What Is Cryptocurrency Mining And How Does It Work?

Cryptocurrency mining is the process by which new crypto coins are created through solving extremely complicated mathematical problems that verify transactions.

Unlike fiat currency which is based on a centralised physical bank, cryptocurrency runs on a decentralised computer network or distributed ledger known as the blockchain. Computers on the network are rewarded for verifying transactions.

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How Bitcoin mining works

In a blockchain system, a transaction record is kept in multiple locations at once and is updated by contributors to the network. Each "block" in the computer network "chain" contains a number of identical transactions. The blockchain is updated by adding new blocks of data, which contains information regarding Bitcoin transactions.

Miners create new blocks on the chain by a process called "mining". Mining a block isn’t easy and it requires a lot of computing power due to the following properties of the blockchain:

  • each and every existing block is secured by its own unique nonce and hash combination. The nonce is 32 bits long and the hash is 256 bits long, which means the odds of guessing the right nonce-hash combination is roughly one in four billion.
  • the right nonce-hash combination must be found in order for the block to be mined.

To generate the right nonce-hash combination, miners use special software algorithms to solve complex mathematical calculations that find a nonce that generates an accepted hash. When that happens, miners are said to have found the "golden nonce" and their block is added to the chain.

Finding golden nonces requires an enormous amount of time and computing power, but once they do, the miners are awarded a certain amount of Bitcoin. Miners use expensive and complex mining rigs to make these computations. The more the computing power, the easier it is to mine Bitcoin because fast processing means more guesses per unit time. More guesses means higher chances of finding the correct nonce.

How miners validate cryptocurrency transactions

Mining is not just about creating new blocks and gaining coins. It is also way of validating cryptocurrency transactions and adding them to a distributed ledger.

When a person spends cryptocurrency, that person’s corresponding digital ledger record must be debited and the recipient’s record must be credited. However, the challenge of any digital record is security. There has to be a way of making the transactions not easily manipulated.

The security of cryptocurrency comes from the fact that only verified are allowed to update transactions. The responsibility of securing the network falls on the miners and they are rewarded with new coins. So the mining process is crucial for validating transactions.

Crypto miners validate transactions through a proof-of-work consensus.

What Is a Mining Rig?

Mining cryptocurrency requires computational power, so a typical Bitcoin mining rig includes all the components of a PC motherboard:

  • CPU (Central Processing Unit)
  • GPU (Graphics Processing Unit)
  • RAM (Random Access Memory)
  • Storage
  • Power supply.

What Is Cryptocurrency Mining And How Does It Work?

Some miners prefer to use a preconfigured mining hardware, known as Application-Specific Integrated Circuit (ASIC) miner. ASIC is essentially made up of banks of microprocessors with a cooling system.

What is a Hash Rate in cryptocurrency mining?

The complex mathematical calculations required by the blockchain system for miners to verify transactions are known as "proof of work" equations. The first miner to correctly guess a hash that is at or below the target value of the proof of work equations gets the reward for that block.

Since the reward works on first proof basis, if a miner wants to make money, they need to have a mining rig that is fast enough to calculate the hash before anyone else.

The solving of each new proof of work problem requires the mining equipment to "grind" through many possible answers to guess the correct hash. That requires tremendous amounts of energy and power.

That brings us to the definition of hash rate. A hash rate is the number of guesses per second your mining rig can manage.

Sydney Chako

Mathematics, Chemistry and Physics teacher at Sytech Learning Academy. From Junior Secondary School to Tertiary Level Engineering Mathematics and Engineering Science.


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