What is Crypto Mining? How Cryptocurrency Mining Works

Updated on: October 4th, 2021
This content has been Fact-Checked.

What is crypto mining? Crypto mining is the process of creating individual blocks added to the blockchain by solving complex mathematical problems. The purpose of mining is to verify cryptocurrency transactions and show proof of work, adding this information to a block on the blockchain, which acts as a ledger for mining transactions. 

This process uses a node run on a device with extremely high processing power called a mining rig or a Bitcoin mining app. As an incentive, miners receive a reward in cryptocurrency for each block added to the chain. This reward is how new coins are generated and put into circulation. 

Crypto mining involves several proof systems depending on the type of cryptocurrency. Since the blockchain is decentralized, mining is uniquely different from central banks and the creation of fiat. The question is, how does crypto mining work?

Cryptocurrency Mining Explained

What is crypto mining for, and how does cryptocurrency mining work? The process of mining is energy costly and requires expensive hardware and software. 

There are multiple processes miners must follow. These include verifying transactions and performing mathematical computations known as proof of work (PoW), and other later developed systems like proof of stake (PoS), and other proof methods such as proof of authority (PoA). These systems use a modified version of the original blockchain, such as the Ethereum blockchain. 

Proof of work (PoW) is a form of cryptographic zero-knowledge proof in which one party (the prover) proves to others (the verifiers) that a certain amount of a computational effort is expended.

These blocks are made up of one or more transactions, equaling 1 megabyte per block. While miners compete at mining, the winner who successfully adds the next block gets rewarded with a specified amount of tokens.

Key Takeaways

  • Blockchain mining

Understanding the blockchain is crucial. Mining, as nodes and blocks, make up the crypto ecosystem. The name blockchain comes from the blockchain’s structure. Each block is connected to the last in a chain, thus creating an effective ledger. Without the blockchain, mining, crypto ledgers, and transactions would not be possible. The blockchain is a decentralized and secure cryptographic system.

  • Nodes

Nodes to connect to the blockchain network, mine cryptocurrency, and verify blocks and transactions. There are three types of nodes: full nodes, lightweight nodes, and mining nodes. Mining creates new tokens awarded to the miner who creates the block.

  • Decentralization for miners

Crypto miners make up a decentralized network of nodes. This process of individual nodes competing and working together to build the blockchain makes it more safe and secure and makes manipulation of cryptocurrency more challenging.

Traditional Banks Are Centralized Systems

A central bank is a financial institution responsible for overseeing the monetary system. Banks issue currency and set interest rates on loans and bonds. Banks control the money supply, increasing and decreasing it and deciding on required cash reserve deposits.

Banks work alongside the Federal Reserve, lending money to manage the money supply and control liquidity. These loan transactions can cause increased interest rates which lead to inflation.

Banks have control over currency built off a centralized oversight design. Banks see this as being crucial for managing the financial system. Despite this, it can lead to issues of potential corruption and temperament.

Cryptocurrencies Use Decentralized, Distributed Systems

Blockchain technology uses a decentralized distribution system. The system organizes through a network of nodes. There is no central authority that has control over the blockchain. The blockchain is a direct and transparent ecosystem between miners, exchanges, and the blockchain itself.

By storing data across the network, the blockchain eliminates most issues and risks that centralized systems have. Blockchain has no central point of favor, making it function resiliently and hard to manipulate.

Because blockchain works in a “Chain,” it is a self-reinforcing system allowing few possible vulnerabilities.

Understanding the Terms: Centralized, Decentralized, and Distributed

Generally, money systems tend to become more centralized with time and more central access to regulate the system. 

There has been some critique over decentralized cryptos, namely altcoins, such as coins operated through the ethereum blockchain network. Blockchains that use proof of stake may be less decentralized. Stakers holding more tokens may have an advantage in the network over those with fewer. 

On the other hand, proof of stake can achieve consensus and speed up the network process while consuming less energy. These systems are still highly transparent and decentralized because they use blockchain encryption.

The central bank is centralized because to use it to exchange money, we rely on a third party to hold our money and do our transactions. This reliance is a trust system that Bitcoin does not have. Bitcoin is known as a trustless system.

Is Crypto Mining Legal?

People often ask, is Bitcoin mining legal? What is crypto mining in the eyes of the law? There are still no uniform international laws that regulate cryptocurrency and crypto mining. A few countries currently do not allow cryptocurrency, including Algeria, China, Russia, Columbia, and Bolivia. In these countries, mining is generally still allowed and even encouraged with incentives.

Crypto mining has a reputation for its use by criminals on the dark web, which is why some countries have challenged its legality.

Inevitably, Bitcoin and other cryptocurrencies have gained ground and approval as they have become more widely used. The result has been ETFs and corporations in certain countries embracing Bitcoin. 

