Introduction
Blockchain is a novel technology that is changing the way that computer programs, software, and mobile applications work. Blockchain has also laid the foundation for DeFi or Decentralized Finance. Even when blockchain is still a novel technology that is under development, its basic working has opened up innovation opportunities in many sectors. Even when blockchain is not hardware, it still works like an engine. Therefore, it is necessary to have standards to measure the performance of a blockchain, such as hashrate.
What is Blockchain?
A blockchain is a network for conducting financial transactions that are based on the principles of DLT or Distributed Ledger Technology. Bitcoin is a type of program that allows users to send cryptocurrencies from one point to other using federated servers. The bitcoin blockchain is decentralized, which means that it does not need any intermediaries such as banks or private financial enterprises to supervise the ecosystem. However, the consumers can only use a transaction network that is secure and trustworthy.
Therefore, all the transactions on a blockchain are first added to a single block. This block is protected with a verification signature or cryptographic code. Blockchain miners use computing power to solve these cryptographic puzzles and verify the transactions on a single block. Once the block is verified, it is added to the rest of the network in the form of the next link of the chain. The copies of every verified block are sent to every single blockchain server present in the world.
As mentioned before, blockchains are decentralized. It means that there is no one to authenticate if a blockchain transaction is real or fabricated. Therefore, all the cryptocurrencies and transactions on a blockchain are protected with a very complicated cryptographic puzzle or code. The job of the miners is to solve these puzzles and verify the transactions. Miners make sure that all the transactions on a blockchain are authentic. Once a transaction is verified, every user on a blockchain can view and verify the transaction record without any restrictions.
What is a Hash rate?
A hash rate is a unit of power used or generated by the mining machines that are working to solve the cryptographic puzzles on a blockchain. It is a type of power consumption unit, and it is used to measure the amount of power required or consumed by a miner or a group of miners.
Outside of the cryptocurrency sector, hash rate is still considered a measure of power consumption used by a single operating system. However, for cryptocurrencies and blockchains, hash rate has become a key performance and security indicator. Hash rate is associated with cryptocurrencies like Bitcoin that use PoW or the Proof-of-Work consensus model. PoW blockchains require miners to verify transactions in exchange for rewards or transaction fees.
Working Mechanism of Hash Rate
It is important to break down the term hash rate into smaller components first to understand its inner workings. Hash represents a string of data made up of alphanumeric values. Hashes are created to contain important data strings like cryptographic code, passkeys, communication, words, and any other digital form of information. Various cryptocurrency projects use hashing mechanisms for creating word randomizing protocols that make a password more secure and difficult to crack.
Miners on a PoW blockchain compete with each other to guess the encrypted or hashed code before others. The required numeric value that can solve the cryptographic puzzle is known as a nonce. The first miner to generate the correct nonce is the one who can verify the transaction and earn the cryptocurrency reward for it. Therefore, miners try to create hashes that are closest to the required nonce with increasing accuracy. These hashes are like keys, and only the perfect nonce can unlock the treasure or verify the transaction.
However, every new hash created by the miners is completely random. It means that the miner can’t calculate the total hash value. Therefore, miners have to keep creating randomized hash values until the correct one fits. Miners want to receive the block reward and the transaction fee as a reward for solving the puzzle. Therefore, they keep modifying the nonce to create new hashes. The calculation of total hashes is created until the correct one is found, called hash rate. Once the transaction copies are added across blockchain federated servers, no one can change or manipulate the transaction data.
What is a Good Hash Rate?
Miners associated with every blockchain are working to make sure that they continue to create as much hash rate as possible to solve the cryptographic puzzle. When the hash rate generation for a blockchain is massive, it indicates that there is a lot of mining competition, and the blocks can get verified faster. However, there is also an issue of increasing the supply of cryptocurrencies among miners by offering it as a block reward.
Therefore, many blockchains have implemented mining reward shrinking mechanisms. Consider a cryptocurrency based on a blockchain called Xcoin. If Xcoin supply is massive in the market, its prices can go down and depreciate. Therefore, Bitcoin slashes all the block rewards in half after every four years. In the same manner, the Dash coin reduces its block reward by 7.14% after every 210,240 blocks. Similarly, Litecoin also halves mining rewards after every 840,000 blocks.
