In recent years, cryptocurrencies have made a significant impact on the world in multiple ways. You often hear about the price of Bitcoin or Ethereum, while numerous other digital coins emerge and enter the discussion on a regular basis. But have you ever taken a moment to wonder where these cryptocurrencies come from?
The answer to this intriguing question lies in the process of crypto mining, sometimes also referred to as crypto minting. Although these terms are relatively simple to grasp, it is important to expand on the actual process a little bit to get a proper understanding of what crypto mining actually is.
The two terms originated as an analogy between crypto mining and/or minting and gold mining or minting physical gold coins. Just as mining gold requires energy, cryptocurrency mining demands energy, too. However, instead of human labor and pickaxes, this energy comes from electrical power.
In this article, we will primarily use Bitcoin as an illustrative example, although the same or similar principle applies to a number of different cryptocurrencies. We chose Bitcoin because it is the most recognizable cryptocurrency that embodies the concept of mining.
Essentially, cryptocurrency mining represents the vital process of generating new digital coins, and it is the exclusive means of coin creation, a mechanism that is crucial for maintaining controlled inflation. Mining also plays a pivotal role in the authentication and validation of transactions before they are permanently added into the blockchain.
This validation process serves a critical purpose: safeguarding against the possibility of double-spending, an issue that doesn't exist with physical currency. To aid the verification process, every miner possesses a complete copy of the blockchain, which serves as a self-referencing and self-correcting ledger.
When miners validate a transaction, their primary objective is to ensure its uniqueness, mitigating the risk of fraudulent activity. Consequently, the mining process acts as a rewarding incentive to miners for their contribution to upholding the network's integrity.
So, how do miners achieve this? They engage in a competitive race by solving intricate mathematical puzzles. The first computer to successfully solve the puzzle is granted new coins. This process is known as Proof of Work.
While this might seem straightforward, the reality is far more complex. As each new block is solved and fresh miners join the mining pool, the complexity of these mathematical challenges escalates. In the early days of cryptocurrency, it was possible to mine Bitcoin using standard computer equipment. However, this is no longer the case.
The algorithm stipulates that a new block must be completed approximately every ten minutes. Since its inception, the difficulty of mathematical problems has surged exponentially. As more miners join the network, the likelihood of swiftly finishing a block increases. Consequently, the difficulty level must also rise to maintain the ten-minute block completion timeframe.
To address these challenges, mining pools have emerged, where multiple miners pool their computing power and share the resulting rewards. Solo mining has become less viable due to the diminished odds of successfully minting new coins when working in isolation.
The mathematical challenges integral to cryptocurrency mining aren't conventional equations or puzzles in the traditional sense. Rather, they involve complex computations centered on a unique set of 64-digit numbers generated from all the transactions within a specific block. To successfully solve these puzzles, computer processors must methodically test an array of possible combinations until they arrive at the correct one.
The ultimate output of this computational process is known as a "hash," more precisely a "target hash." This hash is composed of numerous individual hashes derived from all the transactions within a given block. The efficiency of a miner's operations is quantified by their "hash rate," which represents the number of guesses their computer can generate per second. Hash rates are measured in units such as gigahashes and terrahashes per second, providing a gauge of a miner's computational power.
Now that we have the basics of cryptocurrency mining out of the way, you might understandably have reservations about venturing into the realm of mining. Let's be honest: Mining is a demanding undertaking, both in terms of financial investment and time commitment, and it doesn't offer any guarantees of success.
Fortunately, there are multiple other alternatives to consider. To begin with, you can explore cryptocurrencies beyond Bitcoin that impose less strict requirements on the mining process. An excellent example is Core Blockchain's native Core Coin, which can be mined using compact IoT (Internet of Things) devices, eliminating the need for formidable computing power. This alternative Proof-of-Work method, referred to as Proof-of-Distributed-Efficiency, can make mining possible even on something as small as a laptop, mobile phone, or even a smart refrigerator.
Another possible alternative to the Proof-of-Work system is the Proof-of-Stake mechanism. In this approach, you stake fiat currencies to increase your likelihood of receiving new digital coins as rewards. Ethereum, for instance, recently transitioned to this method.
If you're determined to dip your toes into mining, we won't dissuade you from doing so. However, we strongly advise you to obtain fundamental knowledge beforehand to minimize potential risks and losses. Success in mining often hinges on informed decision-making. Good luck out there, miners!
SO-FIT is a self-regulatory organization approved by the Swiss Federal Supervisory Authority financial markets (FINMA) for the supervision of financial intermediaries referred to in Article 2 paragraph 3 of the Swiss Federal Law concerning the fight against money laundering and the financing of terrorism in the financial sector (AMLA).
