"Mining for Gold: How Cryptocurrency Mining Works
Many people are interested in cryptocurrencies, and a growing number are investing. But even among those who regularly trade cryptos, there are few who actually understand the underlying technology.
This arises from the fact that cryptocurrencies are, at present, largely used as speculative tool. A lot of people are chasing profits and don’t care about anything else. Only minimal technical knowledge is required to get involved with trading, but we believe it is useful to know the basics. Education will eliminate uncertainty and doubt, which are still a large part of the broader public view on Bitcoin and other cryptocurrencies.
Mining is a case in point. Let’s dive in.
What Is Crypto Mining?
Mining is essentially a distributed consensus system. It’s a mechanism through which many people around the world are involved in maintaining crypto networks. “Mining” is a term used to describe the process of validating transactions that are waiting to be added to the blockchain database. Mining is essential on Proof of Work blockchains like Bitcoin’s. Newer blockchains tend to use Proof of Stake and other consensus mechanisms, and they do not need or allow mining.
On Proof of Work blockchains, mining establishes the chronological order of transactions, which is essential in ensuring that previous entries to the crypto “open ledger” can’t be changed. If a transaction is to be successfully confirmed and included, it has to be packaged in a block that must comply with strict encryption rules. Those are verified and validated by the miners on the network and there is no involvement of any government authorities. This protects the neutrality of the Bitcoin network.
We can make a quick comparison with using credit cards in the traditional electronic money system. Every payment must be verified and recorded by the credit card company (for example, MasterCard or Visa). We could say that the entire cash flow of the contemporary banking system is recorded in centralized systems, and they are very susceptible to manipulation.
Cryptos like Bitcoin don’t have centralized organizations that confirm transactions. With Bitcoin, that work is done by miners. They create new Bitcoins in the process.
The process is called mining due to its many parallels with gold mining. Both scenarios involve investing a large amount of work and energy to produce a highly valuable asset.
What is crypto mining? It’s a way of rewarding those who validate blocks of transactions so they can be added to the blockchain.
The basics of mining cryptocurrency
How does crypto mining work? Let’s start our explanation with an analogy.
You are probably familiar with the basics of gold mining. We have to put in a certain amount of work to retrieve the raw material that has value in the eyes of the people. Bitcoin is not much different in that regard, except that it is an entirely digital resource, so the mining process takes place in the virtual world.
Obtaining gold is simple, but the process can be volatile and unpredictable. Mining cryptocurrency is much the same.
There is an economic incentive for gold mining when the costs associated with the mining of one ounce of gold (labor, paychecks, equipment) are less than the value of one ounce of gold.
Bitcoin is similar, but there are slight differences. The miners are discovering new Bitcoins at pre-determined, rising levels of difficulty and increased energy consumption.
There is an economic incentive to mine Bitcoin when costs associated with the mining of Bitcoin (electricity, computing power) are lower than the value of the mining rewards.
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