Cryptocurrency mining is a process of adding the data of transactions to the blockchain. The blockchain will have all the information about past transactions in the form of blocks. The blockchain also serves as the medium to verify the legit transactions in order to prevent the scope of double-spending. The mining process is an intensive exercise specifically structured to have a stable number of blocks. These blocks should have a consensus algorithm called proof of work to be considered as valid. The other nodes in the network will verify the proof of work mechanism for every new block received. All this is done to make sure that no single entity can modify the transactions recorded in the blockchain. Mining is also done to introduce new coins into circulation and enables cryptocurrencies to function in a peer-to-peer decentralized manner. The miners execute this process with the help of specialized processing units. The mining process involves these miners competing with other miners to solve complicated mathematical problems with cryptographic hash functions that are associated with a block containing the transaction data. They are remunerated with newly introduced coins and transaction fees.
How does Cryptocurrency Mining Work?
Miners, also called as nodes, maintain a complete copy of the blockchain and monitor the network for newly-announced transactions. These nodes verify the authenticity of the transactions and arranges them into blocks. The transactions are taken from the memory pool of the network and are mustered into a block. Each transaction is separately hashed. The hashing of the transactions require a certain power to convert them into a hash (output). This power is called as the hash rate. After that, these hashes are paired and passed through the same hash function again. The paired hashes are hashed again till only one single hash is left which is called as the root hash. The root hash is the final output of all the previous hashes. The root hash, previous block’s hash, and an arbitrary number known as nonce are inserted into a block’s header. The output of these three is termed as block hash and qualifies as a new block.
Everytime the hardware runs a cycle of creating a block hash a new hash is created. As per the protocol, the block hash should pass a pre-decided criterion to be considered as valid. The whole process is done on a repeat mode till a valid block hash is produced and the criterion is met. The nodes across the network are in a competition or a race to satisfy this criterion. Once it’s done, the owner node will share it to the network so that other nodes can check its validity before adding it to their blockchain. There are cases when two nodes share the block hash at the same time. In such cases, the miners begin to create the new block depending on the first block hash received by them. The block which gets mined first is accepted and the other one is left deserted. The miner of the deserted one joins to continue the chain of accepted block hash.
In the case of Bitcoin’s blockchain, miners invest in expensive computing hardware and race each other to solve blocks. As a reward for verifying and recording everyone’s transactions, miners receive a substantial Bitcoin reward for every solved block.
What is Mining Hardware?
Mining hardware has evolved in recent years and now there are multiple options available in the market.
CPU (Central Processing Unit) – During the early days, the miners used to mine with their own computers. The rising popularity of blockchain technology made people look for more and better mining hardware. It is now considered as an outdated mining solution and is not recommended as a viable option.
GPU (Graphics Processing Unit) – It was originally created for catering the needs of gamers and designers with heavy graphic requirements. The configuration of the same grabbed the attention of miners. They started to use it for mining purposes which yielded faster and better results than CPU mining.
FPGA (Field Programmable Gate Array) – This hardware is difficult to configure, but is much more effective than GPU mining and consumes less energy with higher hash ratings comparatively.
ASIC (Application Specific Integrated Circuit) – This was launched in 2013 and is used exclusively for mining purposes. The features are way ahead than other hardwares.
What is a Mining Pool?
Mining is a competitive game and often small-time miners leave the game empty-handed. There are several reasons for it as they might not have a powerful mining solution or the resources that a professional mining farm has. In order to overcome this situation small-time miners started organizing themselves to create a pool by working together. They share all their resources and participate in the competition and if they won the competition, prizes are distributed based on the hashrate they have contributed in mining the block.
Steps to Bitcoin Mining:
- Get a Bitcoin Wallet. When you start earning Bitcoins from mining, they go directly into a Bitcoin wallet.
- Find a Bitcoin Exchange like CoinDCX which will help you exchange your Bitcoins for Fiats or other cryptocurrencies.
- Get Bitcoin Mining Hardware. The types of hardwares used are already mentioned above. Make sure the facility in which you install these hardwares are capable of handling the power load requirements of mining.
- Select a Mining Pool. Without a mining pool, you would only receive a mining payout if you found a block on your own. This is called solo mining. Getting a chance to add a block on your own is a one in a million luck. Also, hash rate of a single mining unit will not be close to the current hash rate required to add a block. By joining a mining pool you share your hash rate with the pool. Once the pool finds a block you get a payout based on the percent of hash rate contributed to the pool.
- You also need a Bitcoin Mining Software which connects your mining units to your desired mining pool. This software is also used to communicate your hashrate and Bitcoin address payouts to the pool.
We advise to consider few checkpoints before getting into the mining business:
- Check if Bitcoin mining is legal in your country and in your area.
- Check whether your area is able to provide the power load required by your mining hardware.
- Check whether the business is profitable for you. You can use a Bitcoin mining calculator to get a rough idea.