Mining — somebody’s completely forgotten and somebody’s favorite part of the cryptocurrency world. Nonetheless, it is a pretty major part of the blockchain. It is quite a big topic, but we will try to cover the basics that you must know, no matter if you are a newbie trader or an experienced investor.
So What Is Crypto Mining?
Simply put, cryptocurrency mining is a blockchain transaction verification process. Its end goal is to add confirmed transactions to the blockchain. If you are more techie, then you could call it — inverse hashing.
The best-known mining protocol is Proof-of-Work (PoW), which, in ELI5 (explain like I’m 5) kind of way, would be described as a payment confirmation protocol that requires a lot of computer power in order to confirm ledger history and update it with new data. The second one after it would be Proof-of-Stake, which was explained really well by one Redditor:
Imagine you are at the fairground and there are two rollercoasters, getting to ride the coaster is your reward, like signing the block and getting the coins in crypto.
If you want to ride the PoW coaster, every 10 minutes there is a race, whoever can run fastest (has the fastest hashing equipment) wins the race and gets to ride. The same people tend to be fastest every race, and always get to ride, slower runners never get a ride. People started forming relay teams (pools) to get a chance on the coaster.
The PoS rollercoaster is different, there are a bunch of queues in parallel, if you are rich you go in the rich queue and get to the front faster, but no matter how poor you are you always get a ride in the end. Who is chosen from the front of those parallel queues is random, but the VIP queue has less people in it so they progress to the front quicker. PoS uses coin balance x time since last transaction to build ‘stake weight’, higher stake weight makes you get to the front faster. Once you sign the block (ride the coaster) your stake weight is set to zero and time starts again (you go to the back of the queue system).
If you are curious to learn more about these and other protocols, check out our article — PoS, PoW, and 12 Other Blockchain Protocols You Didn’t Know About.
Why Is Mining Important?
The central authority does not control cryptocurrency. However, there is still the need for a way to guarantee the security and legitimacy of everyone’s transactions. On the other hand, it still has to limit the power of the validating party to maintain decentralization, avoid corruption, data, or fund leaks.
Mining acts as somewhat of an audit. It takes care of network security, prevents double payments, and confirms the transactions. Only confirmed transactions are added to the blocks in the chain. Also, with each new block, the previous transactions are being verified again, this way ensuring that it is valid and making the payment irreversible.
Cryptocurrency payment that has no confirmation can be reversed. Many services accepting crypto assets will require a specific amount of confirmations before the payment is approved, but this can vary depending on the asset and payment size.
Who Can Be a Cryptocurrency Miner?
Anyone can be a miner. However, mining requires powerful equipment, that can be pricey, and resources, such as space and lots of electricity. After all, one research has proven that Bitcoin mining causes a significant amount of CO2 emission that could be compared to the emission levels of some cities and even countries.
Also, it is probably worth mentioning that the competition between miners grew so much that for some smaller miners, it became not rewarding enough considering the expenses. Because of this reason, many miners joined into groups. Shared resources raise their chances of success, and shared income keeps everyone happy. But this situation is definitely not ideal, especially for someone who is new to mining.
How Does Mining Work?
Well, let’s say John wants to send one Bitcoin to Jane. The transaction is made, but it has to be confirmed starting from the fact if John has enough funds for this payment. The system then generates an equation for this exact transaction. As everyone has a copy of the whole ledger (blockchain) that holds the history of every coin, anyone can confirm the payment.
This starts the miners’ race to find the correct number that will resolve the transaction’s mathematical problem and place it in the chain. The formulas to find the correct hash are lengthy and complicated. Of course, it is all done by computers. If the number is correct, the transaction is confirmed, and the system generates a reward and payment for the miner. The transaction is placed in the block and further verified by the Bitcoin network.
This might seem like an easy profit for some of you. However, the system is built to keep everything in the right place, and this usually means regularly paced block creation. The system can start generating more complicated equations that will require more time to resolve depending on the number of miners or the speed of mining at the current time.
The Future of Mining
The growing demand for newer and more powerful hardware and more energy usage is reducing the growth of miners’ network. The competition between miners is really intense too. The rewards and chances to get the reward gets too low and not worth the hassle.
This situation makes developers rethink different protocols that could be used for their coin that could make it easier on the environment, the system, and miners. For example, Ethereum moved from PoW (Proof-of-Work) to PoS (Proof-of-Stake). It made more sense at the time. However, then the question of maintaining the security level was raised.
As already mentioned, mining is a significant part of the cryptocurrency trading system. However, it is still developing just as cryptocurrency and blockchain itself. As per right now, we would probably advise you to get into trading (for example, on ROKKEX Cryptocurrency Exchange ;)) and keep an eye on the news of blockchain changing the world.
At ROKKEX, we take security extremely seriously, and our crypto exchange is built on ‘Security First’ principle. We want to share our expertise with the broader public for the world to become happy, safe, and wise.
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