Cryptocurrency mining is the process of creating coins and verifying transactions, but it’s also a way for crypto investors to earn rewards.
What is cryptocurrency mining?
In simple terms, it’s the process of creating new crypto coins and verifying new transactions. Mining is essential to keeping cryptocurrencies secure since it verifies the blockchain, allows cryptocurrencies to function on decentralized networks, and adds each new coin to a distributed ledger. Mining is most important because it’s how the crypto industry operates without central oversight and prevents digital currencies from being double-spent on a distributed network.
Mining is one way people can get access to cryptocurrencies as opposed to purchasing them on a crypto exchange or receiving them as payments or gifts from someone else. Technically, anyone with the right computer power can mine their own crypto, but that computational power requirement has drastically increased in recent years as the crypto industry has grown.
Coinbase reported that in October 2019, it required 12 trillion times more computing power to mine one bitcoin than it did when the first blocks were mined in January 2009. Back then, people could mine crypto on their regular computers and actually make a profit. In today’s crypto world, miners either pull their resources together to mine crypto or work for specialized companies with the computer capacity to handle the job.
How does it work?
The more extended definition of crypto mining is as follows, per PCMag: “the competitive process that verifies and adds new transactions to the blockchain for a cryptocurrency that uses the proof-of-work (PoW) method. The miner that wins the competition is rewarded with some amount of the currency and/or transaction fees.”
The proof-of-work algorithm is a decentralized consensus mechanism that requires members of a network to expend effort solving an arbitrary mathematical puzzle to prevent anybody from gaming the system, Investopedia reports.
The proof-of-work method requires a lot of electricity, hence why amateur miners may not be able to handle the job alone. Miners need a graphics processing unit or an application-specific integrated circuit to run the mining process.
As an example, here’s a breakdown of the bitcoin mining process:
- With the right software, hardware, internet access, and computer network, miners begin running calculations on specialized computers to create a new bitcoin.
- The network holds something similar to a lottery where every computer on the network works to guess a 64-digit hexadecimal number called a target hash. This “number” could also include letters.
- The faster a computer comes up with guesses, the more chances it will run the most calculations and ultimately hit that magic 64-digit hexadecimal number.
- The winning computer is in charge of updating the blockchain ledger with all the verified transactions for that one bitcoin. This process creates a new block and puts a new bitcoin in circulation.
- The miner behind the winning computer is granted a predetermined amount of newly minted bitcoins to reward their work.
Cryptocurrency mining is costly, and the rewards are sporadic, but it’s necessary to secure digital currencies. Mining is also an alternative for crypto investors to earn assets without spending money from their own pockets.