How to Measure Hash Rate?
In simple words, the Hash rate is the amount of computation power that is consumed or required by a mining machine or farm to process transactions on a PoW blockchain. Hash Rate is essentially a unit of measure for standardizing the amount of power generated or used by cryptocurrency mining farms. Hash rate can be measured by finding out the total number of calculations happening per second. The quantity can go as high as billions to quintillions. Some commonly used units for measuring Hash rate are:
- Hashes per second in Thousands/ KH/s
- Hashes per second in Millions/ MH/s
- Hashes per second in Billions/ GH/s
- Hashes per second in Trillions/ TH/s
- Hashes per second in Quadrillions/ PH/s
- Hashes per second in Quintillions/ EH/s
Hash rate production depends on the factors like the number of computing units, the power capacity of mining machines, the speed of processors, the number of miners, electric power supply, etc. Bitcoin has a built-in protocol called SHA-256 that is used to measure the total hash rate production in EH/s. On the other hand, the Ethereum protocols measure hash rate production in TH/s.
Hash rate production is also affected by the network difficulty since every new blockchain encryption is more difficult than before. When Bitcoin hash rate is measured at 190 EH/s, it means all Bitcoin miners are producing an average output of 190 quintillion times hash function per second.
Key Indicators of Hash Rates
Hash rate is more than just a measurement of power for Bitcoin or the PoW blockchain mining machine. Under different contexts, hash rates can be used to calculate different values. It is important to note that hash rate is a key indicator in the blockchain sector that is useful for measuring performance, speed, scalability, trading volume, and many other important technical indicators. Therefore, here are some important perspectives that will allow the users to understand the significance of hash rate.
Strength of Blockchain Network
Blockchains that depend on miners for verification of transactions are truly decentralized. Flagship blockchain Bitcoin needs to maintain a healthy flow of hash rate to ensure network productivity. There are many Bitcoin miners scattered around the world.
Every new Bitcoin miner adds a thousand times greater computing power for solving SHA-256 hashes. At any given time, the total hash rate production of a blockchain is the sum of all the mining pools, machines, and farms operating to verify the transactions on the block. Therefore, when there is a greater hash rate production, it means that the blockchain is active and strong.
Mining Power
Mining Power is also a key indicator that is based on hash rate production. Take, for example, the Bitcoin hashing protocol called SHA-256. With every new block, the hashing protocol generates a more difficult puzzle. It also means that as the block height increases, the mining power required to solve the cryptographic puzzle also increases consistently.
Therefore, a hash rate production increase indicates the strength and stability of the mining power. It means that miners are also levelling up with the increasing cryptographic puzzle difficulty, and it also ensures that blockchain users can keep depending on the miners for getting blocks verified and added without extensive delays. It is not simply enough to add more mining machines. The Bitcoin miners are upgrading the performance of their mining equipment by using ASIC mining processes that are capable of generating additional mega hashes per second.
Transaction Security
Only PoW blockchains are truly decentralized. It means that these blockchains can verify all the transactions on the network without depending on any centralized regulators. When there is more hash rate production, it signals that more users are active on the blockchain, and more miners are working to authenticate the transactions, which results in higher trading volume and higher mining rewards. At the same time, users can get their transactions verified without compromising their data.
Importance of Hash Rate
Hash rate has been associated with computing power and the ability of the hardware to perform output per unit time. However, with the association of hash rate with blockchain mining, it has quickly gained central importance in the sector.
Many technical aggregators working with blockchain and cryptocurrency markets depend on hash rate production for calculating the correct values for their analysis. By understanding the importance of Hash rates, cryptocurrency investors can use it to their advantage and understand the technical dynamics of a blockchain. Here are some of the most important uses of hash rate:
Mining Upgrading
Bitcoin hash rate output is a powerful and crucial gauge to predict and measure the Bitcoin mining difficulty. It means that at any given time, the active production of hash rate by mining machines around the world can determine the level of difficulty in the Bitcoin block decryption process. At the same time, miners use Bitcoin hash rate production statistics and use it to isolate the blocks with the greatest level of mining difficulty. By doing so, they can conserve power and direct their hash rate production in accordance.
