How cryptocurrency mining works

Cryptocurrency mining is the process by which transactions are validated digitally and added to the blockchain ledger. It is done by solving complex cryptographic hash puzzles to verify blocks of transactions that are updated on the decentralized blockchain ledger. Solving these puzzles requires powerful computing power and sophisticated equipment. This article contains all you need to know.

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Have you ever wanted to own Bitcoin and other cryptocurrencies without having to purchase them on an exchange? You can, via mining. Individuals and businesses are drawn to the cryptocurrency ecosystem because of the increasing values of cryptos such as Bitcoin, Dogecoin, and Ether. While most individuals’ first call is to buy from the exchanges, it is also possible to mine tokens using computers.

For some, the lure of owning a couple of cryptos is enough motivation to get involved in the mining process. To be clear, you can purchase cryptos with fiat and trade with other coins on an exchange like Binance (e.g., Solano or Cardano to buy Ethereum).

What Is Cryptocurrency Mining?

To many, cryptocurrency mining is simply the creation of new coins. However, it is more than that! Cryptocurrency mining is the validation of transactions on the blockchain network and recording them on a distributed ledger. Importantly, cryptocurrency mining prevents double-spending of coins on the network.

Like the traditional fiat, when a user spends a coin, the distributed ledger must be updated via crediting one account and debiting the other. However, the problem with digital assets is that online ecosystems can be manipulated. As a result, the bitcoin distributed ledger, for instance, only permits verified miners to validate transactions on the distributed ledger. Meaning, miners also have the added responsibility of securing the blockchain network from double-spending.

To make these efforts worthwhile, new coins are awarded to miners as rewards for securing the system. Since there is no central authority on distributed ledgers, the mining process is critical to verifying transactions on the network. Miners, therefore, receive incentives to secure the network by validating transactions, which increases the chance of being awarded newly minted coins.

To ensure that only verified miners can validate transactions and mine cryptocurrencies, a proof-of-work (PoW) protocol is in place. The PoW secures the ecosystem from cyberattacks.

Proof-of-Work

Cryptocurrency mining is similar to mining gold, silver, diamonds, and other precious metals. However, while in traditional mining of precious metals, physical elements are unearthed, crypto mining involves the release of newly minted coins into circulation.

To be rewarded with coins, a miner needs to deploy computers that can solve complex mathematical algorithms that are cryptographic hashes. 

A hash is a short digital signature of a chunk of data. They are generated to protect the data transferred on a public network (more on this later). For example, miners compete to zero in on a cryptographic hash generated during a coin transaction. The first miner to decipher the code adds the block to the ledger and earns a reward.

Each block on the ledger uses a hash function to link to the previous block. As such, there is an uninterrupted chain of blocks that links to the first block. Therefore, miners on the network can also verify whether a block is valid or not. And whether a certain miner who validated a particular block actually solved the hash code to receive the coins.

As miners deploy more sophisticated computers to solve PoW, the equations become more complex. In addition, competition increases among the miners, with a corresponding increase in the scarcity of the crypto.

The different types of Mining

There are two main ways of mining cryptocurrency: using an application-specific integrated circuit (ASIC) or a specialized graphics processing unit (GPU). We explain both below:

Application-specific integrated circuit (ASIC)

ASIC chips are specifically designed for a singular purpose, such as managing a cellphone call or audio processing. Therefore, an ASIC is engineered to mine a specific cryptocurrency. As a result, it usually produces more cryptos than GPUs but is more expensive.

Graphics processing unit (GPU)

In this method, computational power is harnessed by linking a set of GPUs on a rig dedicated to mining. This process requires a cooling system and motherboard. In addition, the linked GPUs on the rig must be connected to the internet all day. Also, each crypto miner must be a member of a crypto mining pool.

Cloud Mining

This is an alternative to the popular ASIC and GPU mining processes. It is less expensive. With cloud miners, it is possible to leverage the power of dedicated crypto mining farms to mint new coins. The process is easy. There are many paid and free cloud mining hosts where you can lease a mining rig for an allotted time. This method makes it easy to mine cryptocurrency without an infrastructural setup, as seen in ASIC and GPU.

Breaking Down the Processes Within the Blockchain

A blockchain, by definition, is a chain of blocks designed to grow continuously as blocks are added to the chain. The main objective of the Blockchain is to validate transactions and to ensure that all transactions are secure, authentic and to prevent double-spending of coins on the network. It is a decentralized ledger explicitly designed to be added but never altered.

