By Ron Frazier

About Me

About This Article

What Is Bitcoin or Litecoin Mining?

Why Is This So Hard?

Limited Money Supply

But How Can They Do That?

So, If Everyone Mines, The Money Supply Explodes ... NOT

It's FAR Worse Than You Think

The Invasion of the ASICs

Third Stage of ASIC's ... Say What? And, What in the World is a Nanometer?

An integrated circuit is composed of a large number of layers, each containing potentially millions of lines and elements. They are created optically, using

. When the optical patterns are embedded into the integrated circuit material, they create circuits, which can ultimately be used for computations.

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Hello, my name is Ron Frazier. I have a broad background in using and working on technology and working with the internet. I have a particular interest in cryptocurrency. You can find out more about me by clicking on my picture below.[caption id="attachment_1018" align="alignright" width="375"]Image credit: Flickr [/caption] In this article, I will examine the state of Bitcoin and Litecoin mining for individuals using actual examples of my own GPU mining and theoretical examples of ASIC mining. I do not personally own any ASIC's at this point. In part 1, I discussed what Bitcoin and Litecoin are and how they work as a currency. In part 2, this part, I will examine mining in more detail and describe what it is and what it does. In part 3, I will review whether it’s profitable to mine or not. Here's a link to Part 1 - the introduction to cryptocoins and their mining. First, I should mention what this article is not. It is not a tutorial on how to do mining. Rather, it is an exploration of the potential financial profitability of mining for the average consumer without thousands of dollars to spend on it. It does not attempt to document all possible methods, only to describe some methods I’ve used. It does not give legal or tax advice, so you will have to find your own competent sources for that. Readers may have various levels of expertise on the topic, but I do not assume any particular level of expertise. I start with a little basic background first. Much of this information exists elsewhere in bits and pieces, and sometimes mostly in one place, but I want to provide it here for the readers nevertheless. Every time you read it, or hear it, you get a slightly different viewpoint. Almost everything I'm going to say applies to Litecoin as well as Bitcoin, although I won't always say so.Actually, I'll spend much of this article answering that and discussing various aspects of it. I'm going to speak in generalities for the most part and try not to get caught up in too much techno jargon. I'll provide some references below where you can do additional research on your own if you like. Mining in terms of cryptocurrency is meant to be a metaphor for mining in the real world. Let's say you want to go to Alaska or California and mine for real gold. There is a limited supply of gold. You don't know for sure that you'll find it on a plot of land, although you can do tests to better your odds. You must buy equipment, provide staff, and operate the equipment to dig through lots of dirt and process and test the dirt to find the gold. All that requires that you invest money, and pay for machinery, expertise, and electricity. All this involves certain costs, and you hope your profits will outweigh those costs. Bitcoin or Litecoin mining is similar in many ways. It will require you to get equipment and expertise and it will require you to run this equipment and use electricity to search for the digital gold, the Bitcoins or Litecoins. (I cannot speak about other digital currencies as I don't have experience with them.) Mining, in this context, is a process whereby you run a computational algorithm (or formula or program) on your computer or on a specialized mining device. This algorithm allows you to search for special mathematical results which match certain predefined criteria. When you get those results, you are rewarded with a certain number of Bitcoins or Litecoins. So, mining Bitcoins creates new currency. It expands the money supply. The miner, or mining pool (which we'll discuss later), gets these new coins. They may keep them, share them, or spend them. Bitcoin transactions are stored in blocks in a public ledger called the blockchain. So, mining also creates new blocks and adds them to the blockchain. Transactions often carry small fees, which the miner gets, which provide an incentive for the transactions to be processed and verified and included in the blockchain.What?! You mean it's hard? Yes ... Bitcoin or Litecoin mining is very hard, for your computer or mining device. In fact, it's getting harder all the time. But, why is it hard at all? Why can't the computer just snap its digital fingers and generate a coin? In fact, why can't everyone's computer do that? Sorry, there's no free lunch. The algorithm involved is designed to make this intentionally hard. This is not just to torture you. There are practical reasons which relate to the fact that we're creating an actual currency