The average block production gap is 10 minutes. However, the Bitcoin protocol is designed to adjust mining difficulty after every 2016 block. On average the mining difficulty on Bitcoin blocks is rotated after a 2-week gap. At the same time, the blockchain users can also measure the correct productivity level on the blockchain by arranging the period with higher mining difficulty versus lower mining difficulty blocks.
It means that when mining difficulty is higher, greater hash rate production does not mean more activity on the blockchain and vice versa. At the same time, the block production time on Bitcoin is also adjusted by keeping in view the hash rate production and maintaining it at 10 minutes on average.
Validation and Testing
In many cases, hash rate production and output are used as a baseline value for calculating other factors associated with a blockchain. For example, data analysts can use hash rate data and use it to compute the blockchain monitoring forces.
For example, Bitcoin Core can use hash production data concerning mining difficulty for working out the time difference between two block productions. At the same time, the blockchain and cryptocurrency analysts can also work out the correct value of trading volume and transaction strength on Bitcoin at any given time using the hash rate.
Security of Blockchain
When the hash rate production on a blockchain is higher, it almost always means that the network security has improved. When there are a considerable number of miners working to generate a massive amount of hash rate, it means that a 51% attack is not possible.
For executing a 51% attack, a considerable number of miners need to work together. It is worth noting that a 51% attack is a hypothetical scenario where the miners join forces to manipulate the transaction records on a blockchain. Therefore, a higher hash rate means that more miners are working individually to solve the blockchain puzzle.
Hash Rate and Energy Usage
Many cryptocurrency critics point out that the PoW blockchains require a considerable amount of energy input for generating hash rates. It is worth noting that the parallel between energy consumption and Hash rate production is drawn since higher energy input is directly proportional to better hash rate output. Some experts claim that total energy consumption for annual Bitcoin hash rate production is equal to the electricity consumption of the entire Switzerland country yearly.
The total Bitcoin hash rate production is estimated to be around TWH per year. On the other hand, many Bitcoin miners have started to switch to green and renewable energy resources. Some miners use recycled energy from the state-owned power grids in their region.
At the same time, crypto proponents also argue that in comparison to centralized banking, real gold mining, oil production, and many other private financial networks Bitcoin’s energy consumptions and production are relatively quite petite.
Impact of Hash Rate Fluctuations
It has been established that more hash rate production means better network security and greater productivity for a blockchain. However, cryptocurrency investors should also know about what happens when the hash rate production starts to dwindle. Hash rate can depend on variable factors such as power input, time, block difficulty, and hardware quality, among others. The accurate measurement of hash rate production is very important to validate and verify other statistics related to a blockchain. Here are some immediate consequences of a decline in hash rate production:
Smaller Hash rate production means that the network risks have increased considerably. It is easier to control for one mining pool to control 51% hash rate production and launch an attack.
When the hash rate production drops for a blockchain, and it becomes weaker, the price of its core cryptocurrency also suffers measurably. It can also lead to a drop in transaction activity and result in the delisting of the token.
When the hash rate does not increase with time, it is unable to keep up with the increasing mining difficulty. It will result in miners waiting for days, in the end, to get one transaction verified and completed.
When hash rates are dropping in a blockchain network, it means that users face difficulty in getting their transactions verified, and therefore they have to increase the transaction fees to attract more miners. It means that the hash rate drop can also lead to gas fee inflation.
When miners are not upgrading their equipment and increasing hash rate consistently, it means that they are not getting enough rewards or profit from mining and purchasing upgraded equipment for mining.
Conclusion
Hash rate is an important part of blockchain and cryptocurrency trading. When investors wish to find out facts about the quality and strength of a blockchain network, they can use hash rate production for reference. Cryptocurrency users can collect authentic hash rate data from on-chain analytics platforms or use websites that are dedicated to recording hash rate changes in all major blockchains such as Bitcoin, Ethereum, Litecoin, Bitcoin Cash, and Ethereum Classic.
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