How Crypto Mining Works

As we all know, cryptocurrencies like Bitcoin and Etherium have come leaps and bounds from where they were even two years ago. And even though a lot of people are hopping on the bandwagon, not everyone who does really knows much about the process of how cryptocurrencies work behind the scenes and how these cryptocurrencies are mined.

The way decentralized finance works is that there are no banks or other third parties to regulate transactions. You might think that because there is no regulatory body there would be a lot of potential for scams and other security issues, however, each crypto transaction is recorded on a global ledger called the blockchain.

Even though the blockchain is a central record there is no official group of people responsible for updating the ledger and recording transactions as a bank does. In fact, anybody can volunteer to update the ledger and a lot of people do. It all works because there are a lot of people that verify the same transactions to make sure they are accurate. That way, if someone makes a mistake or tries to cheat the system the discrepancy is caught. Think of each transaction being recorded as a block and each of those blocks being added to a blockchain, hence: blockchain.

For example, let’s say Leonard wanted to send his friend some Bitcoin or complete a transaction, he would need to announce it to the Bitcoin peer-to-peer network so that his transaction could be recorded. With each transaction, Leonard would need to announce three things: his wallet address, his friend’s wallet address, and the amount of Bitcoin he wants to send. However, because lots of people are keeping copies of the same blockchain all over the world, network delays could cause people to receive transaction requests at different times and in different orders. The problem with that is that now there are a bunch of different people with slightly different blocks to pick from but none of them are specifically wrong. So the question becomes whose block do you choose from?

What the system does is assign each person who volunteers a mathematical problem which they must solve in order to submit their block. More specifically, each volunteer must solve a series of complex mathematical problems created by a cryptographic hash function. A hash function is an algorithm that takes an input of any size and turns it into an output with a fixed size. Whoever solves the hash first gets to add his block of transactions to the blockchain. After each hash is solved a new one is generated and the process starts all over again.

However, solving these hash problems requires a lot of computing power and a lot of money. These volunteers, better known as miners, spend a lot of money on computer parts and electricity bills just for the chance to solve even just one of these hash problems. This begs the question, why? What do miners get in return for updating the blockchain? Each cryptocurrency has its own built-in system to reward its volunteers. Every time a miner wins the race to add a block to the blockchain, they are rewarded with a specific amount of coins from the currency they are mining. Additionally, the coins that miners receive as rewards are brand new. This means that every time a miner is rewarded, new coins are generated and added to the total circulating supply.

Even though on the surface blockchain might just seem like a new type of database technology, in reality, it’s changing lives. By providing a centralized database anyone can access, blockchain has made things like finance and business more transparent and fair for everyone. Crypto miners play a significant role in that process and are the backbone of blockchain.

Be sure to come back soon to learn how staking cryptocurrency works!!

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