What is Crypto Mining?
Cryptocurrency Mining Explained
Cryptocurrency mining was not a thing until Bitcoin came into the picture on January 3, 2009. This was the date when Bitcoin creator Satoshi Nakamoto mined the first block of the Bitcoin blockchain called Genesis Block or Block 0 and received 50 BTC as a reward.
Since then, cryptocurrency mining has created a lot of buzz in the cryptocurrency space, which might leave you wondering what it is, how it works, and why people mine cryptocurrencies in the first place.
To put it simply, cryptocurrency mining is the process of verifying transactions, adding them to the blockchain, and generating new coins as a reward.
However, while Bitcoin is a cryptocurrency that can be mined, it is worth noting that not all cryptocurrencies are mineable such as in the case of IOTA, XRP, and ADA.
How Cryptocurrency Mining Works
When we say mining, it is understandable that you may think of gold and how this precious metal is extracted from the earth – a process that is labor-intensive and time-consuming.
While this may be the case with actual gold mining, it’s interesting to note that this process is also the origin of the idiomatic expression “[to] strike it rich” – something that has proved to be applicable both to gold and cryptocurrencies to a certain extent, and which might explain why some want to get into mining.
In the olden days, gold miners chip away at dirt and rocks using pickaxes. On the other hand, cryptocurrency miners use powerful computers in a bid to add transactions to the blockchain by being the first to solve a cryptographic puzzle and earning the reward.
In a more technical sense and vis-a-vis Bitcoin, let’s break down cryptocurrency mining into these four stages that are easily understandable – double spending, blockchain technology, proof of work, and halving.
Double spending is a problem that is especially concerning for digital assets like cryptocurrencies. It involves being able to create a copy of an asset and using it over and over again to pay for goods or services.
Unlike physical cash where there is an actual transfer of possession (I hand you a $5 bill to pay for something I bought) when you use it as payment, digital assets like Bitcoin exists entirely online, so there is no way for the recipient to check if the person who paid had just used a copy of the asset and retained the original.
By using blockchain technology, Bitcoin was able to solve the problem of double-spending when it comes to assets that exist entirely online.
Blockchain Technology: Understanding the Terms
In a nutshell, blockchain technology can be described as a system of keeping records, and it solved the problem of double-spending because of the way how its records are kept on the blockchain – decentralized, distributed, and immutable.
In the case of Bitcoin, its blockchain is maintained by a network of powerful computers called nodes, which are operated by miners.
These miners race against each other in a process called mining in a bid to be the first one to solve cryptographic puzzles hardcoded into the bitcoin protocol in order to validate the newest Bitcoin transaction and add it to the blockchain. The first miner to do so will get a new bitcoin as a reward.
While anyone can be a miner, not all computers are built to solve complex cryptographic puzzles efficiently and not all locations can prove to be practical as mining consumes massive amounts of electricity.
Today, Bitcoin miners invest in cutting-edge and powerful computer equipment built specifically for mining such as GPU (graphics processing unit) or ASICS (application-specific integrated circuit), which can run from $500 to tens of thousands of dollars.
Have you heard of Bitcoin being described as a trustless system? This pertains to its consensus mechanism, which in the simplest of terms, can be described as a process to achieve agreement, trust, and security across a decentralized network.
To put this into perspective, let’s start with the classic Byzantine Generals Problem. Imagine having two armies on either side of an enemy city, and you both need to attack at the same time, otherwise you’ll lose. However, the only way to do this is to communicate via a messenger, who could possibly be a traitor or manipulated by the enemy.
In short, you need to agree on a concerted strategy with the other general in order to be successful without relying on central authority (the messenger) and even in the presence of potentially untrustworthy parties. This scenario is a common dilemma in decentralized systems such as Bitcoin, where anyone can participate in the network.
By using proof-of-work (PoW), Bitcoin was able to solve this problem by requiring all miners (generals) in the network to put in the effort (or “work) in solving an arbitrary cryptographic puzzle to prevent anyone from manipulating the system and to arrive at a central source of truth agreed by everyone on the network.
Bitcoin miners have an equal chance proportional to their computing power to solve this cryptographic puzzle, which will create the next block. The solution, called hash, is 64 characters long and is based on the information contained on that block.
The miners will compete to solve for this hash and once someone finds it, this is broadcasted to the network to be confirmed by other miners. Once this is done, the block containing the hash will be added to the blockchain, which will serve as the basis for the hash needed for the next block, and the miner who solved it will get rewarded.
But while the Byzantine Generals Problem illustrates the need of coming to a consensus in a decentralized system, the endgame is pretty different as it seeks to come to the final decision of when to attack, while the Bitcoin blockchain is an ongoing scenario.
Bitcoin Halving: Why Is There So Much Hype Around?
After every 210,000 blocks are mined, which is roughly estimated to occur every four years, Bitcoin goes through an event called “halving”. When halving occurs, the amount of Bitcoin that miners can gain as a reward for mining is cut in half.
Bitcoin halving is significant because it marks another decrease in its dwindling finite supply of 21 million BTC. After every Bitcoin halving, the supply of available Bitcoin decreases, thus increasing the value of those yet to be mined. For people who invest in Bitcoin, this is something to look out for as it often results to price fluctuations that could potentially bring significant profit or loss.
Halvings have occurred in the following years, with the block rewards being reduced as follows:
|Halving||Date||Block||Block Reward||Mined in Period||% mined|
|BTC Launch||3 January 2009||0||50||1,050,000||50|
|Halving 1||28 November 2012||210,000||25||5,250,000||75|
|Halving 2||9 July 2016||420,000||12.5||2,625,000||87.5|
|Halving 3||11 May 2020||630,000||6.25||1,312,500||93.75|
|Halving 4||Expected 2024||840,000||3.125||656,250||96.875|
|Halving 5||Expected 2028||1,050,000||1.5625||328,125||98.4375|
|Halving 6||Expected 2032||1,260,000||0.78125||164,062.5||99.21875|