What is cryptocurrency mining?

As cryptos are entering the digital world with countless numbers of people developing an interest in this new tech world every day, it’s made quite a relative display with miners, investors and many more.

If you are wondering whether they are doing this mining for free or not, the answer is no. You can do it voluntarily but the main grounds to why people mine is because they can earn money or cryptos through this process. Even if you do it voluntarily or for the money, the end result is that you earn some crypto for your hard work. So now let's take a look at what mining actually is and why so many are interested in this job.

What is Mining?

In simple terms, mining is the process through which high powered computers perform certain tasks that are very complicated or tough to earn cryptocurrency rewards. These tasks are like high level maths equations - hard and complicated. This doesn't mean that you can have cryptocurrencies only if you are a miner. You can buy cryptocurrencies using your fiat currency then you can start trading on platforms like Binance or Coinbase. Back to the topic of mining, as more miners want to mine a single mining pool, the tasks get tougher. We’ll look into mining pools later so don't worry.

Cryptocurrency Mining
Photo Credit: digitalwalletsnews.com

What happens through the process of mining?

In the process of mining, transactions between users are approved and then added to the existing public blockchain ledger. This process is also superintendent for adding new coins into the existing money supply that is currently circulating. This is because new coins are created as a reward to the miners for validating transactions. This is one of the main elements that allows cryptocurrencies to work as a peer-to-peer decentralized network. This helps it run without the requirement of any third party companies like banks etc.

This process moreover serves as a prevention in defiance of deceptional transactions or transactions splurging the same amount of bitcoin more than once, known as a double-spend.

Double spend is a big issue where the same money is transacted more than once. The most popular methods for performing a double-spend are :

51% attacks

Finney attack

Race attack

These attacks allow the user to use the electronic cash system for financial gain in which the funds can be transacted more than once.

To earn cryptos in the process of mining, you will have to meet some requirements, that are:

  • You have to verify a specific MB worth of transactions
  • You have to arrive at the correct process for the correct answer. This is known as proof of work.

This is basically like guessing till you get the right answer. The very first miner that comes up with the nearly perfect 64-digit hexadecimal number, a hash, that is quite less than or equal to the targeted hash is considered the winner.

Even though this guessing work sounds quite easy, there actually are a lot of possibilities to guess from, like a billion or maybe even more.

How does mining work?

In the terms of this, a miner is a node in the network that collects transactions and organizes them into blocks. We have looked into this in the Blockchain guide. At the times when any payments are made, they are broadcasted to the network and all network nodes receive them and verify their validity. After this, the miner nodes collect the required transactions from the memory pool and begin assembling them into a block candidate block. A memory pool is an area where all the transactions are temporarily stored.

The first step of mining a block is to hash each transaction that is taken from the memory pool. The miner node adds a transaction where. If they do this they get a reward.

Therefore, every time new miners join the network and competition increases, the hashing difficulty will raise, preventing the average block time from decreasing.  In contrast, if miners decide to leave the network, the hashing difficulty will go down, keeping the block time constant even though there is less computational power dedicated to the network.

However, it can sometimes happen that two miners broadcast a valid block at the same time and the network ends up with two competing blocks.

Bitcoin Mining

Bitcoin mining is exactly the same as the process explained above.

Rewards on mining Bitcoin

If you want to know how much BTC you get as a reward, then here’s the answer:

When bitcoin was first introduced, mining one new block would earn you 50 Bitcoin (BTC), This was in 2009. Three years later, 2012, this was halved to 25 BTC. By 2016, this was halved again to 12.5 BTC. On May 11, 2020, the reward halved again to 6.25 BTC.

This means that the reward was decreased by 12.5% of the initial amount. As the value of bitcoin kept increasing, the mine reward kept decreasing.

Currently, in February of 2021, the price of Bitcoin is about $46,767 per Bitcoin. This means that you’d earn $292,293 (6.25 x 46,767) for completing a block. If you really want to know when the next halving for bitcoin will occur, you can consult the Bitcoin Clock, which updates this information in real-time. This link takes you to a site which has all the information of when the next halving will occur.

Ascertaining the exact time that it takes to successfully mine 1 Bitcoin completely depends on a lot of factors like your computational power, the type of equipment used, the competition and the process used. However, in the best-case scenario, with the ideal computational power and equipment, it should take about 10 minutes to process 1 BTC or even less. This totally depends on how you plan to do it. There are 5 types of mining, that are: CPU, GPU, FPGA, ASIC, Cloud. Lets see them in detail in another guide.

Pros and Cons of mining

Pros

  • By doing mining, you can get cryptos without having to log a lot of money for it.
  • Rise of Cloud mining
  • You have full control

Cons

  • It is considered expensive
  • Complex
  • You could lose money
  • Price is unstable

What is a Mining Pool?

The idea of Mining Pools mainly rose to tackle the one big problem of rising mining difficulty that people faced. Miners who have a small percentage of the mining power stand a very small chance of discovering the next block on their own so they need an efficient way to tackle this problem without spending more money. That’s why mining pools are created. They are created to solve this problem. This means pooling of resources by miners, who share their processing power over a network, is done to split the reward equally among everyone in the pool, according to the amount of work they contribute to the probability of finding a block. This means that a small contributor gets a small share of the total amount.

The chances of one single mining rig gaining a reward is low, but this probability increases rapidly when you pool together thousands of rigs.

Any person who wants to make a profit through cryptocurrency mining has the choice to either go solo or to join a mining pool where many miners and their devices combine to enhance their hashing output and split the reward. Mining pools are now considered essential to getting any shot of successfully mining Bitcoin or any other crypto.

Disclaimer: Digital Wallets News does not recommend that any cryptocurrency should be bought, sold, or held by you. Do conduct your own due diligence and consult your financial advisor before making any investment decisions.

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