What is Cryptocurrency Mining?

 What is Cryptocurrency Mining?

The process of authenticating blockchain transactions and producing new coins is known as cryptocurrency mining. PoW cryptocurrencies such as Bitcoin (BTC) and Litecoin (LTC) can be mined (LTC).

The process of checking and confirming blockchain transactions is known as cryptocurrency mining. It's also the method for creating new cryptocurrency units. Miners' labor necessitates a lot of computer power, but it's what makes a blockchain network safe. Miners that are honest and successful are rewarded with freshly produced cryptocurrency as well as transaction fees.


Mining is the process of verifying and adding cryptocurrency transactions between users to the blockchain public ledger. In addition, mining operations are in charge of adding new coins to the existing circulating supply.

One of the essential components that allows the Bitcoin blockchain to function as a distributed ledger is mining. Without the need for a central authority, all transactions are recorded in a peer-to-peer network. We'll talk about mining on the Bitcoin network in this post, although the procedure is comparable with altcoins that use the same mining method.

How does mining work?

New blockchain transactions are transmitted to a memory pool as they are created. A miner's task is to check the legitimacy of these pending transactions and group them together into blocks. A block may be thought of as a page in the blockchain ledger where many transactions are recorded (along with other data).

A mining node is in charge of gathering unconfirmed transactions from the memory pool and putting them together into a candidate block. The miner will then attempt to turn the candidate block into a genuine, confirmed block. They must, however, solve a difficult mathematical problem in order to do it. This necessitates a significant amount of processing power, but every successfully mined block rewards the miner with freshly minted cryptocurrency plus transaction fees. Let's look at the mining process in more detail.

Step 1 - Hashing transactions

The initial stage in mining a block is to take pending transactions from the memory pool and submit them to a hash function one by one. Every time we pass a piece of data through a hash function, we get a hash, which is a fixed-size output. Each transaction's hash is a string of numbers and characters that serves as an identification in the context of mining. The transaction hash encapsulates all of the data associated with the transaction.

The miner adds a unique transaction, in which they transfer themselves the block reward, in addition to hashing and reporting each transaction separately. This transaction is known as the coinbase transaction, and it is responsible for the creation of new coins. The coinbase transaction is usually the first to be recorded in a new block, followed by all the pending transactions they wish to validate.

Step 2 - Creating a Merkle Tree

Following the hashing of each transaction, the hashes are sorted into a Merkle Tree (A Merkle tree is a structure used to efficiently verify the integrity of data in a set. They’re particularly interesting in the context of peer-to-peer networks, where participants need to share and independently validate information). The Merkle Tree, also known as a hash tree, is created by grouping transaction hashes into pairs and then hashing them. The new hash outputs are then paired and hashed again, and the process is continued until a single hash is produced. This final hash is also known as a root hash (or Merkle root), because it represents all of the preceding hashes that were used to construct it.

Step 3 - Finding a valid block header (block hash)

A block header serves as an identification for each individual block, resulting in a unique hash for each block. Miners use the hash of the previous block with the root hash of their candidate block to build a new block hash when producing a new block. Apart from these two parts, they must also include a nonce (A nonce refers to a number or value that can only be used once. Nonces are often used on authentication protocols and cryptographic hash functions. In the context of blockchain technology, a nonce refers to a pseudo-random number that is utilized as a counter during the process of mining), which is an arbitrary number.

As a result, while attempting to validate a candidate block, a miner must combine the root hash, the preceding block's hash, and a nonce, and pass them all through a hash function. Their purpose is to make a hash that can be trusted.

Miners must adjust the nonce value numerous times until a valid hash is obtained since the root hash and the prior block's hash cannot be modified.

The result (block hash) must be smaller than a particular target value set by the protocol in order to be considered genuine. The block hash in Bitcoin mining must begin with a specific amount of zeros. This is referred to as "mining difficulty."

Step 4 - Broadcasting the mined block

Miners must hash the block header many times with various nonce values, as we've just seen. They keep doing this until they come up with a legitimate block hash. After that, the miner who discovered it will publish his block to the rest of the network. If the block and its hash are genuine, all other nodes will add the new block to their copy of the blockchain.

The candidate block becomes a confirmed block at this point, and all miners move on to the next one. All miners that failed to identify a valid hash in the allotted period throw away their candidate block, and the mining competition begins again.

