Cryptocurrency mining is an essential function of the blockchain, it is the blood to the network’s body — allowing it to function.
In this article I am going to explain what cryptocurrency mining is, and whether or not you should be doing it.
What is Mining?
You are probably aware that mining, in our current world, is the process of obtaining coal from a mine. Essentially, the fundamental objective of cryptocurrency miners is the same; to mine Blocks. In blockchain, mining is the process of verifying transactions on the public ledger by putting the transaction data into blocks and connecting them to the public ledger (blockchain).
What is a block and how is it mined?
A block is a compiled, secure and unchangeable verification of transactions on the network. Blocks are connected and form a chain, hence the name Blockchain.
When transactions take place, the information of the transactions are sent to nodes and it is the nodes’ job to validate the transactions that have taken place.
- Node is a technical term referring to a computer that is connected to the network using software to verify and relay transactions across the public ledger.
Over a set period of time (around 10 mins for BTC), a number of transactions are compiled into a block by a miner, and then the block is verified on the public ledger and added to the list of blocks which make up the blockchain. Miners compete to solve the hash code, although this process differs dependant on the blockchain.
Now as you can imagine, there are a large number of transactions that would need to be compiled into a block. A cryptocurrency miner uses their hash power / rate (speed of creation of said hash) to create an individual hash for that block, based upon the previous hash given.
- Hash is essentially an identity for a group of transactions compiled into a block.
The purpose of an individual hash being created for each and every block is for 2 main reasons:
1.To reduce the size of the data being submitted to the public ledger — therefore increasing transaction speeds
2. Enables all nodes to verify that the transactions of the previous blocks have not been tampered with, eliminating fraudulent transactions in the blockchain.This is all very confusing and I have tried to explain it the easiest way possible, I have created an illustration below that might help:
Timestamp — this refers to when the block has been created and all the transactions have been authenticated.
How miners make money:
Every 10 minutes a group of prioritised transactions are compiled into a block and are then made into a mathematical puzzle for the miners to solve, once a node (miner) has solved the equation, it is then broadcasted to the network of nodes to verify, and if it is correct then the original node that solved the transaction will be rewarded with a certain amount of that cryptocurrency, it is currently 12.5 BTC (halves every 4 years).
The probability of a miner solving this would be based on his hash rate power and a little bit of luck.
It is virtually impossible to individually profitably mine Bitcoin currently, you would need massive upfront costs to invest in the best mining processors and you also need to take electricity costs into account.
That was just a basic overview on cryptocurrency mining and how it works.
- Transactions occur on the network
2. Transactions are sent to the nodes and placed in the pending transaction pool, in order.
3. Nodes will select (based on a few factors) transactions to validate within the next block
4. Nodes will then complete the mathmatical equasions to create the hash
5. Once the hash is created, the transactions are verified across all nodes
6. The block is placed on the blockchain and the transactions will be complete
7. The Miner is then rewarded (in crypto) and the cycle repeats
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