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How does crypto mining work?

You’ve probably heard a lot about crypto mining: the crypto equivalent to minting currency, involving maths, tons of electricity, and commitment of crypto miners – people who produce cryptocurrency with their powerful computers. What do these miners do exactly? And why is their work rewarded with precious bitcoins? Let’s find out!

Crypto mining

Crypto mining, alongside blockchain and cryptocurrency, is one of the key terms widely associated with crypto. Yet, like many things crypto-related, it can initially be a bit confusing. No need to worry if that’s the case for you! The Exeno team – people behind the first online store accepting direct crypto payments – are happy to share a brief explanation on our blog.  

What is crypto mining? 

For some, mining is all about one thing: earning cryptocurrency as a reward for solving specific cryptographic equations. Yet, the process has three main functions: issuance of new bitcoins, confirming transactions, and ensuring security. From a macro perspective, crypto miners contribute to the maintenance and development of the entire blockchain by validating data blocks and adding emerging transactions to the public ledger. 

Broadly speaking, miners have to arrive at the right hash for the next block in the blockchain, taking the form of a 64-bit hexadecimal number.  

But why is this so crucial? Why do we need crypto mining in the first place? The answer is simple: it’s a consequence of the nature of blockchain technology, the backbone of cryptocurrencies. With crypto, there is no central authority (like a bank) to release new cryptocurrency into circulation. Thus, it’s the miners’ network that takes the responsibility for releasing new coins and verifying transactions. It’s the only way to legitimize cryptocurrency while staying true to its decentralised nature.

How to mine crypto? 

Let’s use Bitcoin as an example. As a miner, you’re eligible for the reward (a certain number of Bitcoins, more on that later) when you verify 1 MB worth of Bitcoin transactions, a ‘size’ of a block in the Bitcoin blockchain. It means that even though a miner can verify even a single transaction, they certainly won’t be paid until they verify at least 1 MB of them. This can be equal to one or several thousand transactions: it all depends on the nature of the information within them. 

Verifying 1 MB worth of transactions is not enough, however. There is another condition to be met: as previously mentioned, a miner needs to be the first person to solve a numeric puzzle (or at least be the one closest to the correct answer). This process of solving a cryptographic problem is called proof of work and acts as a special mechanism ensuring transactions are verified with a decentralized consensus of the whole network. Proof of work prevents crypto users from double-spending and malicious actors’ from overtaking the network.  

The mathematical puzzle-solving doesn’t resemble finding a scientific solution worthy of a Nobel prize nomination, however. It is more of a guessing game, though a challenging one: crypto-miners are trying to work out a hash, a 64-digit hexadecimal number. More specifically, they try to generate the right ‘nonce’ (‘number only used once’) that is added to every blockchain block and constitutes a key to the 64-digit hash. Not having to figure out the entire number certainly makes the job easier: the size of a nonce is only 32 bits whereas a hash is 256 bits. Ultimately, crypto mining essentially boils down to generating as many nonces as possible, as quickly as possible. It’s an everlasting race that requires an enormous amount of computing power and electricity – high processing speed or ‘hash rate’ is vital to successfully mine bitcoins. 

The reward

As previously mentioned, the main appeal of crypto mining is the possibility of getting bitcoins out of ‘nowhere’: the author of the right solution to a mathematical puzzle is rewarded with newly minted coins.  

It’s possible for several miners to guess the correct answer. Yet, there can only be one winner. That’s where the aforementioned transaction verification comes back in: it’s the miner who’s done the most work (verified the most transactions) that’s rewarded. As you might have noticed, the system is designed so that the probability of getting the prize decreases as more miners take part. As an additional setback, the puzzle itself becomes the harder the more computers join in, to match the growing computing power of the mining network and ensure fair competition. Bitcoin’s underlying algorithm purposefully makes crypto miners’ crucial, and potentially very rewarding, work increasingly laborious. 

Moreover, the reward for mining bitcoins is halved every four years. In 2009, when the first bitcoin entered circulation, it was set to 50 BTC. Thus, per this formula, the reward is now 6.25 BTC (since May 11, 2020). As of 7 July 2021, Bitcoin is $34,150.54, so the remuneration is equal to approx. $213 440. Given this, it’s no surprise that the Bitcoin gold rush is still a hot topic in the crypto community, despite the increasing difficulty of mining.  

However, crypto mining is not like getting bitcoins out of thin air. An aspiring miner has to invest in special hardware, like a GPU (graphics processing unit) or an application-specific integrated circuit (ASIC), which can cost from five hundred to thousands or even tens of thousands of US dollars. And that’s just the beginning: specialised software can also set one back thousands of dollars, and there are electricity bills and taxes to be paid after (hopefully!) getting the bitcoins.  

Though obtaining the ‘sought-after’ bitcoins is not impossible, crypto mining is a very time and resource-consuming activity and is definitely not for everyone. But even if you don’t plan on taking an active part, it is always valuable to take a closer look at the process and understand how cryptocurrencies are minted. It’s thanks to crypto miners that we can continuously enjoy an innovative decentralized currency that is perfect for online shopping. And that’s where we come in! At the Exeno store, you can purchase a wide range of products including mobile phones, computers, PC gaming gear, notebooks, graphics tablets, drones, and many more, with direct crypto payments. We accept BTC, BTCV, and ETH with no FIAT conversion. See you on our website!  

Sources:  

https://www.investopedia.com/tech/how-does-bitcoin-mining-work/

https://www.thebalance.com/how-does-bitcoin-mining-work-5088328

https://www.buybitcoinworldwide.com/mining/

https://www.investopedia.com/terms/p/proof-work.asp  https://www.investopedia.com/terms/n/nonce.asp

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