Cryptocurrency mining: What is it and how does it work?
December 8, 2022
The number of people interested in investing in cryptocurrencies keeps rising. However, very few people understand the technology behind cryptocurrencies, even among those who regularly trade them.
This is because many people see cryptocurrencies as a concept that is too technical for them to understand. Some people would rather care about making money from trading cryptocurrencies than concern themselves with learning the technical aspects of it. To begin trading, only a bare minimum of technical knowledge is necessary, but we think it’s still helpful to understand the fundamentals.
So, what is mining?
You may be familiar with the fundamentals of gold mining. To obtain this precious raw material that has great worth in the eyes of the public, we must put in a certain amount of effort. There aren’t many differences between that and mining for Bitcoin and other cryptocurrencies, except that the mining takes place entirely online.
The process of validating transactions that need to be added to the blockchain database is called “mining.” On proof-of-work blockchains like Bitcoin, mining is crucial. Most modern blockchains don’t require or allow mining and instead use other consensus mechanisms, like proof of stake.
Mining ensures that only valid transactions are verified and added to the blockchain. Giving a cryptocurrency network a dependable settlement system is what mining entails.
How does it work?
The computers used by miners, known as nodes, continuously compile and group individual transactions from the previous ten minutes (the predetermined “block time” of Bitcoin) into blocks. Then, by cracking a tricky mathematical puzzle, these nodes compete to be the first to validate a new block for the blockchain. This is done to prevent attackers from compromising the Bitcoin network.
Each miner in the network is competing to solve this puzzle first. The first miner to discover the answer receives a specific number of newly created bitcoins, or whatever currency is being mined, as a reward.
The entire network is informed when the mathematical puzzle is solved, and the other nodes verify that the solution is accurate. The new block is added to the blockchain if everything is in order.
The difficulty of these cryptographic puzzles increases as more and more bitcoins are mined. Therefore, to continue receiving the same amount of bitcoin in exchange for solving puzzles, miners must increase their computational power.
Due to the lack of computing power available worldwide to successfully solve the difficult mathematical operations required for successfully validating a block, the prize is no longer ever won by a single person. As a result, miners come together and establish “mining pools” such that, based on the amount of work that each pool member contributed, the award is then divided. As you would expect, greater rewards are given to those with more computing power.
Also, once all bitcoins have been mined, miners will instead receive a portion of the transaction fees that users of the network have paid as compensation.
For every 210,000 blocks, the reward is cut in half. 50 Bitcoins were given to miners as a reward at first, but in 2012 this amount was cut in half to 25 Bitcoins. Every four years, the number is halved (divided into 2).
After all, as we’ve said, you may still wonder if the mining process can be attacked or compromised. It can (never say never, right? ), but it would be extremely difficult and expensive, making that probability almost impossible. To reverse a transaction on the Bitcoin blockchain, for instance, would require 51% of the network’s computing power (i.e., a 51% attack). It would be extremely challenging to modify transactions that had already been validated before the attack; the older the transaction, the more challenging it would be.
Here are some key takeaways:
- The Bitcoin network depends on mining (proof of work mechanism)to function.
- Miners validate network transactions in exchange for newly created units.
- Mining workers compete with one another to solve mathematical puzzles.
- Energy is used a lot in mining.
- Mining needs specialized equipment to remain profitable.
Trying to understand the world of cryptocurrency may seem frightening, but at Mowblox, we desire to make it easy for you to understand, so make sure to stick around. You’ll be thankful you did.