How Does Cryptocurrency Mining Work? (With Examples)
As a cryptocurrency beginner, you must have many questions in mind like what crypto mining actually is, how it works, what the benefits are and so on. It is especially important to know everything about the mining process if you are planning to start with it.
While expert investors may already have a good understanding of how cryptocurrency mining actually works, wannabe miners often stay confused around the whole wordplay. This is why this article aims to ease the vocabulary of Cryptocurrency Mining for those who are planning to get started in it and those who are already invested in this industry.
What is blockchain mining?
In simple terms, cryptocurrency mining refers to the process of creating new coins. This is done by creating new blocks of transactions. In order to understand this, we must first understand what blockchain is and how it works.
A blockchain is a distributed public ledger which contains blocks of transactions. Each block in the chain is linked to the previous block by a hashing function which stores the address to the linked block.
In the mining process, a miner is rewarded in the form of coins/tokens for each new transaction that is verified and added to the block by him. Let’s see how it works.
How does Cryptocurrency Mining Work?
New coins are created by verifying transactions in a blockchain network. Transactions are verified by Miners, who are individuals performing calculations and solving complex mathematical equations.
In order to participate in blockchain mining, a person will require the following 3 things:
- Good quality computing hardware (Computer)
- Internet Access
- A Reliable Power Source
In most cases, the miner is responsible to arrange the above resources if he/she is working alone. There are also Mining Pools where two or more individuals form a group to perform mining tasks in collaboration.
The profitability of a Miner greatly depends on how much power he/she can contribute to the network, or in other words, how sophisticated his computing hardware is. This is why the cost of mining is directly proportional to profitability. But there are ways to limit the cost of mining without compromising the profitability, which we will discuss later. First, let’s try to understand the basic process of crypto mining.
The process of mining essentially involves the verification and compilation of new transactions into blocks in the form of a chain. Miners compete against each other to solve every new transaction that is performed through the network. The transaction verification process involves solving complex mathematical problems using the hashing power. The Miner who first solves the problem is allowed to add the verified transaction to the block and place the new block to the blockchain. Once the process is complete, the Miner is rewarded with a newly released coin.
As for the cost of mining, it depends on the cost of computing hardware as well as the cost of the energy. High electricity consumption in the mining process is having negative impacts on our environment. This is why Pieta has come up with an alternate solution where Solar Energy, instead of traditional power sources, is used in the blockchain mining process. This, in addition to the new X20 Mining Algorithm, reduces the overall cost while increasing the efficiency of mining.