Cryptocurrency has been in the centre of attention for some time now. In case you are not very familiar with what is Cryptocurrency. In short, it is a secure digital decentralized currency that can revolutionize how we transact in the future. Investors are looking at it as a lucrative investment option. Cryptocurrency mining or crypto mining plays a very important role in cryptocurrency transactions. However, it is important to mention that there are some cryptocurrencies that cannot be mined. We have composed this blog to explain what is cryptocurrency mining and how is cryptocurrency mined.
What is cryptocurrency mining?
The transaction between the Cryptocurrency receiver and the sender is verified by cryptocurrency mining. People who perform cryptocurrency mining are called miners. Miners solve complex mathematical problems to verify the transactions, add the unique code or hash to the block representing the transaction and add the block to the blockchain. Another important aspect of cryptocurrency mining is that it adds new coins into the existing circulation. Cryptocurrency mining ensures that the currency is decentralized, i.e., it can function without central authorities regulating them. Cryptocurrency mining is definitely hard work and costly. The possibility of being rewarded for cryptocurrency mining is what attracts voluntary coders or miners.
How is cryptocurrency mined?
Cryptocurrency miners use high-performance computers to solve complex mathematical problems to verify the transactions. The miners collect transaction information from the network and assemble them into a block known as a candidate block. First, each transaction is hashed that is a unique code is added to it. Each transaction after being hashed is organized into pairs and then hashed together to form a hash tree or what is known as a Merkle Tree. The process of organizing into pairs and hashing them together is repeated until “the top of the tree” is reached. The top of the tree is a single hash that represents all the previous hashes used to generate it. It is known as the root hash or the Merkle root.
The candidate block’s header is hashed using the root hash, hash of the previous block, along with a random number known as the nonce. The output which is obtained based on these, along with a few other factors, is known as the block hash. This block hash is the unique code which will represent the candidate block. For the block hash to be valid it should be less than a target value dictated by the protocol. Cryptocurrency mining demands miners to keep hashing the block header repetitively by iterating through the nonce. The process is to be repeated until one miner eventually generates a valid block hash.
The cryptocurrency miners compete with each other to crack the code in order to generate the valid block hash. The first miner to solve the complex mathematical problem and generate the valid block hash will be rewarded. The reward is usually in terms of block cryptocurrency. The block representing the transaction is added to the public ledger database.
Maintaining a constant new block generation rate
To ensure the rate at which new blocks are generated remains constant, the valid block hash target value is regulated continuously by the protocol. Every time new miners enter the network and competition increases the target value is raised. Thus, preventing the average block time from decreasing. On the contrary if miners leave the network the target value is reduced. Thus, keeping the block time constant although there is less computational power dedicated to the network.
Cryptocurrency mining pools
The chance of finding a valid block hash is directly proportional to the total mining power in the network. The miner who cracks the code first and generates the valid block hash first will be rewarded. Individual cryptocurrency miners with limited mining power have a very low chance. Thus, miners join mining pools to increase their chance of being the first to generate a valid block hash. Groups of miners merge their hashing power, resources and processing power over a network in order to compete more effectively. The rewards generated from mining are distributed among the members depending on the work that they have contributed.
Is it worth investing in cryptocurrency mining?
During the early days of cryptocurrency mining, the computing resource costs and the energy required to mine cryptocurrency were low. Thus, miners could make full profit from each of the mining rewards. At present times the cost of cryptocurrency mining has drastically increased. Hardware and electricity are far more expensive in the present days. The profit of cryptocurrency mining usually depends on the energy consumption costs at the miner’s location and the type of hardware one is using. Thus, the profit of mining cryptocurrencies varies depending on the location of the miner. However, the rewards of cryptocurrency mining usually surpass the costs of mining.
Cryptocurrency mining basically has two purposes. One is to verify cryptocurrency transactions and add valid transactions to the public ledger. The other is to add new cryptocurrencies to circulation. Cryptocurrency mining is the only way to release new coins, so miners play a vital role in increasing the circulation.