What is Cryptocurrency Mining? How Does it Work?

Crypto mining is mainly thought of as a way of generating new coins. That, however, is just one part of the larger equation. Crypto mining also includes the process of validating different cryptocurrency transactions on Blockchain networks and then appending them to the desired distributed ledger. Even more importantly – cryptocurrency mining is essential for preventing the extra spending of digital currency on a distributed network.

Like physical currencies, when one person from the network spends a cryptocurrency, the entire digital ledger needs to be updated in real-time. This is done by debiting one account and crediting the other. In the case of physical currencies, it is difficult to manipulate these transactions. However, with digital currencies, digital platforms are much easier to manipulate. As a result, only verified miners are mostly allowed to update transactions into the digital ledger. This also entrusts miners with the responsibility of keeping the Blockchain network safe, secure, and operational. 

Meanwhile, the cryptocurrency miners are rewarded for their work in securing the network using new coins. Cryptocurrencies work on distributed ledgers that lack a centralized governing body – that is why crypto mining is all the more essential for validating different transactions. Thus, crypto miners are incentivized to find ways to provide utmost security to the network by participating in the transaction validation process and increasing their chances of getting freshly minted coins.

To ensure that only authenticated cryptocurrency miners can validate and mine different transactions on the ledger, a Proof-of-Work (PoW) consensus protocol needs to be put into place. This PoW is necessary for securing the network from various external attacks. 

Importance of Proof-of-Work in Cryptocurrency Mining

Think of cryptocurrency mining as somewhat similar to mining metals. While miners of these precious metals unearth diamonds, silver, or gold, cryptocurrency miners will incept the release of new coins into public circulation. For these cryptocurrency miners to win new coins as a reward, they need to work with machines that are capable of solving complicated cryptographic and mathematical equations using the concept of hashes.

Think of hash as a truncated digital signature of a piece of data. Hashes are useful for securing data transmission, especially when it is happening across a public network. Miners compete among one another to zero in on a hash value generated by a cryptocurrency transaction. Then, the first miner to add the block to the ledger after cracking the code gets the reward! 

Each block has a hash function that helps in linking it to the previous block. In this manner, a thoroughly connected chain of blocks is formed that finally leads back to the first block. Because of this reason, peers present on the network can easily and accurately verify whether some blocks are valid or not and whether or not the miners who are validating these blocks have solved the hash to get the award. 

Over time, as miners work with more advanced machines to solve this Proof-of-Work problem, the difficulty of equations across the network gradually increases. Along with that, the competition among miners also increases, which leads to the shortage of cryptocurrency.

Starting with Cryptocurrency Mining

Crypto mining requires systems having special software used for solving cryptographic mathematical equations. In the early days, Bitcoin could be mined using a simple CPU chip on a personal computer. However, CPU chips are now impractical for mining most of the cryptocurrencies that are in circulation now. The reason for this is the increasing levels of complexity. 

Today, crypto miners need specialized GPUs or Application-Specific Integrated Circuits (ASIC) to carry out the crypto mining process. In addition to this, the GPUs in the mining rig must also be connected to a stable internet connection at all times. Another vital thing to note is that each cryptocurrency miner must be a member of an online crypto mining pool.

Methods of Cryptocurrency Mining

Cryptocurrency mining techniques have evolved over the years along with the improvements in technologies. In the early days, CPU mining was the default option for the majority of miners. However, that is a completely impractical approach in today’s world. It is extremely slow and requires months to generate even small amounts of profit – because of the high cooling and electricity costs. As a result, some new methods have emerged over the years. Here are some of those: 

  • GPU mining is one of the ways to maximize computational power. It does so by combining several individual GPUs into one mining rig. If you wish to take this approach, you’ll require a motherboard and a cooling system. 
  • ASIC mining is another method of crypto mining. Unlike GPU mining, ASIC mining is specifically designed to mine cryptocurrencies. As a result, the number of cryptocurrency units produced by ASIC is higher than that by GPUs. However, this approach tends to be expensive. 
  • Another approach that is quickly emerging due to the increasing costs of ASIC and GPU mining is cloud mining. Cloud mining would allow crypto miners to benefit from the power of major corporations and dedicated cryptocurrency mining facilities without any hassles. Independent cryptocurrency miners can identify free and paid cloud mining hosts and rent a mining rig for a specified period. This is the most convenient way for you if you wish to become a crypto miner. 

Mining Pools in Cryptocurrency Mining

Using Mining Pools, cryptocurrency miners get a chance to combine the computational power of their resources and enhance their chances of mining. If a particular mining pool becomes a success, the total reward is distributed all across the pool. This is done in proportion to the contribution of each of the miners towards the total amount of resources. 

Most of the cryptocurrency mining applications come with a mining pool. However, in today’s age of social media, crypto enthusiasts also have the option of collaborating and creating their crypto mining pools. Since some collections are likely to earn greater rewards than others, miners are not bound to stay only in one mining pool. Also, they can switch to different pools if required. That said, seasoned miners prefer official cryptocurrency mining pools since they provide ongoing technical support and receive frequent upgrades from their host companies.

In Conclusion

If you are an aspiring cryptocurrency miner, curiosity and a strong desire to continuously learn will take you a long way. The cryptocurrency space is highly dynamic, and with new technologies emerging every few months, things will constantly change with time. 

As a result, now is the perfect time to dive deeper into the world of Blockchain and understand the finer nuances of how it works. To help you with that, upGrad brings you the Advanced Certificate Program in Blockchain Technology. Offered in collaboration with IIIT-Bangalore, this course starts 30th September 2021 and runs for 7.5 months. So get yourself enrolled and start your Blockchain journey among global peers, industry-leading mentors, and all-around placement assistance. 

Is cryptocurrency mining legal?

This depends on your country. Please check the legalities of your place of residence since crypto mining is legal in some countries while not permitted in others.

Can you mine cryptocurrencies for free?

Yes, you can use various GUI-based mining tools to start crypto mining for free. One such tool is EasyMiner.

When is cryptocurrency mining a profitable venture?

Several factors are responsible for determining whether or not cryptocurrency mining is going to be profitable for you. These include the cost of the electricity to power the computer system, the availability and price of the computer system, and the difficulty in providing the services.

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