Crypto Mining – What Is it & How Does it Work?
Crypto mining is the joint process of generating new crypto currency and verifying transactions made with the cryptocurrency and adding them to its ledger, the blockchain, but exactly what does this mean in simple terms? How does crypto mining work?
In this guide, learn all about this interesting topic: the foundation on which many cryptocurrencies operate.
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What is crypto mining?
Crypto mining is the process of adding new cryptocurrency to a blockchain and verifying the new transactions that take place using the currency.
Crypto miners use powerful computers to solve cryptographic hash puzzles (complex mathematical sums) which are assigned to each block.
As miners solve a hash, the block is verified and added to the chain, publicly showing the transactions on the block while 'locking' the block from being edited. This ensures that the blockchain can be trusted and is secure from theft and crime which might harm the cryptocurrency's legitimacy.
In exchange for this service, miners are rewarded with cryptocurrency (6.25 per block in 2023), plus the transaction fees levied on all the transactions within the block.
Not all types of crypto use mining. The likes of Cardano, Stellar, Ripple and other 'non-mined cryptocurrencies' use a system called proof-of-stake to validate blocks, whereby holders of the currency are chosen at random to perform the verification.
That said though, crypto mining is a feature of many different cryptocurrencies, including the two most popular, Bitcoin and Ethereum. But how does this work in practice?
How does crypto mining work?
A blockchain is a virtual ledger that records cryptocurrency transactions. When one user of the crypto network sends cryptocurrency to another - such as when purchasing goods or services - they are added to a block. Each block contains a number of these transactions - in Bitcoin's case, there are, on average, 2182 per block, according to 2023 YCharts data.
However, for these blocks to be added to the blockchain, they need to be validated. That's where miners come in.
Here's how crypto mining works in practice for Bitcoin:
Step 1: Getting ready to mine
Crypto miners must first build a bitcoin mining rig that lets them perform the complex maths needed to mine. This used to mean linking together groups of PC components like central processing units (CPUs) or graphics processing units (GPUs). Today, however, miners need to use advanced technology like field programmable gate arrays (FPGAs) and application-specific integrated circuits.
Miners also need the right mining software, like ECOS, BeMine or Kryptex, which can interact with the network for which they wish to mine. Additionally, to store any cryptocurrency that they receive, miners must set up a crypto wallet.
Lastly, a mining setup needs electricity - a lot of it. According to the Digiconomist's Bitcoin Energy Consumption Index, a single Bitcoin transaction in 2022 required as much energy as a US household uses every month to process and validate. With rising electricity costs, miners need to be sure that their energy expenditure doesn't eat into the bitcoin that they receive.
Step 2: Mining alone or by pool
There are two main ways to mine crypto - alone, with your own hardware, or as a group, or 'pool' of other miners and hardware.
Looking at Blockchain's Bitcoin difficulty graph, we can see that the complexity of mining has skyrocketed as the technology has gained popularity. That's because crypto networks like Bitcoin have made the cryptographic hash puzzles more difficult to solve as more miners and users join the network and more coins are generated.
Where once anyone with a PC could have tried their hand at crypto mining, today, mining pools combining vast amounts of hardware are now needed to validate a single block. That means that most must join a mining pool for a chance at success.
Step 3: Validating a block
All crypto miners race to validate the current block of transactions so that it can be added to the blockchain, solving complex mathematics to do so. It involves checking whether the purchaser in a transaction has enough cryptocurrency to afford the transaction, that they have signed the request with their private crypto key, and they have sent it to a valid wallet address. If all of these tests come up correct, the transaction is added to the block.
Only one miner can win the reward for validating all transactions on a block. To ensure that a single miner or pool is chosen at random and that the winning block has been verified correctly, the network uses a system called 'proof of work'.
Proof of work involves miners trying guess a 64-digit hexadecimal number called a 'hash'. This hash value then needs to be less than a predefined target value that's generated by the network.
To work this out, they need to determine an essentially random number called a nonce. Once it's been found, the miner wins the reward, and all of the other crypto miners use the nonce value to check that miner has provided the correct hash.
After they've verified the block, it's added to the blockchain, and everyone moves onto solving the hash for the next block.
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The information in this article is for educational purposes only.