Bitcoin and other cryptocurrencies might be all the rage around the world; however, not many people understand how they work under the hood. You see, there are three fundamental ways to obtain a cryptocurrency through cryptocurrency mining:
(1) Purchase the crypto coins from a cryptocurrency exchange using wire transfer, credit card, Paypal, and other traditional payment methods. The good news is that there are several popular crypto exchanges, including Coinbase, Kraken, Coin square, etc.
(2) Accept cryptocurrency coins as payment for services or goods.
(3) Mine new coins, which is the premise of this article.
So, What Is Cryptocurrency Mining?
Although it might sound like it, mining Bitcoin or other cryptocurrency has nothing to do with shovels, pickaxes or excavators. In fact, it doesn’t involve any kind of underground exploration or excavation. As such, mining cryptocurrency entails the process of adding new transaction records to the Blockchain, a decentralized public ledger that exists to make sure that every transaction can be verified and everyone can access it. More than that, blockchain plays a key role in confirming legitimate cryptocurrency transactions and preventing double spending.
To recap, crypto mining offers twofold purpose: (1) it releases new coins into the circulation, and (2) adds new transactions to the public ledger (blockchain).
Why are these two related functions important? You see, every new transaction added to the public ledger helps ensure that the blockchain is functioning without a hitch. It also helps prevent fraud and maintain the integrity of the blockchain. More importantly, the miners play a pertinent role of auditing, verifying, and recording each and every transaction on the blockchain. And, as an incentive, they get to keep the crypto coins they release to the circulation.
Who and What Do You Need to Mine Cryptocurrency?
In the early days of Bitcoin, it was only the ardent crypto aficionados who engaged in mining. Nowadays, the cryptocurrency mining space has opened up and gained traction with big farm operators and individuals alike. Similarly, a group of enthusiastic miners, often called a mining pool, can join hands and bring together their resources to mine Bitcoins collectively.
For best results, mining cryptocurrency calls for the right tools. Oftentimes that means steady internet connectivity, devices with high-level computing power, and robust electricity feed. Serious miners also might need to invest in customized mining hardware called ASIC. Of course, there are a ton of other mining methods apart from ASIC-based cryptocurrency mining. Besides, mining techniques vary from one cryptocurrency to another.
How does Cryptocurrency Mining Work?
To release new crypto coins to the network, miners have to solve complex mathematical problems. Why? The blockchain is programmed in such a way that cryptocurrency transactional data is collected in the form of “blocks” of computational algorithms. It’s these complex algorithmic problems that miners have to solve for the said blocks to be added to the public ledger.
As mentioned above, you need the right ASIC hardware and robust power source to mine Bitcoins and other cryptocurrencies effectively. You don’t need to be a math guru; all you have to do is set your computing device to generate a hash (a hexadecimal number with 64 digits) that’s either equal or less than the target block’s hash.
Interestingly, this block-building process is accepted on a first-come basis. If you’re the first miner to solve the block of the algorithm, you are the lucky person designated to add the next block to the public ledger. The trouble is that cryptocurrency mining has been intentionally set to become progressively difficult as more and more crypto coins are mined. This is particularly important because the supply of most cryptocurrencies such as Bitcoin is limited or capped.
Proof of Work
Again, several miners often attempt to solve the algorithmic problem simultaneously. But, the first miner to provide evidence of the solution is the only one who’ll be rewarded. This process is called the proof-of-work system (PoW), and it helps keep the blockchain healthy and authentic
Rewarding Crypto Miners
Block reward is a term used to refer to the prize the cryptocurrency miners gain for solving the problem and releasing new cryptocurrency to the blockchain. The reward for the first block of Bitcoin was 50BTC. Perhaps of more interest is that the block reward is halved after several blocks have been added — for Bitcoin and Litecoin, this is every 210,000 and 840,000 blocks respectively.
The inherent benefit of halving the reward block is to reduce the rate of inflation as well as maintain the integrity of both the cryptocurrency and blockchain.