with economic value and ramifications. There are also reasons which relate to the fact that this digital currency needs to be hard to create, hard to fake, and easy to verify. I'm intentionally not going into great technical detail, but I want you to get the general concept.PS, I'm not an economist or monetary expert. But ... Let's say you are the government or central bank of a fictitious country called the nation of Moon Castle. As such, you realize that you need currency, so you mint 250 million coins and put them into circulation. Your economy is proceeding nicely and people are buying and selling things. Now, let's say you decide to mint another 750 million coins and put them into the money supply. So, now you have 4X as many coins as when you started. In general, this will lead to the value of each coin going down, which leads to your cost of each good or service going up, which is called inflation. What used to cost you 1 coin to buy may now cost 4 coins. Now, back to Bitcoin and Litecoin. The same thing applies. If people are continually flooding the market with Bitcoins or Litecoins, and the demand for them remains essentially constant, or even if it increases at a rate slower than the increase in supply, the value of the coins will drop, and the cost of goods and services bought will rise. So, you have inflation, which could be extreme. These digital currencies are designed to limit the rate of money production, which has a tendency to curtail inflation. In fact, the rate of production of coins will decrease over time, and eventually stop. Over time, Bitcoins and Litecoins, and others, assuming they still exist, are still in demand, and are still legal, should increase in value. This means each coin should buy you more stuff, which means it's fundamentally deflationary. There is much debate as to what effects a deflationary currency will have. Since this is unique in the history of Earth, I'm not going to jump into that debate. I'll just have to wait and see like the rest. I will say that I like the idea of my Bitcoins or Litecoins intrinsically rising in value over time as an investment. I might not like it so much if I borrowed $ 1000 worth of Bitcoins from you and later had to spend $ 2000 to pay you back. This risk exists even with normal currencies if their value fluctuates dramatically.Bitcoin has no central authority to control its issuance. The mining algorithm includes a PROOF OF WORK function. I'm not going into great detail on that either, but I will provide some references below. Your mining device has to prove it's done a certain amount of work in order to be allowed to create new coins for you. This involves solving exceptionally difficult math problems. This, in turn, limits the growth of the money supply to a predictable rate. Since coins are hard to create, this also makes them hard to fake, which provides security and stability for the entire system. When the mining system solves this exceptionally difficult problem, it can then create a new block of transactions and add it to the blockchain. That system, and it's owner, gets a bounty or reward for it's efforts. Originally, this was 50 Bitcoins. This gets cut in half periodically. Now it's 25 Bitcoins.Sorry. Everyone you know COULD get into mining, but if we have 1000X the miners, we WON'T have 1000X the Bitcoins. There is a catch, and it's a big one. Along with the proof of work system, there is a DIFFICULTY rating built into the algorithm. Bitcoin is designed to, on average, produce one new block of transactions every 10 minutes. Litecoin is designed to produce a block every 2.5 minutes. The network ADAPTS, and the difficulty automatically increases, to make sure this stays the case. Pretend that, years ago, you were the first and only Bitcoin miner. You had your computer running, doing computations, and you were producing 1 block every 10 minutes, and you were getting the bounty, which was then 50 Bitcoins. Of course, they might have been worth only $ 0.20 (or whatever) each. But, still, you're getting some income. So, just hypothetically, 50 Bitcoins * $ 0.20 ea * 6 blocks / hour = $ 60.00 / hour. Not bad at all. Now, let's say 99 of your buddies join you with the same equipment. So, you'd think that everybody would be earning $ 60 / hour. NOPE! The network ADAPTS! So, now the network has 100X the mining power, the difficulty gets 100X harder. The WHOLE network still produces 1 block, worth 50 Bitcoins every 10 minutes. BUT, YOU have 1/100 of that total power. So, you personally get 50/100 Bitcoins or .5 Bitcoins every 10 minutes or 3 / hour. At $ 0.20 ea., now you're making $ 0.60 / hour, which is much less attractive. So, you can see the problem. Because Bitcoin production is strictly limited, as a long term average, to 1 block every 10 minutes, the more people jump in and mine, the more the network increases the difficulty, such that the overall production remains the same, and THE LESS MONEY EACH INDIVIDUAL MINER MAKES!You haven't heard the half of it yet. Bitcoin was originally mined by running the algorithm on the central processing unit (CPU) of your computer. However, eventually, the