Cryptocurrency mining has not been around for very long as it was only about 10 years ago that Bitcoin was first mined. Since that time, however, there has been a massive increase in interest and investment in crypto mining as more and more people understand how it works.
The topic of crypto mining is, however, not the easiest to grasp. Most online information about crypto mining is usually about how to mine various cryptocurrencies or the best cryptocurrencies to mine that year. In this article, we will provide a beginner’s guide to crypto mining, explaining what it is, how it works, and the potential risks involved.
What is Crypto Mining?
Crypto mining is an essential part of the system that holds the entire crypto-sphere together. This system is known as Blockchain, and without it, there would be no way to place any trust in the community of crypto buyers and sellers that gives cryptocurrency its value. Through mining, the Blockchain ledger, which contains a history of all past transactions, is maintained and can hence be trusted by all users.
Moreover, crypto mining is the process by which more cryptocurrency can steadily flow through the system to be traded between buyers and sellers. This is because crypto miners perform work that maintains the crypto-sphere and earn a financial reward in return. However, this work requires sophisticated computers and complex math problems, and so may not be for everyone.
Understanding how crypto mining works in a more detailed manner will require learning about the basics of the technology that holds the crypto universe together: Blockchain.
What is Blockchain?
While we could dedicate a whole article to the workings of Blockchain, here, we will only explain the very basics. Simply put, Blockchain is software that acts in a similar way to a financial ledger. Every transaction of cryptocurrency that is made between buyers and sellers shows up on this public ledger as a block. This block is connected in a chain to all other past transaction blocks before it. Hence, Blockchain.
Since everybody has access to the same public ledger, transactions can be trusted and hence verified. This is exactly what gives cryptocurrency an edge over fiat currency, as transactions are not conducted through a third party and are hence immediate and, more importantly, transparent.
How Does Crypto Mining Work?
In order to be able to trust that everyone viewing the Blockchain is seeing the same verified ledger, there is a protocol in place by which the ledger is constantly being updated. The people who do this are cryptocurrency miners, and their job is to participate in the procedure of updating the transaction ledger.
Miners do this by using computing power to guess a random number that solves an equation generated by the system. By going through as many random numbers per second as their computing power allows, crypto miners compete with one another to come up with the one number that is the solution.
This solution acts like a key, and once a crypto-miner arrives at it, they can publish it for everyone on the ledger to see, thereby verifying the transaction that they solved the key for. Once this is done, they move on to trying to randomly generate a solution for a different transaction.
In a way, bitcoin miners act as temporary bankers because they are the ones who are given the ability to update the ledger. Moreover, since the process of finding the correct key is completely random and also has a financial incentive attached to it, this system becomes very trustworthy as the bank is now essentially in the form of a collectively updated and publicly accessible ledger.
Since crypto mining is essentially a guessing game, those miners who have invested in the most computing power will have a slight edge over others. This is because, with more computing power, you can generate more random guesses per second, which increases the probability of coming to the correct solution. However, the laws of statistical probability dictate that it is still highly unlikely that the same miner will come upon the correct solution again and again.
How Do Crypto Miners Make Money?
After a miner has published the updated block for everyone to view and verify, the system generates more cryptocurrency, which it then rewards to the miner. This acts as compensation for the work done by the miner to update and maintain the Blockchain ledger. The financial incentive ensures that crypto miners will continue to update the Blockchain and hence that more cryptocurrency will consistently flow into the system.
In fact, this is where the term crypto mining gets its name because it is through the verification of transactions that new cryptocurrencies can be mined and allowed to enter the system. This makes the name slightly misleading as mining itself is only a byproduct of the main goal of crypto mining, which is to update and maintain the Blockchain ledger in a decentralized manner.
Risks of Crypto Mining
As mentioned, effective crypto mining requires a lot of computing power and means you are essentially competing with other crypto miners and their computing capabilities. There is certainly a financial risk involved in investing in a crypto mining rig, as it is possible to invest in thousands of dollars worth of hardware for little to no return.
The way in which the mining system is set up is that only the most efficient miners will be successful. Moreover, the major difficulty with mining is that the more miners there are, the more difficult it will be for any single miner to come up with a solution. This is to make sure there is a steady inflow of cryptocurrency into the system without too much overall inflation.
Crypto mining is an essential element in the cryptocurrency trading process through which miners compete to update and hence verify the Blockchain ledger. Without mining, there would be no way to maintain a decentralized network that consistently generates new money.
Getting into mining requires a large financial investment in order to be successful, and so may not be for everyone. However, as crypto enthusiasts, we should be thankful to all crypto miners, as it is their work that maintains the integrity and transparency of the crypto-sphere.