Bitcoin, litecoin, ethereum, dogecoin- it’s all over the news! Everyone around us seems to be going crazy over cryptocurrency, and somewhere we hear this term- Cryptocurrency Mining and puzzle over it.
Mining, in layman terms, refers to digging through the soil to find some precious metal like gold right? But if cryptocurrency is digital, what are we digging?
To understand this, let’s take a deeper dive into what cryptocurrency is and how it works.
It is essentially digital money bought and sold online. There are no bills or coins, and it’s not based on another asset like gold, and it doesn’t have to go through traditional financial institutions like banks.Instead, these currencies are traded in a completely decentralised system using blockchain technology to track transactions.
To see how this works let’s look at how you buy with cryptocurrency. Say, Alice wants to buy a bike from Dan using bitcoin. Alice begins the process by logging into her bitcoin wallet with her private key, which is a unique combination of letters or numbers.
In case of traditional financial transactions, the key gets sent to banks on each side- who record money being recorded from one account to another.
But in this scenario, as there are no banks or middlemen, Alice’s transaction is shared with everyone on the network. It is a shared list of recent transactions known as a block. Every few mins the new block of transactions is added on or chained to all previous blocks, essentially to form the blockchain.
To ensure that each block of transactions on the chain is verified, a subset of bitcoin’s network, a group of people called Miners, join the race to solve a very difficult math puzzle called Proof of Work. With each puzzle being solved, crypto transactions are being verified (so bitcoin correctly transfers from Alice to Dan).
Cryptocurrency mining is defined as the process of using sophisticated computers to verify the legitimacy of bitcoin transactions and to enter new bitcoin into circulation.
Essentially, while mining you’re actually running what’s called a hashing algorithm to work out all those digital transactions, and it is very necessary in order to maintain the ledger of transactions upon which a particular cryptocurrency is based.
The miner or group of miners(called miner pools) who solve it get some benefits to keep them motivated and on the job. Their record of the block of transactions becomes the official record, and they are rewarded with cryptocurrencies of their own. With each cryptocurrency mining, the network gets a new block on the chain. The fact that many computers are competing to verify a block ensures that no single block monopolises the bitcoin market.
Now, coming back to our initial analogy with gold mining- It’s pretty obvious that instead of chipping away a rock, we are solving complex puzzles. But if we think carefully, some bits are similar to gold mining. The more mining that we do, the harder it is for us to get the reward. This is because, to ensure the completion stays fair and evenly timed the puzzle becomes harder when more computers join in.
Looking at bitcoin, the bitcoin protocol says mining will continue until there are 21 million bitcoins in existence. That’s said to happen in 2140, if bitcoin lasts that long.