How Crypto Mining Works (And an In-Depth Look at Blockchain)

What is mining? How is cryptocurrency mined? Cryptomining is the process by which new tokens get put into circulation. The process begins when a transaction is submitted and authenticated. A block representing that transaction is created and sent to every node in the network. Nodes then validate this transaction.

The update is sent across the network after the transaction is complete. Then add the block as the next block in the blockchain. Nodes receive payment in cryptocurrency for their work in validating transactions. The process continues as the blockchain grows.

Proof of Work (PoW) is how they call the mining process Bitcoin uses. How mining works here is by a process involving complex mathematical calculations. 

Blockchain networks have adapted to a process called proof of stake (PoS) validation consensus protocols. In this system, participants stake their crypto to gain mining access. The more cryptocurrency they stake, the more they can mine.

Breaking Down the Roles and Processes Within the Blockchain

By definition, a blockchain is a chain of blocks that grows continuously as each block gets added to the chain. The purpose of the blockchain is to validate transactions and assure that transactions are authentic, secure, and not spent more than once. The blockchain is a decentralized ledger designed to be added to but not altered.

Each block contains a timestamp, transaction information, and fixed information used by the miner to develop the cryptographic hash. The cryptographic hash is a central part of the blockchain network process

A hash is a long string of numbers that comes at a set length. The hash has a fixed length to make it more difficult for malicious actors to crack the block using the hash output. 

Miners use the hash to validate transactions on the block. Hashing is when miners process the data of a hash through a mathematical equation, resulting in an output hash. The purpose of Hash cryptography is to make the blockchain foolproof against malicious actors.

A Step-by-Step Look at the Crypto Mining Process

How does crypto mining work? What does it mean to mine cryptocurrency? When miners use computations to create a new block on the blockchain, they are trying to guess the target hash. Miners are rolling the dice using their GPUs and generating a 32-bit sized nonce or number only used once. 

The 256-bit hash is much larger than the nonce. The first miner whose nonce generates a hash less than or equal to this target hash is awarded tokens for completing the block. Through consensus, the node is qualified to add these new transactions to the blockchain.

Each 1-megabyte block created contains a hash of the previous block, transaction data, and a timestamp when added to the chain.

1. Nodes Verify Transactions Are Legitimate

What is cryptocurrency mining transaction validation? Users create cryptographically secure transactions and broadcast these transactions to the network. When they initiate a transaction, data adds to a block and duplicates across multiple nodes across the network. These nodes act as administrators for the blockchain. Their job is to route out bad actors while verifying transactions through consensus.

Since the block hash depends on the data from a block, changing even one character in a single transaction would invalidate the reference. This system makes it apparent immediately if data has changed.

They incentivize the verification process through rewards, usually in the form of cryptocurrency. This incentive for verifying transactions encourages faster mining and quicker transactions as the blockchain develops.

2. Separate Transactions Are Added to a List of Other Transactions to Form a Block

They store transactions on nodes before being added together to form a block. Each node carries a full copy of the blockchain.

Every block must have at least one transaction and typically have many making up the whole block. Once transactions are verified, these transactions are pooled together for encryption, and the block adds to the blockchain. If any of the transactions are not legitimate, the miners will route them out.

On the Bitcoin network, the average confirmation time for one payment is 10 minutes. The network can process a maximum of 7 transactions per second.

3. A Hash and Other Types of Data Are Added to the Unconfirmed Block

When they create the block, the block header contains the items needed to solve the hash. 

The block header has a version number, a timestamp, the hash used from the one before it, the hash of the Merkle root, the nonce, and the target hash. Cryptography uses block headers to validate transaction data before the block gets added to the chain.

The nonce appends to the hashed contents of the block that came before it and then hashed.

4. Miners Verify the Block’s Hash to Ensure the Block Is Legitimate

What is cryptocurrency mining hash verification? Before a block gets added to the blockchain, the network must verify the information contained on the block using the hash. 

To verify a block, miners must collect the transaction data and assign it a hash. To verify the next block in the blockchain, miners will have to collect another set of transactions and then find a new hash. Each block’s hash contains the hash of the last block, plus a new hash created from its transaction data.

The hash is the primary security element in the blockchain. For a malicious actor to change any data in a block, the hash would change.

5. Once the Block is Confirmed the Block Gets Published in the Blockchain

To publish the block there needs to be confirmation through one or multiple miners in a mining pool. The miner’s job is to confirm and validate transactions. 

They publish the block as part of a connected chain, and the block remains there as more blocks add on. These blocks are tamper-proof, meaning that it’s arduous to modify them once published.

This is an effective security method because the malicious actor would have to alter the entire blockchain to change the stored data of a single block. Even with modern technology, this is next to impossible because of the time and computing power it would require.

How These Components Work Together in the Blockchain Ecosystem

What is crypto mining as an ecosystem? The blockchain ecosystem circulates between users who make transactions, the miners who verify transactions and create blocks, and the block that is finally updated and stored on the blockchain.

