Crypto Mining - How does it Work?
We all know that in the first half of this year the prices of crypto coins like Bitcoin, Ethereum and Dogecoin have rapidly increased. For this reason, more and more people have taken curiosity in the crypto ecosystem. The most common ways to buy and sell are through exchanges, but there are also some other ways.
Most cryptocurrencies are built using a technology called Blockchain, which is secured by complex encryption techniques. That is why coins can be exchanged by using a computer able to solve complex mathematical equations. Not everyone believes in the investment of this technique, but one thing’s for sure — it is always better to do your own research and decide for yourself. Let’s dig deeper into this concept.
What Does Cryptocurrency Mining Imply?
Before deciding to invest time and equipment into crypto mining, understanding the concept is crucial. The process refers to the gathering of cryptocurrency as reward for a completed work that consists mostly in verifying transactions. Crypto mining is most commonly used as an alternative income source, but also to obtain a greater financial freedom that keeps you away from government or bank oversight.
Cryptocurrencies are an area of interest for several types of people in the business market, which makes us believe that someday, the blockchain, can become our only form of exchange. In more technical terms, crypto mining implies the gathering of cryptocurrencies by solving cryptographic equations with the help of computers. The process also includes data blocks validations and transactions added to the blockchain.
In order for this process to function, entire networks of devices are involved in keeping the records shared via blockchain. With a market like this, we can completely forget about the traditional system of banking. Consequently, to have a better picture of the entire concept, it’s essential to see the difference between a centralized and decentralized system.
Understanding the Systems: Centralized and Decentralized
On the one hand, a centralized system is used by the traditional banking system. There’s a central authority in charge to maintain and update the record of each transaction. This is also a restricted system, because only a few organizations are able to connect to the system directly.
On the other hand, in a decentralized system, the central authority and centralized ledger are absent. Cryptocurrencies are a part of this system, because everyone can be directly connected to the distributed ledger, known also as blockchain. In this process, exchanges are made without the involvement of a bank. In addition to this, the system is also distributed, because all the transactions are publicly available.
For the transactions to be verified, cryptographic algorithms are used instead, and here’s where crypto miners come in. They use their computers for the cryptographic work in exchange for a small amount of cryptocurrency.
How Does Crypto Mining Work?
Now that we better understand what the process involves, let’s see how it really works. But first, let’s take a look at the technologies and processes behind it, which include understanding blockchain and how it operates:
- Nodes - devices and individuals within the blockchain;
- Miners - nodes that are specific and in charge of solving unconfirmed blocks;
- Transactions - the exchange of crypto between two parties;
- Hashes - integral component of each block, generated by the combination of the header data from previous blocks with a nonce;
- Nonces - describes a number used only once. It is added to the hash in each of the blocks, and it represents the number that miners are trying to solve;
- Consensus algorithm - the protocol of blockchain, also known as proof of work;
- Blocks - individual sections that contain a list of completed actions; once confirmed, they can’t be modified;
- Blockchain - a series of blocks listed chronologically, which provide transparency, taking into consideration that everyone can see the transactions.
Now, let’s see how the process of crypto mining works using an example. Let’s say you’re a crypto miner and your friend Jason has borrowed $10,000 to your other friend John, but now he wants to return the money in Bitcoin units. For this transaction to be completed, a verification process is needed which has to be added into the blockchain, in order to avoid “double spending.”
The transaction is added, along with the needed information, which includes the header data and hash from the previous and new block. Here, the header of the recent block and a node are combined to generate a new hash that will be added to an unconfirmed block that will be verified by a miner node. Once solved, other miners will have to verify and confirm the block. After that, the block will be legitimate in the blockchain and Jason and John can be happy with their transaction.
The time-consuming process lies in solving the hash, so it can be verified and legitimate. It may sound harder than it is without the proper training. To be able to get started with mining, here are a few extra things that you will need to do:
- Calculate profitability
- Get mining hardware
- Choose a mining software
- Install a (Bitcoin) wallet
- Enter a mining pool
Obtain a New Source of Income with Cryptocurrencies
Investing in cryptocurrency can change your life for the better, but for that, you will need to research and understand how the blockchain works. Crypto mining is one way of increasing your income. If you’re curious to learn more, get in touch and get ready to see how rewarding this entire process can be.
