Cryptocurrency, or crypto for short, is a digital currency or asset that can be used as a medium of exchange and/or a store of value. To source these digital assets into circulation, they must be mined by miners; aptly named for the characteristics akin to mining precious metals for instance. These miners set up high performance computers to extract the data aka the asset/crypto. Given the value that some cryptocurrencies have nowadays, mining is just the first step to what has revolutionised the world. Here is a breakdown of what crypto mining is and how it works.
How does crypto mining work?
To first understand mining, you must understand how and why it exist. Bitcoin was the first cryptocurrency to be created. The idea came up by the pseudonymous Satoshi Nakamoto, either believed to be a single person or more likely a collaborative effort of disruptors.
Bitcoin wasn’t the first attempt of creating digital currencies. With the advent of the internet in the 80s the idea of whilst invented as an information highway. It wasn’t long before people spotted how it could be used for de-centralised commerce and peer to peer transactions in the same way we could email each other instantly. Z-Cash and Digicash tried first but they couldn’t solve the ‘double spend’ problem. This occurred when transacting peer to peer if I send a photograph digitally, via the internet. I maintain a digital copy of the photo on my computer as does the recipient. The reason 3rd party payment software like Paypal quickly triumphed. But this costs the user to send their own money around as they need compensation for validating money that has left one account and been received in another.
Satoshis vision after the 2008 financial crisis was to take the power away from the large banks but to create something truly decentralised; the double-spend problem needs solving. Enter the ‘crypto-miner’, a miner takes on the role of validating transactions that occur on the blockchain. These are time stamped into blocks every 10 minutes and thus form a chain to make the blockchain. To make this reward system fair. Miners compete in solving a mathematical problem per block of transactions with the winner receiving newly minted crypto. This is how it comes into circulation. Hence the moniker ‘miner’. For instance the current reward for Bitcoin is 12.5BTC per block every 10 minutes.
The process of crypto mining is carried out either independently or in a group often referred to as a ‘mining pool’ with the use of a cutting edge computer hardware run by powerful graphics cards and usually connected in tandem or series to create server farms that are capable of creating the largest hashing power possible; the larger the hashing power the more chance of successfully mining the asset.
These individuals or groups verify transactions across their dedicated networks by competing against each other. The individual miner or group succeeding first is rewarded with a ‘coin’ (or piece thereof) of the respective currency. Not all cryptos are mined, but the most popular crypto, Bitcoin, definitely is. And it’s big business.
How does mining help a cryptocurrency network?
The cryptocurrency networks entirely rely on miners who use their hardware systems
to verify the transactions which in turn create and maintain the ledgers which can also be known as nodes. These nodes hold entire copies of the respective blockchains which when linked up create the distributed ledger system and protects from having data stored centrally and thus having single points of failure.