In the last few years, currency has steadily begun to undergo a significant change as a medium of money circulation. The traditional modes of monetary exchange are not being treated with the same gusto anymore. Instead, people have started rooting for an alternative system that bypasses needless regulations while providing the benefits of both transparency and accessibility.
This is why it comes as no surprise that the idea of a digitally-enabled cryptocurrency has started to gain an immense amount of traction.
What Is Cryptocurrency?
Cryptocurrency is essentially a virtual currency that leverages the power of blockchain technology for conducting seamless, immutable, and efficient financial transactions. All of these transactions are verified and authorized on a publicly distributed ledger which is completely decentralized. This means that cryptocurrencies do not fall under the purview of any regulatory authority, thereby making them immune to external intervention or government control.
However, the creation of cryptocurrencies is not as easy as the creation of regular cash. Each financial transaction made using blockchain needs to be validated and approved. For this purpose, a number of mathematical equations and cryptographic algorithms have to be solved. This process of solving complex problems in order to add transaction records, ensure informational authenticity and generate new currency is known as cryptocurrency mining.
How Does Cryptocurrency Mining Work?
Also known as crypto mining or crypto-coin mining, cryptocurrency mining has witnessed tremendous growth in the past five years. This is primarily because as a verification process, it is responsible for eliminating double spending, confirming transactional legitimacy and thus, protecting currency integrity. Nonetheless, a number of people still remain confused about the actual working of cryptocurrency mining.
Detailed here is a step-by-step explainer of how cryptocurrency mining functions in a decentralized, peer-operated, and digital ecosystem.
- Whenever the blockchain process is used to make a financial transaction, all information about that specific transaction is placed in a composite data set, called a ‘block’. This block is connected to other similar blocks through an interlinked and chronological chain. To ensure proper encryption, every single block must be securely validated by a group of contributing peers called, ‘miners’.
- Miners, also called ‘network nodes’, are basically a category of users who verify and authorize each transaction that is added to a block and appended to a blockchain. However, the job is not as easy as it sounds. For doing this, each miner has to compete with numerous other miners across the world and decrypt a complex cryptographic puzzle.
The decryption of this puzzle involves two key tasks:
- Guessing a unique ‘hash’ i.e. a 64 digit hexadecimal number.
- Validating transactions that are worth at least 1 MB.
- Once the puzzle has been decrypted, the information obtained needs to be re-encrypted and added to the blockchain. This is called ‘securing the block’. Nevertheless, each one of these securely added blocks has to be corroborated by other network nodes/miners, in a ‘consensus’ building process. This consensus obtaining protocol is largely referred to as ‘Proof of Work’ (PoW).
- The miner who has successfully created a node and secured the block within the shortest space of time is rewarded with a newly minted crypto-coin.
Although cryptocurrency mining can reap great value, it can also prove to be a highly daunting task. The entire blockchain network processes around 6 quintillion hashes every second and decoding them to make the perfect calculations is often a tough nut to crack.
To overcome this hurdle, a number of miners prefer to band together and share their resources so that their chances of profitable cryptocurrency mining can be maximized. This joint ownership of both risks and returns is commonly called a ‘mining pool’. At present, apart from individual miners and mining pools, a lot of organizations too are involved in the process of crypto mining.
What Role Do Miners Play?
The value of each financial transaction is legitimized only when it is confirmed by a credible source. For fiat currencies, this confirmation either comes through banks or via the government. But in cryptocurrency mining, this confirmation is obtained through miners. Miners don’t just validate these transactions but they also substantiate their authenticity on a regular basis. In order to do this, they check if the users initiating the transactions have adequate amount of funds in their bank account. They further ascertain the user’s identity, find out if all the proper criteria have been met, verify the user’s signature, and perform frequent transaction tallies.
Do Miners Require Any Equipment? As beginners in cryptocurrency mining, miners require an extensive set of equipment like:
- A dedicated computer hardware.
- A specialized GPU(Graphical processing unit) chip.
- An ASIC(Application specific integrated circuit).
- A round-the-clock internet connection.
- A software package dealing with crypto mining.
- A membership in an online crypto mining exchange.
Alternately, a cryptocurrency mining software like ‘Honeyminer‘ can also be used to mine crypto-coins on a simple desktop/laptop. Honeyminer, in fact, is ideal for people who are just starting to venture into the field of cryptocurrency mining. Its set up incurs minimal costs but helps miners realize maximum value.
Are There Any Disadvantages of Cryptocurrency Mining?
For most practical purposes, cryptocurrency mining is a greatly beneficial process. It equips miners to earn money and create value. Nonetheless, crypto mining also has a few disadvantages such as:
- Quite like their fiat counterparts, crypto coins are subject to market fluctuations and the associated risk of depreciation.
- The net revenue generated from crypto mining is often neutralized by the cost of input resources like hardware, software, electricity, etc.
- In case you are locked out of your digital wallet, regaining access to all your minted crypto-coins would almost become impossible.
The Way Forward
In 2018, the value of cryptocurrencies globally amounted to an overwhelming $128.78 billion! With changing times and improving technologies, this demand is bound to witness an exponential increase. In such an environment, the need for competent miners who can successfully partake in cryptocurrency mining is most likely to see a quantum jump. Therefore, it is wise to be prepared for this upcoming revolution so that you can easily navigate your way through the competitive but choppy waters of crypto mining.
If understanding and participating in cryptocurrency mining has been one of your dreams, you can gain a deep insight into this alluring world by joining a cryptocurrency course here.