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What Is Mining? Understanding Cryptocurrency Mining

Getting Started With Mining

The Blockchain is central to cryptocurrencies. Blockchain keeps a record of the transactions taking place block-wise. Cryptocurrency Mining is the process of validating a block of transactions in order for them to get added to the blockchain.

What are Cryptocurrencies?

Understanding how Bitcoin works

What Is Cryptocurrency Mining?

The Blockchain serves as a public ledger of validated transactions. Each Block contains a certain number of transactions. Validated blocks keep on getting added. Every validated block is linked to its previous block making a chain of bocks.

Various protocols are used to validate blocks. For example, Bitcoin uses Proof-of-Work (PoW) rules to validate a block. Cryptocurrency mining is this process of validating a block. Mining is basically the process of exchanging the computing power required to run the blockchain, for the cryptocurrency.

On the successful validation of a block, the miner receives a designated amount of cryptocurrencies. This is called the block reward.

Cryptocurrency Mining performs two important roles. It allows for a consensus to be achieved. This is important as it prevents double spending. It also keeps the blockchain secure and tamper-resistant. Nodes can thus successfully maintain a copy of the blockchain with them. Hence, a distributed ledger is made possible this way.

The second important role of Cryptocurrency Mining is to bring in/mint new coins it to the system. When a miner receives a block reward, new coins are created out of thin air and allocated to him.

Additionally, transaction fees included in every block of transactions are appropriated by the miners. As block rewards keep decreasing over time and cease later, transactions fees are supposed to run the blockchain.

Difficulty Metric (PoW)

Cryptocurrency mining involves a lot of miners competing for block rewards. To ensure that only one block is validated every 10 minutes (in the case of Bitcoin) a difficulty level is set. The miners have to solve this computational puzzle by committing computational resources. The difficulty level is set in such a way that it always takes 10 minutes (in the case of Bitcoin) to find a validated block.

Depending on the type of mining algorithm used, the concept and application if difficulty level varies.

Mining Ecosystem

Mining hardware 

Users have used various types of hardware over time to mine blocks. Earlier it was possible to mine the first cryptocurrency, Bitcoin, on a computer. But with the advent of GPU mining and later ASIC mining, cryptocurrency mining on CPU is not possible for cryptocurrencies like Bitcoin.

GPU Mining is more efficient and some cryptocurrencies like Bitcoin Gold can only be mined using GPUs.

ASIC or application-specific integrated circuit is a specially designed microchip specifically for a purpose like mining. A mining rig now consists of a number of such Integrated circuits. Since they relatively consume less power compared to the computing power offered, cryptocurrency mining with ASIC is profitable.

Cloud mining

Cryptocurrency mining, in this case, is sold as a service. A mining contractor rents out computing resource (hash power) for a specific duration of time. The remotely located hardware mines the cryptocurrency and the coins earned are shared with the contract owners appropriately.

Cloud mining removes the need for purchasing mining hardware. Als, electricity and bandwidth rates and reliabilty are no more an issue. The excess heat from the mining rig is avoided too.

Hashflare and Genesis Mining are the most trusted companies offering mining contracts presently. Beware of a huge number of scamming cloud mining companies.

Mining Pools

Groups of miners pool their computing power to compete for block rewards. Mining pools hence aim to achieve better efficiency. As more mining power increases the chance of validating a block, mining pools are very popular now. Mining pools use different approaches to share their mining rewards among themselves.

  • Slush approach: Follows a score-based method where older shares have a lower weight than more recent shares.
  • Pay-per-Share approach: An instant flat payout is offered for each share that is solved.
  • Full Pay-per-Share approach: Similar to PPS but also shares some of the transaction fees.

Vist here for a Comparison of mining pools.


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