Mining difficulty adjustment

The protocol adjusts the mining difficulty on a regular basis, ensuring that the pace at which new blocks are generated remains consistent. This is what ensures that fresh coins are issued in a consistent and predictable manner. The complexity of the network varies in proportion to the amount of computational power (hash rate) dedicated to it.

As a result, the hashing difficulty will climb as more miners join the network and competition intensifies, preventing the average block time from lowering. In contrast, if a large number of miners abandon the network, the hashing difficulty will decrease, making it easier to mine a new block. Regardless of the network's overall hashing power, these modifications keep the block time constant.

What if two blocks are mined at the same time?

It is not uncommon for two miners to broadcast a valid block at the same moment, resulting in two competing blocks on the network. Miners then begin mining the next block using the block they obtained initially as a guide. This causes the network to divide into two separate blockchain versions (temporarily).

The fight between these blocks will continue until the next block is mined, either on top of one of the competing blocks or on top of both competing blocks. When a new block is mined, the block that came before it is determined to be the winner. The abandoned block is known as an orphan block or a stale block, and any miners who chose it are forced to return to mining the winner block's chain.

Can all cryptocurrencies be mined?

Although Bitcoin is the most well-known and often used example of a mineable cryptocurrency, not all cryptocurrencies are. Bitcoin mining is based on the Proof of Work consensus algorithm (PoW).

Learn more about Proof Of Work (PoW). 

Click here.

Different cryptocurrency mining methods

Cryptocurrency mining may be done in a variety of ways. As new technology and consensus methods become available, the equipment and procedure evolve. Miners often solve difficult cryptographic equations with sophisticated computer equipment. Let's take a look at some of the most popular mining techniques.

CPU mining

Central Processing Unit (CPU) mining is the process of leveraging a computer's CPU to accomplish the hash functions required by PoW. Mining was low-cost and low-barrier-to-entry in the early days of Bitcoin. Anyone may try to mine BTC and other cryptocurrencies because the difficulty of mining could be handled by an ordinary CPU.

However, as the network's hashrate grew and more individuals began to mine, successful mining became increasingly difficult. Furthermore, the development of specialized mining hardware with increased computing capacity made CPU mining almost impossible. Because all miners now employ specialized hardware, CPU mining is no longer a feasible alternative.

GPU mining

Graphics Processing Units (GPUs) are processors that can handle a variety of tasks in simultaneously. They're commonly employed in video games and for producing visuals, but they may also be utilized in mining.

GPUs are less expensive and more adaptable than the more common ASIC mining technology. GPUs can be used to mine some altcoins, although the efficiency is dependent on the mining difficulty and algorithm.

ASIC mining

ASICs (Application-Specific Integrated Circuits) are circuits that are designed to perform a particular purpose. It is a term used in cryptography to describe specialized mining devices. ASIC mining is very efficient, but it is also quite costly.

Mining is a competition. Competitive mining gear is required to mine profitably. ASIC miners are substantially more expensive than CPUs or GPUs since they are at the leading edge of mining technology. Furthermore, as ASIC technology advances, older ASIC models soon become unprofitable, necessitating their replacement. Even without including power expenses, this makes ASIC mining one of the most costly ways to mine.

Mining pools

Because the first successful miner receives a block reward, the chances of obtaining the correct hash are exceedingly slim. Miners with a tiny share of the mining power have a little probability of finding the next block on their own. This dilemma has a remedy in the form of mining pools

Mining pools are collectives of miners that pool their resources (hash power) in order to maximize their chances of collecting block rewards. When the pool successfully discovers a block, miners will share the prize evenly among themselves, based on the amount of labor they put in.

Individual miners can save money on gear and power by joining mining pools, but their dominance in the industry raises fears about a 51 % attack on the network.


Closing thoughts

Bitcoin and other PoW blockchains rely heavily on cryptocurrency mining. It's one of the factors that helps to maintain the network safe and the supply of new coins consistent. Mining offers a number of advantages and disadvantages, the most prominent of which being the possible revenue from block rewards. However, a variety of factors, such as power costs and market prices, can have an impact on mining earnings. There is no assurance that you will benefit from crypto mining, so DYOR and assess all potential dangers before diving in.

If you enjoy this kind of deep dive, make sure you subscribe to the newsletter below. It's 100% free, and I only send out one issue per week. ↓

                                                      SUBSCRIBE NOW!

credit: Binance Academy