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What is Crypto Mining?

What is Crypto Mining?
Author: Mansi Patodi

In general terms, mining is the process of digging the resources through various methodologies, just like we dig gold and extract the crude oil. Similarly, crypto mining is the process of producing cryptocurrencies like Bitcoin and Ethereum. The major difference between crypto mining and traditional mining is "the way these are done." Crypto mining is done through computers and algorithms. In contrast, traditional mining is done physically through tools and big machines.

How does mining work?

Let's understand this with an example of Bitcoin.

  • A large network of computers carries out the process of verifying the transactions. This process requires a lot of computational power. The power is derived from miners who have connected their specialised computers to verify and secure the transactions on the blockchain.
  • Earlier, the cost of installing hardware and connecting it to the network was minimal and could be done by a home computer. But, due to increased network difficulty, the computational power requirement has increased, in turn calling for the need for mining machines.
  • Each computer of the network is called a node. The nodes on the network are synced to one another. The transactions that take place on the network are stored in a memory pool and are verified one by one by the nodes on the network. After being verified, the transactions are added to the block. This block is further pushed to the network called the blockchain.
  • How is a new Bitcoin generated? It is minted as a reward for generating a block. All the miners in the network compete to guess a unique 64 digit code known as "hash." The miner that guesses the correct code becomes the block's owner, earning a new Bitcoin as a reward. 
  • The reward is not only a new Bitcoin. They also own the fees of all the transactions they have added to the block. Over time, the reward earned on adding a block will reduce, as only 21 million Bitcoins are to be mined. (At the start, the reward was 50 Bitcoins, which has recently decreased to 6.25 Bitcoins. This reward keeps reducing to half every 4 years.)


Why is mining important?

Besides increasing new Bitcoins to the supply. Mining machines also verify and secure peer-to-peer transactions, adding them to the blockchain ledger without any involvement of the third party, which makes the network decentralised.

Can I mine Bitcoin and other cryptocurrencies?

Years ago, in 2009 when Bitcoin was just a name. There were very few miners contributing to the network, so the difficulty level of guessing the "Hash" was low. Hence, mining a Bitcoin was even possible with home computers. But, as the network started growing, the difficulty level started increasing. Verifying the transactions and earning rewards became complicated; this urged for more computational power; hence, special mining computers were introduced to overcome this. Installation of such computers involves a lot of resources. If you can afford the installation cost and expenses involved, you can easily set up your mining farm.

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