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How Does Cryptocurrency Mining Work?
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Crypto mining is simply the process of validating crypto transactions on the blockchain, mostly using the proof-of-work (POW) consensus mechanism, and creating new coins, similar to how a central bank creates new fiat money. We may have used some complicated words there. Follow along as we dissect everything there is to know about cryptocurrency mining.
However, in this article, we will focus more on Bitcoin mining, as the BTC network serves as the largest and most popular Proof of Work (PoW) blockchain network.
What is bitcoin mining?
Before delving into how bitcoins are mined, it is necessary to first understand the fundamentals of blockchain and bitcoin.
Blockchain is a public, decentralized database that stores and records all bitcoin transactions. The technology is a type of digital data structure that enables a ledger of digital transactions to be shared over a dispersed network of computers. With regard to cryptocurrencies, the blockchain ledger records data such as the total amount sent, the sender and recipient's addresses, the precise moment the transaction was completed, and a special transaction hash or ID.
Meanwhile, each transaction is recorded as a "block" of transactions that are "chained" together from the very first to the last. They are often checked and verified by miners before being posted to the blockchain. Miners are the computers, or the operators of those computers, that collectively authenticate trustworthy transactions and reject those that are not. In essence, the option with the highest amount of support among miners will win out.
All the information “chained” together and stored on the blockchain becomes very difficult to change or take down by any party because the same information is equally shared across a disparate network of computers in real time.
Moving on, Bitcoin mining is a complicated mathematical and technical procedure that validates bitcoin transactions over the Bitcoin network. It is analogous to verifying a block on the blockchain network and receiving payment in Bitcoin in exchange for their efforts. They are typically paid with transaction fees or from new coins generated.
We can compare them to bankers in the traditional banking system who make sure that every transaction that is taking place is legitimate and also to central banks that issue new traditional currencies into circulation.
The term "miners" refers to those who work in the mining process. Like with any other natural resource, there is only a certain amount of bitcoins available, which is why the method of issuing them is termed "mining."
The number of bitcoins that may be created or mined is limited to 21 million, although more than 19 million of them have already been issued and are now in circulation. However, Bitcoin mining, like actual mining, requires an investment of energy in order to generate or create.
And in this case, the energy comes in the form of electrical energy, which is used to mine bitcoins. Miners compete against one another to solve complicated hash problems that are cryptographically encrypted to validate the blocks containing transactions.
Why does Bitcoin need mining?
The major reason why Bitcoin requires mining is that the Bitcoin network uses the consensus protocol they call "proof-of-work" or "PoW." This is a coin-creation protocol that miners leverage to validate transactions by solving a difficult mathematical puzzle called "proof of work."
This mechanism is the most expensive to set up and operate, as it primarily requires computers, mining software, graphics processing units (CPUs), and other high-energy computational methods to function.
Mining is different from the "Proof of Stake" or "PoS" consensus protocol used by other cryptocurrencies, including Ethereum and Cardano, that requires nothing more than staking, or locking up one’s coins in a "staking pool," to validate transactions and create new coins for use.
The PoS method does not require any energy-intensive verification method, unlike the PoW, which majorly relies on electricity and hence has negative impacts on the environment. One bitcoin transaction is estimated to take 1,449 kWh to complete, or the equivalent of roughly 50 days of power for the average US household. Because of this excessive energy consumption, many Bitcoin mining businesses are now switching to using renewable energy sources like solar or wind energy to mine their coins.
Satoshi Nakamoto, the "anonymous" person who invented Bitcoin, came up with this protocol with the intention of keeping Bitcoin users as honest as possible. Miners aid in preventing the "double-spending problem" by validating transactions. Basically, they are being compensated for acting as auditors. They are responsible for examining the authenticity of Bitcoin transactions.
In the case of physical currency, once a $100 bill is spent, it is no longer in the possession of the spender and cannot be used by the same person again. While counterfeit cash exists, it is not the same as spending the same physical currency twice.
Imagine that you possess a genuine $100 bill and a fake one that looks exactly like the real one. If you attempted to utilize both notes for payment, a careful observer who inspected the serial numbers of both bills would detect that they have the same serial number.
As a result, it's apparent that one of the bills is fraudulent. This scenario is analogous to the function of a bitcoin blockchain miner, who verifies transactions to ensure that users haven't tried to double-spend the same bitcoin illegitimately.
Closing Thoughts
Despite being a complex mechanism, mining is still the most effective way to secure a blockchain network. The proof-of-work mining protocol is also used by other well-known cryptocurrencies like Dogecoin, Litecoin, and Monero. In essence, mining basically serves three functions: introducing new coins into circulation and approving existing transactions; detecting fraud and double spending; and decentralized ledger maintenance.Source: Coin market Cap
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