What Is Cryptocurrency Mining?

How mining work in blockchain
How mining work in blockchain


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 allow 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 article, 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 can 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 collecting 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 letters that serves as an identifier 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 individually. 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 want to validate.


Step 2 – Creating a Merkle Tree

Following the hashing of each transaction, the hashes are sorted into a Merkle Tree. 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 repeated until a single hash is produced. This final hash is also known as a root hash (or Merkle root), and it represents all of the previous hashes that were used to construct it.

Blockchain and Hash Function
Blockchain and Hash Function

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 combine the hash of the previous block with the root hash of their candidate block to generate a new block hash when creating a new block. Apart from these two elements, they must also include a nonce, which is an arbitrary integer.

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 found because the root hash and the prior block’s hash cannot be changed.

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 number of zeros. This is referred to as “mining difficulty.”

Step 4 – Broadcasting the mined block

Miners must hash the block header many times with different 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 rate at which new blocks are created remains consistent. This is what ensures that fresh coins are issued in a consistent and predictable manner. The difficulty of the network adjusts in proportion to the amount of processing power (hash rate) dedicated to it.

As a result, the hashing difficulty will rise 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 total 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 time, resulting in two competing blocks on the network. Miners then begin mining the next block using the block they obtained first 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 all 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).


Proof of Work (PoW)

Proof of Work (PoW) is Satoshi Nakamoto’s original blockchain consensus technique. It was first mentioned in the Bitcoin whitepaper, which was published in 2008. In a word, PoW establishes how a blockchain network achieves consensus without the use of third-party intermediaries among all dispersed participants. To disincentivize undesirable actors, it needs a lot of computational power.

Miners verify transactions on a PoW network, as we’ve seen. Miners compete by solving challenging cryptographic riddles with specialized mining hardware in order to earn the right to mine the next block. The first miner to find a valid solution receives the block reward after broadcasting their block of transactions to the blockchain.

The amount of cryptocurrency in a block reward differs amongst blockchains. As of December 2021, miners on the Bitcoin blockchain can earn 6.25 BTC as a block reward. The halving mechanism reduces the amount of BTC in a block reward by half every 210,000 blocks (about every four years).


Different cryptocurrency mining methods

Cryptocurrency mining can be done in a variety of ways. As new hardware and consensus methods become available, the equipment and procedure evolve. Miners typically solve complicated cryptographic equations with sophisticated computer equipment. Let’s take a look at some of the most popular mining techniques.


CPU mining

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 hash rate grew and more people began to mine, profitable mining became increasingly difficult. Furthermore, the development of specialized mining hardware with increased computational 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 simultaneously. They’re commonly employed in video games and for producing visuals, but they can 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 method.


ASIC mining

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

Mining is a competitive industry. Competitive mining hardware is required to mine profitably. ASIC miners are substantially more expensive than CPUs or GPUs since they are at the cutting edge of mining technology. Furthermore, as ASIC technology advances, older ASIC models soon become unprofitable, necessitating their replacement. Even without including electricity expenses, this makes ASIC mining one of the most expensive 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 small share of the mining power have a slim 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 who pool their resources (hash power) in order to maximize their chances of collecting block rewards. When the pool successfully finds a block, miners will split the prize evenly among themselves, based on the amount of labor they put in.


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


Closing thoughts

Bitcoin and other PoW blockchains rely heavily on cryptocurrency mining. It’s one of the factors that help 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 is the possible earnings from block rewards. However, a variety of factors, such as electricity costs and market prices, can have an impact on mining earnings. There is no assurance that you will benefit from crypto mining, so do your homework and assess all potential dangers before diving in.

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