Understanding Crypto Tokens and Cryptocurrency Mining

Barely a decade has passed since the launch of the most popular cryptocurrency, Bitcoin, which has achieved milestones after milestones. However, Bitcoin is not the only cryptocurrency. The cryptocurrency market has over a thousand cryptocurrencies in operation, and more are launching every single day. Furthermore, the market is evolving at a fast pace introducing new ways of doing things using the blockchain technology. And this brings us to tokens; introduced in 2014, seven years after the birth of cryptocurrencies.

What are Crypto Tokens?

Tokens offer a different way to come up with the design of open networks and are an innovation from the main cryptocurrencies. Introduction of Ethereum in 2014 popularized cryptocurrencies. With crypto tokens, came a new way of crowdfunding called Initial Coin Offering (ICO). The majority of tokens are built on Ethereum blockchain. Ethereum employs the use of smart contracts. Smart contracts are referred to as a set of directions and instructions given in programming languages and are well capable of interacting with the blockchain technology. The contracts are created in such a way that they can perform certain ‘things,’ for example, store and transfer value from one address to another, perform delay or time actions as well as to be able to require several characters from different parties to confirm specific transactions.

It is crucial to realize that tokens are indeed smart contracts. However, not all smart contracts are tokens. In other words, tokens should be transferable from one address to another according to the ERC20 token requirement standards. In addition to that, the balance of tokens for certain addresses should be easily checked.  Initial Coin Offering is a means of raising capital to create tokens and was highly popularized in 2017. ICO startups raised over $5 billion in 2017, and the trend is expected to continue in 2018. Most ICOs offer tokens in exchange for investment into the company from investors.

How Crypto tokens work?

Most tokens represent a value that is tradable (a good). The good can be anything from coins, certificates and voting rights among other things. It is correct to say that, a crypto token can be used to symbolize a share in a company or even sometimes indicate the number of voting rights in a company board for example. In crowd-sales, tokens are used to raise capital by selling crypto assets and crypto equity. Some tokens are developed to be able to trade on cryptocurrency exchanges. The exchanges allow users to buy and sell tokens after the end of the ICO period. Besides, demand and supply in the market help to increase the value of the tokens.

Cryptocurrency Mining

Mining cryptocurrency is essential to ensure that there is enough supply of the coins in the market. However, mining is not as literal and does not require digging holes into the ground the way gold and other valuable metals are mined. There are no centralized institutions like the central banks to issue cryptocurrency coins and notes. Bitcoin, Litecoin, and other altcoins require the process of mining to meet the demand. But before we dig deep into cryptocurrency mining it is critical to understand that cryptocurrencies are built on the blockchain. The blockchain refers to a decentralized record or to be precise a public ledger associated with a particular cryptocurrency’s transactions.

The transactions are gathered into what is popularly known as ‘blocks’ which require authenticating or verifying by miners. The miners go further to make sure that the coin has not been spent elsewhere before that transaction is cleared and the next transaction is linked to the previous one, forming a blockchain. However, mining is made of two functions; adding transactions to a blockchain as well as introducing new coins or currency. A proof-of-work (PoW) is required from every miner.

How does mining work?

Cryptocurrency mining involves the use of computers (rigs) running a unique program that is used by miners to solve complex mathematical equations. The miner who finds the solution to the equation first is rewarded with the coin. That is the reason why miners require powerful specialized computers referred to as rigs. High energy consumption and the need to increase the processing power of computers result in high cost of cryptocurrency mining. In most cases, miners solve the blocks containing the transaction data with the use cryptographic hash functions. Different cryptocurrencies offer different rewards to miners solving transaction blocks. Currently, Bitcoin rewards 12.5 Bitcoins for every transaction block authenticated. The level of mining difficulty increases as the blocks of transactions are solved. This ensures that the hashes are scaling up to ensure that the number of coins mined remains steady.

Most cryptocurrencies have a finite, defined number of coins that will ever be mined. For Bitcoin, it is 21 million, and Ethereum has a mining cap of 60 million; however, 12 million of these coins had already been mined before the launch. Cryptocurrency mining is a lucrative business. Entrepreneurs invest vast sums of money in developing mining warehouses and hardware. Current innovations have people forming mining pools to combine resources and increase the mining rewards.

Cryptocurrency mining requirements

Cryptocurrencies can be mined using a computer’s processing unit (CPU). However, do not expect a lot using a simple PC. Regular computers cannot withstand continued mining for a long time and usually break down often. The need for efficient mining equipment has led to the development of specialized hardware useful for mining coins. Some of the equipment range from a moderately-powered processor, to a top of the range GPU. While some even incorporate many GPUs working together. Consequently, some of the latest mining equipment consist specially designed chips for mining.

Conclusion

Cryptocurrency tokens are a store of value and can be bought using other digital currencies such as Ethereum and Bitcoin. Mining, on the other hand, is another lucrative way to invest in the digital assets. It is essential to research before signing up with cryptocurrency mining companies. Some of the world’s largest cryptocurrency mining is done in China.

By Eric Weisman

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