Cryptocurrency Mining: How does it work?

Cryptocurrency is a topic that needs no introduction, whether the reader is a schoolboy or a person nearing retirement. It is more of a trend than a technological advancement in today’s world. Investing, buying, or selling digital currencies or cryptocurrencies over the internet is not a big deal in today’s world, but have you ever wondered “what is a cryptocurrency”, “how they are made”, “who makes them”, or anything which relates to its origin?

 

There are a lot of complex structures, techniques, chains, processes, and whatnot behind the distribution of cryptocurrencies that barely anyone wonders or even wants to wonder about.

 

Before indulging in the making of cryptocurrencies, their distribution, and mining techniques, we should first have a clear idea about what cryptocurrencies are, how they are used, and most importantly, why they are used.

 

Table of Contents

 

• What is Cryptocurrency?

• How does it work?

• What is Crypto Mining?

• Who are Miners?

• Beginning of Crypto Mining

• Different Methods of Cryptomining

• Conclusion

 

What is Cryptocurrency?

 

Cryptocurrency has many names and many speculations attached to it, which depends on different people and their experience with the same.

 

But if we have a detailed look into what cryptocurrency is, then it can be quoted as "Cryptocurrency, sometimes called crypto-currency or crypto, is any form of currency that exists digitally or virtually and uses cryptography to secure transactions."

 

Cryptocurrency, unlike the physical money system being exchanged in the real world, is shared peer-to-peer irrespective of the sender and receiver. "Cryptocurrency" is generally a combination of two different English words; "crypto" meaning encrypted, and "currency" meaning money. As the name suggests, cryptocurrency is simply a digital unit holding some cash value that is being transacted in an encrypted way between users, because of which it gets its name too.

 

Cryptocurrency transfer does not require verification from banks, and thus is independent of the banking system, or in other words, does not have a central controlling system. Cryptocurrency can be made anywhere, by anyone, and even transacted to or from anyone.

 

Cryptocurrencies are stored in a digital wallet that is unique for every user, as well as very well encrypted so that it cannot be broken or breached.

 

Also Read | 7 Applications of Cryptocurrency

 

How does it work?

 

You would be wondering if cryptocurrency does not have a central control system, then how does it work.

 

Well this question has a very interesting answer i.e. crypto runs on a distributed public ledger called blockchain.

 

All the details of the transactions of a specific cryptocurrency are with the currency holder, which gives us the idea that although cryptocurrency does not have a central control system, all currencies do have a control system, i.e., their holders only.

 

The system totally runs on blockchains, which are getting more advanced day by day. Bitcoin has been around since 2009, but still, new technologies are coming up to enhance the blockchain system it runs on.

 

What is Crypto Mining?

 

Crypto mining or we can say cryptocurrency mining is a technique to create new “digital” coins or currency, validate them on a blockchain network, and add them to a distributed ledger with a proper transaction over the network. 

 

Crypto mining is somewhat similar to mining precious metals from their ores. The difference lies in the fact that there are no so-called “ores” of cryptocurrencies. Cryptocurrencies can be mined anywhere irrespective of the physical location of the miners.

 

Another bigger difference is the type of techniques that are involved in the mining of cryptocurrencies, which involves complex calculations, encryption, heavy software, etc.

 

Since distributed ledgers lack a centralized authority, the mining process is crucial for validating transactions. Miners are, therefore, incentivized to secure the network by participating in the transaction validation process that increases their chances of winning newly minted coins.

 

This verification of miners is done by a proof-of-work (PoW) technique which also prevents the system from external attacks.

 

Proof-of-Work (PoW):

 

This technique involves the process of competition of miners among themselves to solve the hash value generated by a transaction and the first one to crack the code gets the opportunity to add the block to the ledger and hence get rewarded. A hash is a truncated digital signature of a chunk of data. These are generated to secure the transactions of cryptocurrencies from external attacks as well as to validate the miners. Over time, as miners deploy more advanced machines to solve PoW, the difficulty of equations on the network increases. At the same time, competition among miners increases, increasing the scarcity of the cryptocurrency as a result.

 

Also Read | What is Proof of Work in Crypto and How does it Work?

 

Who are Miners?

 

In layman’s terms, miners can be described as people who mine cryptocurrencies. However, this definition seems so incomplete when matched to the actual work of the crypto miners. 

 

The main focus of the crypto miners is to ensure an encryptable network. This is a combined effort of all the miners who take part in securing and maintaining the blockchain. As discussed earlier, the task of the miners is to compete with each other and find the values of transaction hashes through complex calculations, pieces of code, etc.

 

Miners are rewarded once they crack the hash values of the transactions happening in the blockchain and update that block back into the chain. This process is not a cake walk as it requires a huge amount of computation power.

 

For instance, It takes an estimated 1,449 kilowatt hours (kWh) of energy to mine a single bitcoin.

 

There are different types of miners involved in the system. Let us have a look in the types of miners:

 

• Individual Miners

 

They are generally individuals who purchase mining hardware and then connect to the internet. These individuals require a huge amount of investment as a mining setup is too expensive and complex. 

