Crypto Mining Explained: Understanding Cryptocurrency Mining” Crypto mining ensures the security and decentralization of cryptocurrencies, such as Bitcoin, based on a Proof of Work (PoW) consensus mechanism. It’s the process by which user transactions are verified and added to the Blockchain’s public ledger. As such, mining is a critical element that allows Bitcoin to function without a central authority.
Mining operations are also responsible for adding coins to the existing supply. However, Crypto mining follows hard-coded rules that govern the mining process and prevent anyone from arbitrarily creating new coins. These rules are built into the underlying Cryptocurrency protocols and enforced by the entire network of thousands of nodes.
To create new cryptocurrency units, miners use their computing power to solve complex Cryptographic puzzles. The first miner to solve the puzzle has the right to add a new block of transactions to the Blockchain and broadcast it to the network.
How Does Crypto Mining Work?
As new blockchain transactions are made, they are sent to a memory pool. A miner’s job is to verify the validity of these pending transactions and organize them into blocks.
You can think of a block as a page of the blockchain ledger in which several transactions are recorded (along with other data). More specifically, a mining node collects unconfirmed transactions from the memory pool and assembles them into a candidate block.
The miner then attempts to convert this candidate block into a valid, confirmed block. To do this, the miner must solve a complex mathematical problem requiring many computing resources. However, for each successfully mined block, the miner receives a block reward consisting of newly created cryptocurrencies plus transaction fees. Let’s take a closer look at how it works.
Hashing transactions
The first step of mining a block is to take pending transactions from the memory pool and submit them, one by one, through a hash function. Each time a piece of data is run through a hash function, an output of fixed size called a hash is generated.
Crypto Mining Explained: Understanding Cryptocurrency Mining, the hash of each transaction consists of a string of numbers and letters that acts as an identifier. The transaction hash represents all the information contained in that transaction.
In addition to hashing and listing each transaction individually, the miner also adds a custom transaction to send themselves the block reward. The coinbase transaction, which creates brand-new coins, is the first transaction recorded in a new block in most cases, followed by all the pending transactions awaiting validation.
Creating a Merkle tree
After each transaction is hashed, the hashes are organized into a Merkle tree (also known as a hash tree). A Merkle tree is generated by containing transaction hashes into pairs and then hashing them.
The new hash outputs are then organized into pairs and hashed again, and the process is repeated until a single hash is created. This last hash, the root hash (or Merkle root), represents all the previous hashes used to generate it.
Finding a valid block header (block hash)
A block header acts as an identifier for each block, meaning each has a unique hash. When creating a new partnership, miners combine the previous block’s hash with their candidate block’s root hash to generate a new block hash. They must also add an arbitrary number known as a nonce.
As such, when validating their candidate block, a miner must combine the root hash, the previous block’s hash, and a nonce and put them all through a hash function. They aim to do this repeatedly until they can create a valid hash.
Miners cannot change the root hash and the previous block’s Hash, so they must repeatedly alter the nonce value until they discover a valid hash. To be deemed reasonable, the output (block hash) must be less than a target value determined by the protocol. In Bitcoin mining, the block hash must start with a certain number of zeros — the mining difficulty.
Broadcasting the mined block
As we’ve seen, miners must hash the block header repeatedly using different nonce values. They do so until they find a valid block Hash, after which the miner who found it will broadcast this block to the network. All other nodes will check if the league and its soup are valid and, if so, add the new block to their copy of the Blockchain.
At this point, the candidate block becomes confirmed, and all miners move on to mine the next block. Miners who couldn’t find a valid hash on time discard their candidate block, and the mining race starts again.
What if Two Blocks Are Mined at the Same Time?
Sometimes, two miners broadcast a valid block simultaneously, and the network has two competing blocks. The miners then start mining the successive league based on the block they received first, temporarily causing the network to split into two versions of the Blockchain.
The miners compete between these blocks until they mine the next block on top of one of the competing blocks. When miners successfully mine a new block, it becomes the winner, and they consider the previous block abandoned, referring to it as an orphan block or a stale block. This abandonment prompts all the miners who had chosen the abandoned block to switch back to mining the chain of the winning block.
What Is the Mining Difficulty?
The protocol regularly adjusts the mining difficulty to ensure a constant rate for new block creation and, in turn, steady and predictable issuance of new coins. The difficulty adjusts proportionately to the computational power (Hash rate) dedicated to the network.
As such, every time new miners join the network and competition grows, the Hashing difficulty increases — preventing the average block time from decreasing. Conversely, if many miners leave the network, the hashing problem decreases, making it easier to mine a new block. These adjustments keep the block time constant, regardless of the network’s total hashing power.
Types of Crypto Mining Explained: Understanding Cryptocurrency Mining
There are several ways to mine cryptocurrencies. Equipment and processes change as new hardware and consensus algorithms emerge. Typically, miners use specialized computing units to solve complicated Cryptographic equations. We’ll now look at some of the most common mining methods.
