Bitcoin Mining in the Heart of South America

This week we learned that Paraguay is about to build the world’s largest bitcoin mining farm. Don’t expect to see big trucks, derricks and miners lamps, though. What you are going to see is state of the art buildings full of humming servers, computers and techies. Think big data centres.

What is Bitcoin Mining?

It is basically being paid a reward to solve a very complex puzzle. A bit like the princess having to guess Rumpelstiltskin’s name.  It’s like digging for gold, hence the analogy. The Bitcoin miner throws huge processing power at solving the hash value. This is in order to add a block of verified transactions to the blockchain. They call this the ‘proof of work’.

The catch is that the hash value is a 64-hexadecimal number, and they have to be the first miner to solve a complex mathematical problem.  So they need special hardware to do this, called Application-Specific Integrated Circuits (ASIC), which cost a fortune. This equipment consumes a lot of power so it’s not worth doing unless you can buy the hardware and run the equipment and still make a profit.

So Paraguay, which generates a massive amount of hydro-power, most of which they export, must believe that they can make more money mining for bitcoin than on-selling their power.

What is the Point of Bitcoin Mining?

Trucks of Gold Bitcoins illustrating bitcoin miningThe key is that the quest to solve the aforementioned puzzle is a building block in the very existence of the blockchain. Furthermore, Bitcoins are created as payment for doing so, making Bitcoin Mining potentially very profitable.

The point of the Blockchain is that a single person or entity cannot manipulate or control it.  Blockchain is decentralised, secure and unalterable. Its transactions leave no trace of who is behind them as privacy is also a pillar of cryptocurrency. The location of the transactions isn’t centralised, either.  Hashtags that allow blocks of transactions to be added to the blockchain are randomly generated. A miner who adds the block to the blockchain has randomly “guessed” the answer. Accordingly, verification of transactions is very decentralised and invulnerable to fraud.

How Hard is it to Solve the Puzzle?

With as many as 600,000 blockchain transactions occurring in a single day, verifying each of these transactions can be a lot of work for bitcoin miners. Miners are compensated with bitcoin whenever they add a new block of transactions to the blockchain. For each block that is mined, the amount of new bitcoin released is called the “block reward.”  They half the block reward every 210,000 blocks, or roughly every 4 years. In 2009, it was 50. In 2013, it was 25, at the time of writing it is 12.5, and sometime in the middle of 2020 it will halve to 6.25.

At this rate of halving, the total number of bitcoin in circulation will approach a limit of 21 million. This makes the currency more scarce and valuable over time but also more costly for miners to produce.

Querying Blockchain Data

Getting the data into the blockchain by Bitcoin Mining, however,  is only one part of the overall puzzle. Getting value from the data is another. The blockchain is not like a relational database. It is a very specific type of distributed database, with highly-specific features and limitations. The tools to easily query existing blockchains are largely still under development, and/or available only to hands-on developers (i.e. querying via APIs). For companies developing blockchain applications, they will most likely want to perform analytics on the transactions as they would for any other mission-critical system.

As the Blockchain is continuously adding transactions,  it is huge in size.  Companies wanting to analyse the blockchain are having to store a local copy of it, with all the storage and CPU costs associated with that. There are very few companies providing the ability to query the Blockchain in real time on their servers. This is where Causality comes to the rescue with their Block Xplorer product, which is about to be launched commercially.

Block Xplorer to the Rescue

Causality has developed Block Xplorer to support applications and businesses doing blockchain data analytics which need to access data in near real-time. As a highly performant, robust explorer it provides easy, reliable, scalable and enhanced access to blockchain data.

So if you want to take time out to explore the fruits of your Bitcoin mining, the Block Xplorer is a good place to start.

Also published on Medium.