algorithm was ported to the graphics processing unit (GPU) or graphics card. ATI / AMD graphics cards were suitable for this purpose. GPU's were dramatically more efficient at performing these computations. Because an individual miner's profit is related to his / her percentage of the total computational (hashing) power of the network, once GPU's were widely deployed, using CPU's to do the work became unprofitable, since they couldn't keep up with the extreme hashing power provided by lots of GPU's. The next evolution in computational power was the Field Programmable Gate Array or FPGA. Think of it as an extremely powerful computational engine that you can custom program to do many computations in parallel (suitable for Bitcoin) at much higher speed and efficiency than a GPU or CPU. So, again, once FPGA's were deployed into the Bitcoin network in large numbers, it became impractical or unprofitable to use GPU's for the purpose.We are now entering the third stage of what is probably the final evolution of Bitcoin computation and hence coin creation. This involves an Application Specific Integrated Circuit, or ASIC . The devices we've been discussing up to this point are programmable for different purposes. You can program a CPU, or GPU, or FPGA, to do weather calculations, or graphics calculations, or Bitcoin calculations, or whatever. This is not true of an ASIC. An ASIC is a purpose built chip that is designed SOLELY to do the purpose for which it was designed. In this case, it ONLY does Bitcoin calculations. An ASIC Bitcoin miner device will ONLY EVER do Bitcoin equations, unless some other cryptocurrency or need uses the same mathematical algorithm. If the need to do those equations goes away or becomes unprofitable, then you've got a very expensive paperweight. Again, ASICs represent a dramatic increase in efficiency over prior technologies. Thus, GPUs are now unprofitable for mining Bitcoins because the power of ASICs has so completely overpowered prior technology. FPGAs may still be profitable, but they won't be for long. NOTE: Litecoin uses a different proof of work algorithm which is, at present, resistant to being used on a FPGA or ASIC. That's not to say it could never happen with increased profit incentive or increases in technology. So, at present, it MAY be profitable to mine Litecoins on a GPU.Even within the subcategory of ASICs, there is technological evolution. Each stage of evolution increases efficiency and decreases operating costs in terms of power. The cost of acquiring the equipment is different, but that too is probably decreasing in terms of $ / GH/S (Giga Hashes / Second). Let's talk about how integrated circuits are made.Think of a slide projector. This increasingly uncommon device takes a very small picture of something, the slide, and projects it on to a much larger screen. With Photolithography, in terms of integrated circuit production, the large pattern image is projected downward to a very small image on the silicon. A key parameter of an integrated circuit is it's feature size, or the size of the smallest usable element. The smaller the feature size, the more elements can be crammed on to the chip. In general, if talking about computation devices, each decrease in feature size crams exponentially more elements on to the chip, and results in great increases in efficiency. Feature sizes are measured in nanometers or nm. A nanometer is one billionth of a meter. The thickness of a penny is about 1 millimeter or mm. There are a million nm in one mm. Stage 1 of the ASICs for Bitcoins were using feature sizes in the 130 nm range. Stage 2 of the ASICs, as in Butterfly Labs' currently shipping products, uses feature sizes in the 65 nm range. Stage 3 of the ASICs, as in Butterfly Labs' next generation of products, will use feature sizes in the 28 nm range. I have heard that existing fabrication technology can go down to about 10 nm. It is said that, after that, radical changes in technology will be required to fabricate smaller features. I haven't researched that. But, a quick Google search of Intel cpu feature size shows that they are currently shipping cpu's with 22 nm features, are developing for 14 nm, and want to eventually do 5 nm. So, there may be a few more stages in the development of Bitcoin ASICs beyond 28 nm. Each additional stage in development tends to render the prior technology obsolete, since it allows miners to deploy devices that cost less per GH/S and use less electricity and contain much more computational power. So, if you could get the latest and greatest ASICs for mining, and could keep up with the other miners who are also getting the latest and greatest, you might become and stay profitable. However, that's very hard for a small operator to do. In, I'll discuss some real world numbers about the profitability of mining on a small scale.Wikipedia - Bitcoin Mining Coding in my Sleep - Bitcoin Mining in Plain English Reddit - Explain Like I'm 5: Bitcoin Mining Ars Technica - How a total n00b mined $700 in bitcoins IT World - Portrait of a Bitcoin Miner

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