CPU mining
Central Processing Unit (CPU) mining involves using a computer’s CPU to perform the hash functions required by the PoW model. In Bitcoin’s early days, mining’s costs and barriers to entry were low, and a regular CPU could handle its difficulty, so anyone could try to mine BTC and other Cryptocurrencies.
However, as more people began to mine BTC and the network’s hash rate increased, profitable mining became increasingly difficult. In addition, the advent of specialized mining hardware with greater processing power eventually made CPU mining nearly impossible. CPU mining is likely no longer viable today, as all miners use specialized hardware.
GPU mining
Designers create Graphics Processing Units (GPUs) to simultaneously process a wide range of applications. While people typically use them for video games or graphics rendering, they can also employ GPUs for mining.
GPUs are relatively inexpensive and more flexible than the popular ASIC mining hardware. Users can employ them to mine some altcoins, but the efficiency of GPUs depends on the mining difficulty and Algorithm.
ASIC mining
An Application-Specific Integrated Circuit (ASIC) is designed to serve a single specific purpose. In crypto, the term refers to specialized hardware designed for mining. ASIC mining is known for being highly competent but expensive at the same time. Because ASIC miners are at the forefront of mining technology, the cost of a unit is much higher than that of a CPU or GPU.
In addition, the constant advancement of ASIC technology can quickly render older ASIC models unprofitable and, as such, need regular replacement. Even with electricity costs excluded, ASIC mining is one of the most expensive ways to mine.
Mining pools
Because the first successful miner receives a block reward, the likelihood of discovering the correct hash is exceedingly low. Miners with a small amount of mining power have a very small chance of finding the next block on their own. Mining pools offer a solution to this problem.
Mining pools are groups of miners who pool their resources (hash power) to increase their chances of winning block rewards. When the pool successfully finds a block, the miners share the prize according to the work they each contributed.
Mining pools can benefit individual miners in terms of hardware and electricity costs, but their domination in mining has raised concerns about a possible 51% attack on networks.
What Is Crypto Mining? Understanding Cryptocurrency Mining and How Does It Work?
Bitcoin is the most popular and well-established example of a Crypto Mining Explained: Understanding Cryptocurrency Mining Bitcoin mining is based on the PoW consensus Algorithm. Satoshi Nakamoto, the creator of the Bitcoin whitepaper in 2008, introduced PoW as the original Blockchain consensus mechanism. Finally, PoW determines how a Blockchain network reaches consensus across all distributed participants without third-party intermediaries. It does so by requiring significant computing power to disincentivize bad actors.
As we’ve seen, transactions on a PoW network are verified by miners who compete to solve complex cryptographic puzzles using specialized mining hardware. The first miner to find a valid solution can broadcast their transaction block to the Blockchain to receive the block reward.
The amount of crypto in a block reward varies from Blockchain to another. For example, on the Bitcoin blockchain, miners can get 6.25 BTC in block reward as of March 2023. Due to Bitcoin’s halving mechanism, the amount of BTC in a block reward decreases by half every 210,000 blocks (approximately every four years).
Is Crypto Mining Profitable in 2023?
While it is possible to make money mining Cryptocurrency, it requires careful consideration, risk management, and research. It also involves investments and risks, such as hardware costs, Cryptocurrency price volatility, and cryptocurrency protocol changes. To estimate these risks, miners often engage in risk management practices and assess the potential costs and benefits of mining before starting.
The Profitability of Crypto Mining Explained: Understanding Cryptocurrency Mining depends on several factors. One of them is changes in cryptocurrency prices. When cryptocurrency prices increase, the fiat value of mining rewards also increases. Conversely, profitability can decline along with decreasing costs.
The efficiency of the mining hardware is also a crucial factor in determining the profitability of mining. Miners must weigh the expense of mining hardware against its potential profits. For instance, excessive electricity prices might wipe out gains and make mining unprofitable.
Furthermore, miners may find the need to frequently upgrade their mining hardware because it tends to become obsolete rather quickly. New models will outperform old ones, and if miners lack the budget to upgrade their machines, they will likely struggle to remain competitive.
Last but not least, some changes happen at the protocol level. For example, halving Bitcoin can affect mining profitability by cutting the reward for mining a block in half. In addition, Ethereum switched entirely from the PoW to the Proof of Stake (PoS) consensus mechanism in September 2022, which made mining unnecessary.
Closing Thoughts
Crypto Mining Explained: Understanding Cryptocurrency Mining is critical to Bitcoin and other PoW blockchains. So, it helps keep the network secure and the issuance of new coins steady. In addition, mining can make a passive income for miners. You can learn more with these step-by-step instructions in our article How to Mine Crypto. Mining has certain advantages and disadvantages, the most obvious of the former being the potential income from block rewards. Yet, numerous factors, such as electricity costs and market prices, influence this situation. Before jumping into crypto mining, you should research (DYOR) and analyze all potential risks.