaller coins, because they have fewer miners, and therefore fewer nodes would need to be controlled to get the 51% together.
What’s the solution?
Other than all the nodes working to operate transactions and keeping the system going, there are also actual programmers working to check the code of Bitcoin as it sits in the open-source repository on GitHub. Most of them have been active in the community for years. Funding for these maintainers comes partly from MIT, partly from independent donations, but is mostly a labor of love. These programmers are definitely one part of the solution.
The other part of the solution is more knowledge of cryptocurrency basics, more crypto ownership, and more participation in crypto blockchains. Maintenance on the blockchain is, in fact, community work. The more miners are out there, be they enterprises, mining farms or individuals, the smaller the chance of a power grab. Since the system is decentralized by principle and structure, there is very little else that can be safely done other than programmers and developers improving the network to prevent such attacks and monitoring the health of the blockchain.