- Cryptocurrency mining is the process of verifying and validating transactions that occur on a blockchain network and then compiling those transactions into a block.
- Miners compete to discover a unique, arbitrary number known as a nonce that can be combined with the hash of all transactions in a candidate block to create a valid block hash.
- Once a valid block hash is discovered, it is broadcast to the network where other miners verify it is valid. Once verified by other miners, the candidate block is added to the blockchain to become a confirmed block.
- New tokens are minted with each confirmed block as a reward for the miner that discovered it.
Looking for how to start mining cryptocurrency? Similar to how precious metal mining increases the available supply of gold and silver, mining for crypto is the process by which new tokens are created and released into circulation as a reward for verifying and validating blockchain transactions.
What's cryptocurrency mining? The main focus of the mining process is actually the validation of transactions and the creation of new blocks, while the cryptocurrency rewards that are awarded for participating in this process are more so intended to help pay for the costs associated with cryptocurrency mining.
In that sense, the mining network for a distributed ledger is really the backbone of what makes the protocol secure and immutable. Looking for information on how to start mining crypto? Here’s our beginner's guide to cryptocurrency mining.
How Does Cryptocurrency Mining Work?
There are some things you should know before figuring out how to start crypto mining. Each new transaction on a blockchain network initially gets sent to what is known as a memory pool, where mining nodes are tasked with verifying the validity of each pending transaction and then organizing them into a candidate block to start mining crypto.
At this point, the miner will then attempt to convert this candidate block into a confirmed block by finding a solution to a complex mathematical problem which is also known as a consensus algorithm. This is the energy-intensive part of the cryptocurrency mining process as solving the algorithm requires a lot of computational resources and electricity.
Crypto mining for beginners can feel overwhelming, but here is an explanation of the mining process a block goes through the following steps:
Step 1: Hashing transactions – Pending transactions in the memory pool are submitted through a hash function, which generates a fixed-size output known as a hash. Each hash consists of a string of numbers and letters that act as an identifier. The resulting transaction hash represents all the information contained within that particular transaction.
As part of the block creation process, a miner also adds a custom transaction in which they send themselves the block reward, known as the coinbase transaction. This is also how new coins are created, and the coinbase transaction is the first to be recorded in a new block, followed by the other pending transactions that need to be validated.
Step 2: The Merkle Tree – Once all transactions have been hashed, the hashes are organized into what is known as a Merkle Tree or Hash Tree. Merkle trees are formed by organizing hashes into pairs and then hashing the pair. The new hash outputs are once again organized into pairs and put through the hashing process. This process is repeated until only a single hash remains, which is known as the root hash or Merkle root, and is a representation of all the hashes that were used to generate it.
Step 3: Locating a valid block header – To create a new block, miners must combine the hash of the previous block with the root hash of their candidate block in order to generate a new block hash. They must also add to the combination an arbitrary number called a nonce, and then pass the combination through a hash function in an effort to create a hash that is considered valid.
If the resultant hash is not considered valid, the miner must attempt the process using a different nonce until a valid hash is found. Since root hashes and the hash from a previous block cannot be changed, the nonce value is the only thing that can be altered to create a valid hash. In order to be considered valid, the block hash must be less than a certain target value that is determined by the protocol.
Step 4: Broadcasting the mined block – Once a miner finds a valid block hash, they will then broadcast the block to the network for other nodes to check if the block and its hash are valid. If deemed valid by other miners on the network, the block is then added into their copy of the blockchain and it becomes a confirmed block. Then the process starts over with the next block as miners begin constructing new candidate blocks and searching for a valid nonce.
The difficulty to mine a cryptocurrency such as Bitcoin is regularly adjusted by the protocol in response to changes in the computational power (hash rate) of the network. As newcomers looking to invest in crypto mining come online and increase the overall hash rate being directed at the network, the protocol will increase the difficulty as a way to ensure that blocks are not created too quickly.
This allows the network to keep the block time constant and the issuance of new coins steady and predictable landscape for the future of crypto mining to thrive.
Cryptocurrency Mining Methods
There are different types of crypto mining. Each of these types of crypto mining has its own unique features and purposes.
- CPU mining - Involves using a computer’s Central Processing Unit (CPU) to perform hash functions.
- GPU mining - Involves the use of Graphics Processing Units (GPU) to perform hash functions. GPUs tend to be more inexpensive and flexible than ASIC mining hardware.
- ASIC Mining - Application-Specific Integrated Circuits (ASIC) are specialized computing devices that serve the single purpose of mining cryptocurrencies. ASICs are highly efficient, expensive machines that have become the dominant hardware choice for mining Bitcoin. Continuous advancements in ASIC technology make the field extremely competitive, with older ASIC models rapidly becoming obsolete and unprofitable, meaning that they need to be replaced quite frequently. With electricity included, ASIC mining is typically the most expensive, yet lucrative, form of mining.
- Mining Pools - Since block rewards are only granted to the first miner to successfully submit a valid block, the probability of finding the correct hash is extremely small. For miners with a limited amount of mining power, the task becomes nearly impossible to do on their own so they join what is known as a mining pool where a group of miners combine their hash power to increase the probability of winning block rewards. When the pool successfully finds a block, the block reward is split equally among the pool participants according to the amount of work each contributed.
Cryptocurrency mining for beginners doesn’t have to be overwhelming, but it is important for newcomers to be informed and be able to answer the question “What's crypto mining?” With this beginner’s guide, you’ll be able to make a smooth transition into the world of crypto mining.