Cryptocurrency mining is the way Bitcoin and other altcoins mint new coins to their network. It’s a vital process that helps verify transactions and secure the respective networks. Typically, it involves solving complex computational math problems to win the right to add the next block on the blockchain, and the winner gets rewarded with network tokens. The process uses the Proof of Work (PoW) mechanism to solve the puzzles. It is an energy-intensive process that requires highly specialized equipment if one is to mine successfully, as the mining difficulty is relatively high for popular cryptocurrencies like Bitcoin.
Understanding Cryptocurrency Mining
In centralised monetary systems, the bank is the intermediary between two parties who would like to transact. Cryptocurrencies are the decentralised version of the bank where there isn’t a single entity that controls transactions. In centralised systems, only the bank has the power to update the ledger. But, since cryptocurrencies are decentralised, this role is left to network participants. When Satoshi Nakamoto was designing Bitcoin, he had to figure out how to create a decentralised ledger. He had to contemplate how to give an individual the ability to update the ledger without giving them too much power, to the extent that they either become corrupt or negligent with their work.
And that is how mining was born. It allows anyone who wants to update the ledger to do it as long as they meet a few set preconditions. These rules include guessing a random number to solve a complex mathematical problem. The guessing is done using a machine; the more powerful your machine is, the more guesses you can make within a given time period, increasing your chances of winning the right to update the ledger. If your guess is right, you win the right to add the next bunch of transactions, also known as blocks on the blockchain, a decentralised public ledger. The winner is rewarded with network tokens.
Importance of Miners to Cryptocurrency Networks
Miners play an essential role within cryptocurrency networks as they help validate transactions, which helps prevent a phenomenon known as double-spending. Before Nakamoto successfully launched Bitcoin, creating digital money had proved problematic since innovators couldn’t figure out how to prevent individuals from duplicating transactions like they would a digital file. The breakthrough came with the introduction of blockchain, which allowed for timestamping groups of transactions before broadcasting them to all the network nodes. Each valid block has to carry a timestamp of the previous block, which is included in its hash. And this creates an immutable record of how transactions took place.
One can argue that the miner’s role is determining which transactions are legit and which are not. The legit ones are added to the blockchain, while the rest are rejected. By doing this, the miner is able to secure the distributed ledger from bad actors.
This process of validating transactions is both expensive in terms of machines required and energy-intensive. That’s why rewards exist in terms of network tokens and transaction fees, which serve as incentives for mines to keep on mining. When Nakamoto came up with this system, he managed to kill two birds with one stone: keep the distributed ledger updated in a decentralised manner, and introduce new coins to the network.
Cryptocurrency Mining limitations
When Bitcoin was invented, Nakamoto intended for only 21 million BTC to ever exist. This goes contrary to centralised fiat currencies, which governments can overprint, thereby weakening these currencies. In the case of Bitcoin, a fixed number guarantees stability and increased value over time. To come up with the total supply of the coin, Nakamoto had to make two crucial decisions. The first one was the duration it would take to add new blocks, which was 10 minutes. The second was rewards paid to miners would reduce after every four years.
Reducing rewards is crucial to help combat inflation within the network. It’s scheduled to occur after every 210,000 blocks have been mined. What started as a reward of 50 BTC dropped to 25 BTC, then 12.5 BTC, and currently stands at 6.25 BTC.
You can imagine more people would love to join mining with even superior machines to earn maximum rewards. That’s why Nakamoto came up with mining difficulty, a self-adjusting process whereby if the network has more computational power, the mining difficulty would increase, making it more difficult to mine for the correct answer. Conversely, the mining difficulty would decrease should there be less computational power. By doing so, Nakamoto ensured that the block timing would stay relatively constant at around 10 minutes, and that new BTC would be added into circulation at a constant and predictable rate.
How Can You Mine Successfully Today?
Today, it is almost impossible to mine coins like Bitcoin using your personal computer. However, a few other coins with less network congestion and low mining difficulty can be mined using your personal computer. To mine mainstream popular coins such as Bitcoin, there are two ways to go about it. You can opt to invest in mining hardware and set up your mining rig before joining a mining pool, or you can purchase a cloud mining service contract and let the difficult work be done by someone else.
Disclaimer: The content in this report is from the open source and for educational purposes only, therefore should not be considered as financial advice. We all know that the cryptocurrency market is highly volatile. Therefore, all the financial decisions should be made after doing your wide spectrum research.