 

• Mining Pools

 

Organizations combine their resources to obtain a huge amount of mining hardware. Mining pools are also open to the public, whereby anyone can add their computers to the network. 

 

• Cloud Mining

 

It is similar to a contract given to a third party in return for some money. Cloud Mining is implemented by giving the amount to mine cryptocurrency to a cloud company and getting the ownership of the currency.

 

Beginning of Crypto Mining

 

In the early days, even a simple CPU would have been enough to mine even a single Bitcoin, but now, things have changed. Due to inevitable competition between miners, the complexity of the hashes used in the transactions has reached another level. Due to this increased complexity, making even 1% of Bitcoin is not possible without any specialized software and hardware.

 

One has to purchase specially designated computers with specialized software for computing heavy and complex cryptographic mathematical equations.

 

Today, mining cryptocurrencies requires a specialized GPU or an application-specific integrated circuit (ASIC) miner. In addition, the GPUs in the mining rig must be connected to a reliable internet connection at all times. Each crypto miner is also required to be a member of an online crypto mining pool as well.

 

The computations reach to an extent where the miners also require a huge power supply for the system. That is not possible inside normal infrastructures. Rather, they require special supplies that are quantitatively huge with respect to the normal usage.

 

For instance, It takes an estimated 1,449 kilowatt hours (kWh) of energy to mine a single bitcoin.

 

Also Read | Advantages and Disadvantages of Cryptocurrency

 

Different Methods of Crypto Mining

 

As discussed earlier, mining has become a complex and expensive task, which requires special software for its development.

 

With respect to the specialized software, hardware also has to support the software, which raises the requirements for performance, storage, and logic to another level. Due to this, specialized hardware is also required for mining. Adding on to the requirement chain, special and heavy hardware also requires heavy power supply, which again adds to the separate infrastructure requirement for the miners.

 

However, meeting these requirements also have several ways listed below:

 

• CPU Mining

 

It is the oldest technique to mine cryptocurrency, which is obsolete in today’s world. CPU mining was first used to mine the first cryptocurrency in 2009, i.e., bitcoin. CPU mining refers to mining using the computation power of a CPU chip, mostly done by individual miners on their personal computers. Earlier, due to the incompetence of miners, these transcations were not heavily encrypted and the blockchains were not that complex and secured. But with time, complexity and demand increased, and this technique became obsolete.

 

• GPU Mining

 

GPU mining is another way of mining in which many GPU systems are grouped under a single system and the computation power is boosted to generate more complex transactions. This is similar to CPU mining, with the difference of boosted computation power and collaboration of several systems. This is also done by individuals, but mostly by organizations.

 

• ASIC Mining

 

ASIC mining is yet another method for mining cryptocurrencies. Unlike CPU and GPU mining, this method focuses only on the generation of cryptocurrencies and not on blockchain maintenance or decryption of hash values. Due to its specialization in making cryptocurrencies, this method produces heavy units compared to the other two.

 

• Cloud Mining

 

For adjusting the shortcomings of the above methods, cloud mining is in style nowadays, where a third party/cloud company is given the contract for mining. These companies have enough computation power and software to efficiently mine cryptocurrencies.

 

Conclusion

 

After reading this so far, we have understood why cryptocurrency is necessary nowadays and why efficient mining is the need of the hour for the crypto world.

 

Now let us have a look at what all we have gathered.

 

• Cryptocurrency has many names and many speculations attached to it, which depends on different people and their experience with the same.

• Cryptocurrency, sometimes called crypto-currency or crypto, is any form of currency that exists digitally or virtually and uses cryptography to secure transactions.

• "Cryptocurrency" is generally a combination of two different English words; "crypto" meaning encrypted, and "currency" meaning money. 

•  Crypto runs on a distributed public ledger called blockchain.

• Crypto mining or we can say cryptocurrency mining is a technique to create new “digital” coins or currency, validate them on a blockchain network, and add them to a distributed ledger with a proper transaction over the network.

• Proof-of-work (PoW)

  • This technique involves the process of competition of miners among themselves to solve the hash value generated by a transaction and the first one to crack the code gets the opportunity to add the block to the ledger and hence get rewarded.

• The main focus of the crypto miners is to ensure an encryptable network.

• Miners are rewarded once they crack the hash values of the transactions happening in the blockchain and update that block back into the chain.

• Different types of Miners:

  • Individual Miners

  • Mining Pools

  • Cloud Mining

• In the early days, even a simple CPU would have been enough to mine even a single Bitcoin, but now, things have changed. Due to inevitable competition between miners, the complexity of the hashes used in the transactions has reached another level.

• Different methods of Mining:

  • CPU Mining

  • GPU Mining

  • ASIC Mining

  • Cloud Mining

 

As we all know, cryptocurrency is the future, which reflects the potential of becoming the new money system. But the future of crypto lies in the hands of the people running it, i.e., the miners. Thus, Crypto Mining is the concept that will give shape to the transaction system in the future.

 

There are lots of crypto-mining techniques being implemented in the market, but the question is which is the best and most efficient. As and when we find answers to this, we will move towards a better future.