After venturing back into crypto basics and going over key definitions last week, this week we will dive deeper into the cryptocurrency ecosystem and examine how cryptocurrencies are retrieved using a unique process known as crypto mining.
Digitally Digging for Gold
As we have already established, cryptocurrencies are found within networks and are stored, managed, and verified on a decentralized, public ledger known as a blockchain. For these transactions to occur, the cryptocurrencies are first retrieved with crypto mining. Put simply, this involves solving complicated mathematical equations using high-powered computers.
For the less technologically-savvy, the easiest way to understand crypto mining is to liken it to mining for gold. The principle of ‘digging’ for value stands, except mining for cryptocurrency can be done from the safety of your own home instead of thousands of meters underground.
To better understand the process, we can break crypto mining down into three essential components of: who, what and how?
Mining is open to any individual, organization, or company. It can either be done independently using one’s own mining devices or in what is referred to as a mining pool. In this instance, mining software and hardware are banded together. By doing so, miners– also referred to as nodes– can hasten the pace of processing, increase their probability of generating stable income, and massively reduce costs associated with the amount of electricity needed for the process.
The purpose of mining is two-fold. The primary function is to verify crypto transactions within the network. In this regard, nodes serve the function of an auditor; working to both supervise and legitimize a network and its blockchain. After a transaction takes place, it undergoes this verification process. When it is approved by the majority of miners, then- and only then, is it added to the system in the form of a ‘block’ on the chain. This auditing aids in regulating the system and prevents the issue of double–spending as responsibility to validate a transaction is dispersed across a large decentralized network of participants.
The second purpose of mining is to release new cryptocurrency coins into the network. These coins are issued in the form of a reward for the first miner to solve the equation. This reward, in turn, acts as an incentive for miners to continue regulating the system and, with the help of the large, decentralized network, discourages any potential abuse of the blockchain.
To get started, a miner would need internet access, a computer, and mining hardware, such as a graphics processing unit (GPU) or an application-specific integrated circuit (ASIC).
Once equipped with the necessary tools, anyone is eligible to mine for crypto. Much like mining for gold, however, crypto mining is a race, where the first miner to fulfil two conditions is rewarded with crypto coins and increased voting power in the system.
The first condition that entitles a miner to earn crypto coins involves taking part in regulating the system. This is achieved by solving complex equations that correspond to a set of transactions referred to as a block. This process is known as Proof-of-Work (PoW).
Albeit complicated for the average person, PoW is a guessing game, where nodes work to find a 64-digit hexadecimal number (known as a hash) that is less than or equal to the target hash set by the system. The difficulty for doing so is adjusted according to the number of active miners. The miner that solves the equation first, thereby confirming the set of transactions and adding the block to the existing chain, is dubbed the winner. New coins are then introduced into the system by being paid out as a reward.
Evidently, although it may seem like crypto mining is for an elite group of those that are more technologically inclined- the principles of PoW and blockchain technology are quite simple. All it requires is the right tools and an informative blog to guide you through it!