What does mining mean in the crypto world? What are the types of mining? How beginners can understand what cryptocurrency mining is? What are the pieces of equipment required for mining?
Friends, if any of the above questions arise in your mind, then you are at the right place. There is a very big craze of cryptocurrencies in the whole world. People with a democratic mind, with privacy and security concerns, are not away from blockchain technology. As blockchain technology makes the internet more democratic and user-friendly, more and more people are learning about cryptocurrencies and blockchain technology.
Various technical terms are emerging with cryptocurrencies. We have made a collection of all such terms. You can get it here.
In this article, I will try to explain cryptocurrency mining in very simple words.
So, let's start...
Overview of Cryptocurrency Mining
Cryptocurrency mining is a way of creating new crypto coins, validating transactions, and providing security to the network. People who participate in mining use high-powered computers to solve difficult mathematical problems created during the transactions of currencies.
The miners compete with each other to get the problem solved first. The one who reaches the solution first gets some rewards in the form of cryptocurrencies. This depends on the efficiency of the devices as well as on the strategy made by the miners.
Each transaction is then recorded in a block. Many blocks constitute a distributed ledger of information that is publicly accessible but can only be edited by verified miners. Every block refers to the previous one when being edited. Therefore to make a change in a single block, we need to change the whole chain that is practically impossible. This prevents the double spending of cryptocurrencies.
How Does Mining Work?
First, let's take an example of mining in the real world.
In the real world, people generally mine some precious metals and stones with the help of some pieces of equipment. While individual peoples are there, there are also other people who combine together in order to increase the chances of getting the metals and precious stones mined. Getting stones and coals mined is a common thing and very easy but it is a throw of luck to get diamonds during the mining. It should also be kept in mind that the more you work, the higher are the chances of getting a diamond.
In a similar way, cryptocurrency mining works. Miners deploy high-powered computers for this purpose. These are just like the pieces of equipment used for the mining of gold and diamonds.
Whenever someone tries to make a transaction, a difficult mathematical problem gets created that is impossible for humans to solve. These problems are in the form of hash functions. The computers deployed by the miners use a very high amount of electricity to solve the hash functions.
There is no single person who deploys devices for mining but a number of other miners are also there who compete with each other. The one, who finds the solution first, gets some rewards in the form of transactions fees. Besides this, the major reward is the block reward. When a new block is created, the miner receives a block reward.
As we saw in the case of diamond mining above, it is a matter of luck who is going to solve the hash function first. But remember, the more you work the higher are the chances of you being lucky.
Miners can also create a pool where they combinedly try to solve the hash function. When any one of them succeeds, the profit is distributed among all the companions depending on the work done by them. Nowadays, it is very difficult to mine individually. So, most of the miners do it this way.
What Are the Types of Mining?
The types of mining on the basis of the type of devices used are four, CPU mining, GPU mining, ASIC mining, and cloud mining.
In earlier days of blockchain technology, when Satoshi Nakamoto discovered bitcoin, people were able to mine bitcoin without much difficulty. Deploying just a normal computer with a mining rig was enough those days. The difficulty of the mining as well as the value of cryptocurrencies was low at that time.
After this came GPU mining which was more efficient than CPU. A Graphical Processing Unit does the same work as the Central Processing Unit but in a more efficient and fast way. Using a GPU makes the process easy for miners.
Now comes the ASIC mining. ASIC stands for Application-Specific Integrated Circuit. These are the hardwares that are designed for the sole purpose of cryptocurrency mining. These are faster and more efficient than GPUs. The cost of such devices is very high making the consumers dissatisfied.
For a normal device, it is very difficult to give a good performance in mining if the device does not have enough storage. The data on the whole blockchain needs to be stored and processed by the devices. In such a case, cloud mining is the most suitable.
Is Cryptocurrency Mining Legal?
There is not a fixed answer to this question as there are different governments in different countries with different levels of development and ideology.
The rules applied by the United States and Canada proved to be crypto-friendly as these are two of the most liberal countries in the whole world. While a communist country like China can totally ban cryptocurrency, a needy country like El Salvador can give cryptocurrency(Bitcoin) a legal tender.
Currently, the decision of India is not one-sided concerning the regulations of cryptocurrencies(as when I am writing these lines in January 2022).
How Do Miners Earn Money?
We discussed above how crypto mining works and you must have got a rough idea of how miners are getting paid. The transaction fee that users pay is a source of income for the miners but it constitutes a very small portion.
The major source of their income is the block reward. Whenever a new block is created, some cryptocurrencies are given as a reward to the miners.
Let's take the example of Bitcoin. Every 10 minutes, a new block is created that contains about 500 transactions on average. The one who creates and validates the block receives a block reward of 6.25 BTC. These newly created coins come into circulation this way.
Remember that the number of coins that I mentioned as block reward gets halved after the creation of every 210,000. This process is known as Bitcoin Halving and occurs nearly every four years. The last halving occurred on May 11, 2020, when the block reward was reduced from 12.5BTC to 6.25BTC.
Wrapping Up
The level of difficulty in mining has increased to a large extent in recent years. As more and more people are joining the crypto world, more and more people are also joining the mining industry. This has made it compulsory for miners to use high-powered and advanced computers.
Miners not only serve as the transaction validators and creators of new cryptocurrencies but also as the security guards of blockchain. The security of a blockchain network is directly proportional to the number of miners involved in this. So, if you are a miner of any cryptocurrency, then proudly say to yourself that you are a security guard of the cryptocurrency.
Now, it's time to hear from you. Is crypto mining banned in your country? Do you know any crypto-miner in your surrounding or on the internet? What type of device is that guy using? How much is that guy earning per month?
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