What is Cryptocurrency Mining & How does it Work?

Crypto Mining: What it is?

Crypto mining is a complex technological process of validating cryptocurrency transactions before adding them to the distributed ledger. Thus, in the verification process, the miners generate a new set of cryptocurrencies. So, more than a validation process, crypto mining is about minting new crypto coins as well.

Crypto mining is a mandatory process as no central authority like banks or government is involved in cryptocurrency transactions. Since cryptocurrencies are decentralized and distributed across the network of computers, miners worldwide verify and validate the crypto transactions. Thus, crypto transactions are highly secure as various miners from various countries validate rather than a single entity.

Since crypto mining is an energy-intensive process, miners need specialized mining hardware like ASICs (Application Specific Integrated Circuits) with high hash rates to solve complex cryptographic puzzles within a stipulated time and mine new blocks of cryptocurrencies. Miners, in turn, receive freshly minted new cryptocurrencies as rewards for contributing their resources and expertise.

In short, crypto mining is crucial for the following purposes,

• To maintain the decentralization of the ledger
• To verify counterfeiting or double-spend
• To bring new crypto coins into circulation
• To validate crypto transactions

How does crypto mining actually work?

Crypto mining is a complex technical process that demands high computational power. It involves a series of events that occur simultaneously. Let’s see them in detail.

Step 1: New transactions are gathered for validation

All new transactions initiated from authorized users on the blockchain are grouped into a pool. Each transaction holds the transaction details and charges, which miners should verify and validate.

Step 2: New transactions are grouped into a block

All unverified transactions are grouped into a block. Miners may prioritize transactions for validation based on factors like their size and associated transaction processing fees.

Step 3: Miners solve complex puzzles

Now, when all the unverified transactions are in blocks waiting to be verified by miners, the complex verification process begins. Miners use sophisticated mining hardware like ASICs explicitly programmed for specific cryptocurrency mining algorithms. Miners compete to solve the complex puzzle and find a specific number called nonce. A nonce is a random number when combined with a block’s data, produces a hash.

Step 4: Successful miner broadcasts the hash

Amidst all the competition and mining difficulty in the network, the first miner who finds the accurate nonce that creates a valid hash is considered successful. That miner broadcasts the hash to the blockchain network for other miners to verify.

Step 5: Miners in the network verify the hash

Now, the other participants in the blockchain network verify the accuracy of the broadcasted hash. Once the miners confirm the hash value and its accuracy and that it abides by the blockchain protocol, the solution is finalized.

Step 6: The new block is added to the blockchain

The miner who solved the hash will continue to process the transactions in the block and add them as a new block to the blockchain. Similarly, all transactions are confirmed and eventually added to the blockchain.

Step 7: Successful miners will receive mining rewards

The miner who just added the new block to the blockchain ledger will receive mining rewards. The mining rewards will be newly minted cryptocurrencies.

Is Crypto Mining Profitable?

The profitability of crypto mining is not straightforward as it depends on several factors, like

• The price of the cryptocurrency you intend to mine
• Electricity costs in your country
• Mining difficulty in the network
• The hash rate, power consumption, and energy efficiency of your ASIC
• Mining pool fees
• Current market trends
• Regulatory affairs upgrades
• Launch of new advanced mining hardware

Thus, users should not simply follow the crypto trend or indulge in crypto mining without sufficient industry knowledge. One should consider the above factors and choose the suitable cryptocurrency to mine to enhance their crypto mining profits.