How Do You Mine Cryptocurrency?
Cryptocurrency mining is generally defined as the acquisition of new cryptocurrencies through cryptographic equations. You solve these equations using computers. It involves validating data blocks and adding transaction records to a public ledger. In this article, we’ll dig deep into the process and steps of cryptocurrency mining. Read on!
What is Cryptocurrency Mining?
Cryptocurrency mining is the process of verifying the legitimacy of a blockchain transaction. Miners reap rewards in the form of cryptocurrencies. To understand how cryptocurrency mining works, you must first understand the blockchain.
The blockchain is a decentralized ledger composed of blocks containing key pieces of data, including cryptographic hashes. Simply put, blocks contain the data of transactions. Each block is added to the end of the ledger, creating a metaphorical chain — hence the name blockchain.
Mining occurs on the blockchain. Miners confirm the legitimacy of new, unconfirmed blocks before they get added to the chain.
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How does Cryptocurrency Mining Work?
Here’s a step-by-step look at the process of cryptocurrency mining:
1. Miners Verify Transactions
Transactions form a block. Miners bundle all transactions they collect into a list within the unconfirmed block. To build one block, they must verify 1 MB worth of transactions. Theoretically, one transaction can have 1 MB worth of data. However, one block these days consists of several thousands of transactions.
Adding transactions into a single block and confirming them prevents “double spending,” which is the risk of spending a digital currency twice. Transactions are kept on an immutable, public, and permanent record; they can’t be manipulated or altered.
2. A Hash is Added
Hashing is the process of converting transactions into a fixed-size array of numbers and letters using a mathematical function. Simply put, they’re cryptographic functions that make it possible to verify the legitimacy of transactions.
To create the hash, the header data from the previous data and the “nonce” — basically a non-repeating number or value — are added to the block. The miner then adds the hash to the unconfirmed block. Other miners will then need to verify it.
3. Ensuring the Block’s Legitimacy
Other miners in the blockchain network check the legitimacy of the unconfirmed block by checking its hash. From the original miner’s perspective, the whole process is like a gamble. The goal is to come up with a 64-digit hexadecimal number that is less than or equal to the target hash. To do this, they need powerful crypto mining equipment that can spit out hashes
The difficulty level of confirming recent blocks is more than 14 trillion as of July 2021. In other words, the computer has a 1 in 14 trillion chance to produce a hash below the target. However, once this is done, then the cryptocurrency miner’s job is almost complete.
4. Block Gets Published in the Blockchain
Once the hash has been confirmed, the proof of work (PoW) is also complete. In a nutshell, the PoW is the lengthy process of proving to other miners in the network that a miner has solved the hash.
To compensate the miner, bitcoin rewards are given to them. The rewards for bitcoin miners are halved every four years. In 2009, one block was rewarded with 50 BTC. In 2012, it was halved to 25 BTC. By 2016, it was only 12.5 BTC, and in 2020, it was halved again by 6.25 BTC.
Apart from bitcoin rewards, being a cryptocurrency miner gives you some amount of “voting” power when changes are proposed on the public network, as is the case with bitcoin and bitcoin forks.
Mining and Cryptocurrency Circulation
Apart from rewarding miners with incentives and supporting the digital currency system, cryptocurrency mining also allows new digital currencies into circulation; cryptocurrency miners are essentially minting new coins.
In the case of bitcoin and the blockchain, every single bitcoin came about because of miners (except the first block, called the “genesis block”, that was mined by bitcoin founder Satoshi Nakamoto).
As of November 2020, 18.5 million bitcoins were in circulation. Eventually, bitcoin mining will end; according to the Bitcoin Protocol, the total number of bitcoins will be capped at 21 million. Meanwhile, the final bitcoin won’t be mined until around the year 2140, since the rate of bitcoins mined over time is reduced.
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