Miners get incentives to validate transactions and create blocks, while users making transactions rely on the miners for their transactions to be confirmed. 

The blockchain works as a public, decentralized ledger that is advantageous for miners and those transacting cryptocurrency. Miners have an incentive to make transactions faster, and users benefit from the encrypted protection of the blockchain network.

With the creation of new cryptos and applications for proof of stake mining every day, more incentive is added to mine and make transactions. This gives programmers everyone an incentive to improve on the blockchain.

Who Updates the Blockchain (and How Frequently)?

What is cryptocurrency mining used for, in terms of updates? The blockchain is decentralized. Therefore, it does not store any of its information in one central location. When a block gets added to the chain, every computer on the network updates its copy of the blockchain to reflect the change. 

Through this decentralized network, the blockchain is updated constantly without the need for a third party. This decreases the chances of a nefarious actor or third party making negative updates to the blockchain. If there’s a mistake, decentralization routes it out.

The bitcoin mining algorithm targets finding new blocks every 10 minutes. If more miners join the network and add hashing power, the process is quicker.

How Much a Miner Earns

How much a miner earns depends on the cryptocurrency they are mining and what proof method they are using.

In Bitcoin, the number of coins awarded decreases over periodic events known as a “halvening,” or halving, when the coin’s subsidy gets cut in half. After each halvening, the reward for creating a block splits in half. 

This means that the miners who create blocks today make half of what they would have before the last halvening. The halvening also tends to correspond to the value of Bitcoin because as it becomes more costly to add coins to the circulation, supply vs. demand will go down.

Over time, if they hold their coins, the value is predicted to continuously go up. In this sense, the profitability of mining over a long period is dependent on the coin’s value. Many miners see this as a reason to mine coins, despite cost inefficiencies. 

A Quick Look at the Different Types of Cryptocurrencies

What is cryptocurrency mining concerning different cryptos? The first cryptocurrency to be successfully adopted was Bitcoin. Now, with its success, cryptocurrency is beginning to be sought after by institutions and retail investors. 

Since Bitcoin’s creation, more cryptocurrencies use the blockchain model at an ever-increasing rate. They call these coins “altcoins.” Some popular examples of altcoins are Ethereum, and Litecoin, Cardano, Polkadot, and Aave.

Similar to Bitcoin, altcoins use blockchain which allows secure peer-to-peer transactions with no central authority or banks managing their transactions.

NFTs or non-fungible tokens are another newly popularized system of non-monetary coins that use the blockchain system. NFTs are seen to many as collectibles, similar to trading cards, but serve many values and have a long way to go in terms of potential use.

As of September 2021, over 6,500 types of cryptocurrency exist. Many projects have failed, while some have grown enormously profitable to investors and achieved use in many applications. 

Why Is Crypto Mining Such a Big Deal?

If you’re interested in crypto, you should know that mining is an integral part of the process. You can earn cryptocurrency without having to put money down. This means there could potentially be a big long-term profit if you play your cards right. 

There’s a reason why huge mining farms exist that work continuously without breaks to mine as much crypto as possible. As crypto is such a valuable commodity today, getting your hands on this appreciating currency is a good thing, through whatever method you choose. 

Mining crypto also means you get to be a part of growing the blockchain and supporting the blockchain system. Without miners, the blockchain wouldn’t work.

What Do I Need to Mine?

What is cryptocurrency mining requiring these days? You need a wallet, Bitcoin mining software or other cryptocurrency mining software, and mining hardware. Wallets are simply for encrypting and storing your earned crypto. There are two types of wallets; hot, and cold. A cold wallet is a physical storage system for your crypto data, like a hard drive. A hot wallets are for online purposes.

Buying and using mining hardware is the difficult part of the mining process. Your mining rig will require a computer with enough capacity to mine, and enough power to keep it running.

These costly computers come in different forms. GPUs that use multiple graphics cards, often powered by Nvidia and AMD can be used to handle mining calculations, such as a Bitcoin mining calculator, Ethereum mining calculator, Monero mining calculator, nicehash calculator, or other crypto mining calculator.

More commonly today, devices like ASIC miner “Application Specific Integrated Circuit” are used for mining because they are more efficient. Generally, people buy specialized mining hardware for mining.

What Are Coin Mining Pools?

Coin mining pools are when a pool of miners works together to solve the hash and create the next block in the blockchain. The crypto reward is then dispersed to everyone in the pool when the block gets created. 

These networks cooperate and receive payments distributed through the pool, allowing miners to improve revenue in exchange for a slight discount in fees paid to the pool coordinator.

Being a part of a mining pool is like having a group of people each trying to guess a number between 1 and 100, vs just yourself. If everyone is guessing at the same time, the number will likely be guessed much faster.

