The result of cryptocurrency mining is the same as the rock version, the possibility of finding something valuable. See below how cryptocurrency mining works, whether Bitcoin or Ethereum, the most well-known, or other examples of coins with reduced fame in the cryptocurrency market.
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Cryptocurrency mining is a crucial part of the technology through which transactions are verified and added to the digital ledger known as a blockchain.
The owners and operators of the computer systems that make up the decentralized network, called miners, receive newly created units as a reward for their work.
In this process, miners compete to solve highly complex mathematical equations. The first to find out gets the reward. The processing power of the PC, mainly graphics cards, is focused on solving the equations.
How mining works
Let’s use bitcoin, the most famous cryptocurrency today, as an example, but the method is the same in other examples, such as ether from the Ethereum network.
Bitcoin is a cryptocurrency, meaning it is a currency that leverages cryptography. It can be used to make payments without financial institutions or governments involved.
Cryptocurrency relies on a process called mining to confirm transactions and add them to the blockchain. In addition to verifying transactions, mining protects the network. It also prevents double-spending, which is when someone uses the same resources twice.
The Bitcoin network is designed to allow interested parties to transact without going through intermediaries like banks. There needs to be some mechanism to determine which transactions take place and commit them.
Bitcoin solves this by taking advantage of a consensus mechanism, an algorithm that determines which transactions take place on the network. More specifically, the Bitcoin network uses a mechanism called proof-of-work.
The basis of the cryptocurrency mining process
We can set some bases on the cryptocurrency mining process, whether bitcoins, ethers, etc.
- Computers on the network gather transactions that have occurred in the last 10 minutes into a block and compete to solve a complex mathematical problem. The response, known as a hash, contains 64 characters;
- The miner or mining pool (collective of mining machines) that solves the equation first all shares the result with the other systems in the larger network. If others verify that the solution is valid, the block is added to the blockchain ;
- The winning miner receives something called a mining reward, which has varying amounts. This incentive is reduced by 50% every four years during events called halvings, in the case of bitcoins.
The race to solve these increasingly difficult cryptographic puzzles requires a significant amount of energy. But this cost is intentional, as the bitcoins created can be very profitable.
What is a mining rig?
In English it’s called a Mining Rig, a typical piece of equipment that includes all the components of a PC — motherboard, CPU, GPU (video card), RAM, storage and power supply.
As mining evolved, people created more complex setups and specialized equipment designed to maximize processing capacity.
Early miners used their personal computers with only the processing power of a CPU at their disposal. With the increasing complexity of solutions, it has become essential to assemble specific machines or networks for mining.
Connecting multiple processing-capable parts together typically means multiple high-end graphics cards bundled together to process more equations at once.
As a result, this requires more power, better cooling, and a way to release all the heat generated, which increases the cost of mining.
Rising demand for graphics cards among miners has contributed to increased shortages during the COVID-19 pandemic, resulting in higher prices on the secondary market.
Another option that has become popular is investing in pre-configured mining hardware such as an ASIC (Application-Specific Integrated Circuit) miner. These are essentially banks of microprocessors with a cooling system.
People also join together to form mining pools that combine their processing power and then split the rewards for whatever blocks they mine.