Crypto mining is the process of creating new coins of a cryptocurrency by verifying transactions on the blockchain.
In the traditional banking system, the Federal Bank prints fiat currencies like USD to maintain money flow. Centralized authorities like governments and banks are responsible for distributing the newly minted fiat into the market.
However, since cryptocurrencies are decentralized, no central authority maintains a ledger and creates new coins for distribution. Instead, they use a distributed ledger called “blockchain” to manage transactions and “mining” to mint new coins by verifying their authenticity.
The contributors on the blockchain network follow a set of rules called the “consensus algorithm” to validate a transaction on the blockchain. The most famous consensus algorithm is proof-of-work that uses computing power to validate a transaction.
Key components involved in the process of mining:
- Nodes: These are the individual computers in the blockchain network that verify transactions and add them to the blockchain. They are also called miners.
- Transaction: A transaction is the exchange of cryptocurrency between two parties using their crypto wallets.
- Hash: These are the cryptographic functions that help nodes in verifying the transaction. The data is encrypted in the form of a hash. Nodes validate it through trial and error to confirm the transaction.
- Consensus algorithm: These are the set of agreed rules followed by every node in the blockchain network to validate a transaction. The two most famous algorithms are proof-of-work and proof-of-stake. The process of mining is used in proof-of-work.
- Blocks: A block is like a page in the blockchain that contains details about the transaction like sender and receivers wallet address, time of the transaction, and address of the previous block.
How does crypto-mining work:
Let’s say you want to transfer one Bitcoin to your friend Andrew. You’ll do this by opening your Bitcoin wallet and add Andrew’s wallet address, along with the amount you want to transfer.
The transaction is encrypted into a cryptographic equation called “hash code” and then added to the list of unconfirmed blocks awaiting verification.
This unconfirmed block is then broadcasted on the network for verification, and nodes compete with each other to find the hash value of the transaction through trial and error.
The node that first solves the equation adds the block on the blockchain and the address of the previous block for other nodes to verify and add to their respective ledger.
Your transaction of one Bitcoin to Andrew will be completed.
The winning node gets a reward in the form of the native coin of that blockchain (Bitcoin in this case) and a transaction fee for verifying the transaction.
The mining process is used by all the cryptocurrencies that use proof-of-work consensus to verify transactions. But mining requires a vast amount of computing power to solve the cryptographic puzzle. Concerns regarding its environmental impact have often been raised in the community.
Mining was first used to create Bitcoins and is later adopted by cryptocurrencies that use a proof-of-work consensus mechanism.
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