If Cryptocurrency Mining Is So Simple, Why Doesn’t Everyone Do It?

What is cryptocurrency mining worth to you? To mine, it helps to have an understanding of hardware, software, cryptocurrency, and mining. Most people just don’t know much about these things and aren’t inclined or don’t have the time to learn. 

Without an understanding of how to use mining tools and work with blockchain, you won’t be able to compete with other miners. You may also be setting yourself up to be hacked or taken advantage of by someone with illicit intentions.

It can be challenging to make a profit. Hence, you have large farms and mining pools working together. Trying and failing to make a profit mining is a reason why some might give up early on mining.

Cost is another factor. Mining and mining equipment isn’t cheap, and it’s important to factor in the ROI as you proceed. People who don’t have an understanding of ROI might get frustrated and quit early on after not making a quick profit. Nicehash calculator is also a great tool.

1. Crypto Mining Is Resource-Intensive

Cryptocurrency mining doesn’t just take expensive hardware, understanding, and time to perform. Proof of work is intensive because of the massive amount of computing power that goes into the process. 

Graphics cards on Bitcoin mining rigs using Bitcoin mining software work 24 hours a day, 7 days a week to perform proof of work. Bitcoin mining rigs are costly. Proof of stake mining is less resource-intensive, but still can be costly.

A node with three GPUs, for instance, can consume over 1,000 watts of power while running. This is like adding another resource costly appliance to your home that runs around the clock, with the risk of overheating, or parts that may need to be replaced. 

Before learning to mine, you should consider if it is feasible for you to use this much power.

2. Crypto Mining Is Expensive

What does cryptocurrency mining cost? The difficulty of mining is high, and it also requires expensive hardware, the right software, and a lot of electricity. Mining is costly and may even be unprofitable for some. The cost of electricity and efficiency of their mining rig will make a big difference in how much they spend.

Bitcoin mining pools have become popular. This is also why certain governments have created massive mining farms designed to mine at high efficiency. 

With each Bitcoin halvening, fewer coins get rewarded to miners for mining blocks. You should know the rules and processes of whatever coins you are mining so that you can more easily maintain a positive ROI. Otherwise, miners may lose money or have a negative ROI.

As of July 2021, the top 5 mining pools control 64% of the total hash rates. A bitcoin mining calculator is a great way to keep track of hashing and costs.

3. The ROI Ain’t What It Used to Be

What is cryptocurrency mining ROI? ROI, or Return on Investment, is a ratio or percentage that reflects the profitability of a trade or investment. There are tools for calculating ROI on many crypto websites and exchanges.

ROI is the net profit divided by net cost. The higher your ROI value, the more profitable your investment. Another way of looking at it is the number of days between the purchase made and the day the buyer has made enough income to make up the cost.

Here are two ways of calculating ROI: 

ROI = Net Profit / Net Cost

ROI = (Current Value – Total Cost) / Total Cost

If a trade has an 80% ROI but takes 9 months to complete, this would be less efficient than a trade with a 70% ROI reached in 6 months.

100% ROI means someone has doubled their money, while a negative ROI means the return was lower than the investment. ROI is useful for seeing the efficiency of your investment over time.

Risks of Mining

What does crypto mining mean to you? For some, it means risk. When mining, there is always a chance you could lose money on your investment. Price volatility can be a factor, as well as the risk of burning out your equipment or losing precious information.

An obvious risk to mining is security. It isn’t uncommon in the cyber world for hackers to target crypto traders and miners. This might come in the form of a security breach where hackers download malware onto a mining device, usually through an unsecured wifi network. Crypto mining software tagged as malware can also be a problem.

Another attack used is phishing, where victims get tricked into clicking links that load cryptocurrency mining code on their devices. They may also infect websites with malicious code. These attacks can happen without the knowledge of the miner, who may see little or no differences. 

A common symptom that your device gets infected with malware is that its processing speed slows down. 

Some tips to protect yourself from these risks are:

  • Avoiding public wifi networks
  • Use a VPN
  • Securing your devices

Final Thoughts on Cryptocurrency Mining

What is cryptocurrency mining for? Why should you be involved?

How crypto mining works is by releasing new crypto into the system and verifying and adding transactions. Mining is a crucial part of the crypto ecosystem. 

Because the blockchain is a public ledger, mining is a novel process for creating digital money. Blockchain and mining have changed the way we look at currency, banks, legislation, and decentralization.

The challenge of mining comes down to the cost versus the reward of earning cryptocurrency. Mining is not only the pursuit to earn crypto.  

It doesn’t matter if you are an individual with the hope of being a successful miner or a massive mining farm funded by corporate or government money. Mining will impact the future.

Mining is a legitimate means of being a part of a future where centralized banking becomes obsolete, replaced altogether by decentralized blockchain technology. It is also a movement that is changing the world.

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