Each block on the Blockchain contains transaction information, timestamp, and other important details needed by miners to determine to develop the cryptographic hash.  The cryptographic hash is key to the success of the blockchain network processes.

The hash is a long string of numbers having a certain length. It has a fixed length, making it extremely difficult for cyberattackers to crack a block using a hash output.

Miners use the hash code to validate transactions on the Blockchain. Hashing is the processing of hash data using complex mathematical equations; The result is an output hash. The function of Hash cryptography is to secure the Blockchain against malicious attacks.

How cryptocurrency mining works?

How does cryptocurrency mining work? We have already established that miners are in constant competition, using complex computations to add a new block on the Blockchain, trying to decipher a target hash. They try to decipher codes using GPUs, generating a 32-bit sized number or nonce used only once.

The 256-bit hash is bigger than the nonce. And the first miner that generates a hash code equal to or less than the target hash gets rewarded with tokens for completing the block. Then, the node is validated via a consensus, and the new transactions are added to the Blockchain.

Every 1 MB block created contains transaction data, timestamp, and hash information of the previous block when added to the chain.

The following are the series of event that takes place during mining.

1. Nodes Verify Transactions Are Legitimate

First, there is a cryptocurrency mining transaction validation. Blockchain users create cryptographically secure transactions that are broadcasted on the network. When transactions are initiated, the data is added to a block and duplicated across multiple nodes on the network. Nodes are the blockchain administrators. They have one job – root out criminal actors while verifying transactions on the network via consensus.

A block hash is sorely dependent on the data generated from a block. One character change in a transaction data and the reference will be invalidated. The system immediately makes it apparent that specific data has been altered.

The verification process is incentivized through token rewards in the form of cryptos. As a result, the incentive for verifying transactions triggers fast mining and fast transactions on the blockchain network.

2. Individual Transactions are chain-linked to Other Transactions forming a Block

Transactions are stored on nodes before they are added together, forming a block. Each node contains a copy of the Blockchain.  

At the barest minimum, each block must have one transaction but is usually made up of a full copy of the transactions on the Blockchain. As transactions are verified, they are compiled and encrypted, and the block is added to the Blockchain. If the miners find any fraudulent activity on any transaction, it will be rooted out.

The average confirmation time for one payment on the bitcoin network is 10 minutes. It can only process a max. of 7 transactions per second.

3. Hash code and other data are added to the unconfirmed block

When a block is created, the header contains the details needed to decipher the hash code.

The block header has a timestamp, version number, nonce, hash of the Merkle root, target hash, and the hash from the previous block. Cryptography uses the block header to validate transactions before a block gets added to the Blockchain. 

4. Miners Validate the Block’s Hash to Ensure it Is Legitimate

This is the basis of cryptocurrency mining hash verification. Before a block can be added to the Blockchain, the network validates its information using the hash.

To validate a bock, miners collect the transaction details and assign it a hash. Then, to validate the next block on the chain, miners must collect a new set of transactions and assign a unique hash code. Each block’s hash contains data about the hash on the last block and the new hash generated from its transaction data.

Note, the hash is the main security element in the blockchain network. Therefore, if any cyberattack changes the data in any block, the hash will change.

5. After Confirmation the Block is Published on the Blockchain

Before a block is published, it has to be confirmed by one or more miners in a mining pool. The miner’s role is to validate and confirm transactions.

Miners publish the block as a component of a connected chain of transactions. The block remains as more blocks are linked on the network. Each block is tamper-proof; it is difficult to alter them once published.

As such, a malicious actor will have to modify the entire Blockchain to change the data on a single block. Even with sophisticated tech, this is almost impossible.

How are these Components integrated into the Blockchain Network?

The blockchain ecosystem revolves around users making transactions, the miners who validate transactions and create, update, link, and store the blocks on the Blockchain.

For validating and creating blocks, miners get incentives and the users making transactions rely on miners to confirm their transactions.

The Blockchain is a public, decentralized ledger that is beneficial for those transacting and mining. Miners are incentivized to make transactions fast. In addition, users transacting enjoy the security of encrypted protection offered by the blockchain ecosystem.

With the applications for proof of stake and the creation of new cryptos daily, incentives are added to mine and make transactions. As a result, everyone benefits a thing or two from improving the processes of the Blockchain.

In Conclusion...

Mining Cryptocurrency is a viable alternative to the traditional monetary system currently operated in the world today. However, it is computationally taxing and requires plenty of power to function. As such, it is not feasible for many.