What is cryptocurrency mining and how does it work?

Cryptocurrency
27 February 2024
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Mining is the primary way in which cryptocurrencies are created and function. How does mining work? What is behind it? In this article, we will explore all these questions and answer them.

crypto mining

The essence of how mining works

Cryptocurrency mining is a process in which participants in a cryptocurrency network perform computational tasks to validate and process transactions and create new blocks in the blockchain. To make an analogy: imagine a very large ledger that thousands of people have access to. The task of a miner is to add new entries to this ledger, for which the miner will be rewarded. These entries are added by solving complex math problems using certain hardware. This ledger is a blockchain and the new records added are blocks. Hence the name - blockchain - that is, a chain of blocks.

The reward for each mined "block" is 6.25 BTC. It is difficult to find exact statistics on how many blocks are mined per day, but the most popular figure that can be seen on the Internet is 144 blocks per day - which equals 900 new BTC every day. It is important to clarify that these are total figures for the whole world, i.e. all miners in the world mine an average of 900 new BTC every day, adding on average about 144 new blocks. The first mining node to successfully verify its block and add it to the blockchain will receive a block reward (6.25 BTC).

The main components of cryptocurrency mining:

  1. Transactions. Miners collect all new transactions on the network and put them into blocks, often these transactions are standard cryptocurrency transfers from one wallet to another.
  2. Proof of Work (PoW). This is an algorithm used in the mining process that requires miners to solve complex math problems (not by themselves, of course) to create a new block and add it to the blockchain. The first miner to solve the problem gets to create the block and is rewarded for their efforts.
  3. Blockchain. The blockchain is a decentralized database containing all transactions and blocks created on the network. It is open and immutable, making it secure and resistant to manipulation.
  4. Rewards. Miners who have solved the mining challenge are rewarded for creating a block. This reward usually consists of newly created cryptocurrency tokens and transaction processing fees.

Despite the appeal in the form of rewards, cryptocurrency mining requires significant computing power and expensive equipment, as well as energy costs. Nevertheless, it is an important process that ensures decentralization and security of cryptocurrency networks. Mining also allows you to validate transactions on the network by making entries into the blockchain and preventing the same cryptocurrency from being spent more than once.

How does cryptocurrency mining work?
Mining is based on the principles of decentralization and security, and involves the work of specialized participants called miners. These participants, with the help of mining equipment, perform a number of important tasks that make mining possible and efficient.

process mining

Step 1: Transaction Hashing

Step 1 in the cryptocurrency mining process is transaction hashing. When a user sends cryptocurrency to another member of the network, this transaction is recorded in a pool of pending transactions. This pool collects all new transactions waiting for confirmation.

In order to add transactions to a new blockchain, miners must first collect them together and create a transaction hash. A hash is a unique string of data derived from the contents of transactions by applying a cryptographic function to them. This hash will be unique for each combination of transactions and serves to ensure data integrity.

The task of the miner is to create a block hash that includes the transaction hash of the previous block in the chain (except for the first block, called the "genesis block"). To create the correct hash, miners must solve a mathematical problem that requires significant computing power and time. This process is called Proof of Work and ensures the security and reliability of the network.

Step 2: Creating a Merkle Tree

In the second step of cryptocurrency mining, a Merkle tree is created. A Merkle tree is a data structure that allows miners to efficiently organize and hash a large number of transactions collected in a blockchain.

To create a Merkle tree, the mining hardware takes hashes of all the transactions in a block and combines them in pairs. It then takes hashes of the first level results and combines them again, creating hashes for the second level. This process is repeated until a single hash is created, called the Merkle root, which represents a unique value for all transactions in the block.

The Merkle tree plays an important role in ensuring the integrity of the data in the block. If even one transaction within a block changes, it will change the hash of the Merkle root, which will be immediately noticeable to all members of the network. Thus, the Merkle tree ensures the safety and security of transactions in the blockchain.

Step 3: Finding the actual block header (hash block)

The third step in the cryptocurrency mining process is finding the actual block header, the hash block. This step is a key part of the Proof of Work, which is used to create a new block in the blockchain.

To find a valid block header, miners take some data elements from the previous block, including a transaction hash and a Merkle root hash. They then add a random number called a "nonce" (nonce, a one-time number) to this data and calculate the hash from this entire combination. The goal is to find a nonce such that the hash result meets a certain condition, such as starting with a certain number of zeros.

Since finding a matching nonce is a random selection process, miners must repeat this process many times, changing the nonce until the conditions are met. The first miner to find a matching nonce announces the creation of a new block and adds it to the blockchain. For this, the miner is rewarded with new cryptocurrency tokens and transaction fees.

Step 4: Broadcasting the extracted block

The fourth step in the cryptocurrency mining process is to broadcast the extracted block to the cryptocurrency network. Once the miner has successfully found a valid block header (hash block), it must inform all participants in the network.

The miner creates a new block that contains the transactions it collected, the Merkle root, and the block header it found. This block is then broadcast to the network, where other participants can verify it and add it to their copies of the blockchain.

It is important to note that other participants in the network, called nodes, also check the validity of the block, including the correctness of the hash and the correctness of the transactions. If a block passes validation, it becomes part of the overall blockchain and transactions in it are considered validated.

Thus, this step ensures decentralization and security of the cryptocurrency network, as blocks are verified and approved by all participants, and no central authority controls the process of creating new blocks.

mining

What should I do if two blocks are being mined at the same time?

When two or more miners simultaneously complete mining and extract new blocks in a cryptocurrency network, a situation known as a "block race" or "conflict state" occurs. This can happen because of the time difference between the creation of blocks and their propagation through the network. In this situation, the network must decide which of two blocks will be considered the primary block and added to the blockchain, and which will be considered the secondary or "orphan" block.

To resolve this situation, the following mechanisms are commonly used:

  • Proof of Work (PoW). In most cryptocurrencies, such as Bitcoin, miners keep working to create new blocks and expand the blockchain. The block that first receives the majority of the network's processing power becomes the master block. That is, the block that has done the most work and becomes the master block.
  • Duration of trust. In some cases, miners and nodes may "trust" a block after some delay to make sure there is no longer a chain of blocks. This avoids network failure due to insufficient synchronization.
  • Automatic selection. Some networks use an automatic block selection mechanism that determines which block should be added to the blockchain based on certain rules.

The main goal in this situation is to maintain the unity of the network and avoid branching of the blockchain. Once one block becomes the primary block, the other nodes in the network must reject the secondary (orphan) block and continue with a unified blockchain.

What is mining complexity?

Mining complexity is a numerical parameter used to regulate the level of computational complexity required to create new blocks. This parameter is automatically adjusted to keep the average time between block creation at a stable level. The complexity of mining depends on the number of miners and the total processing power of their equipment: the more miners, the more complex the mining and vice versa.

The main aspects of mining complexity:

  1. Automatic adjustment. The complexity of mining automatically adapts to the total processing power of the network. If miners are working very fast and blocks are created too often, the complexity is increased to slow down the process. If the processing power decreases, the complexity decreases to maintain a stable interval between blocks.
  2. Complexity target. The complexity target is a numerical parameter that determines how low the hash of a block (proof of work) must be in order to consider the block valid. The lower the target, the higher the mining complexity.
  3. Average time interval. The complexity is adjusted to provide an average time interval between block creation. In the case of Bitcoin, this interval is about 10 minutes.

Mining complexity is an important aspect of decentralized cryptocurrency networks because it controls how much computing power is required to create blocks. It also helps prevent hacks and attacks on the network, as an attacker would have to control over 51% of the network's total processing power.

What is Hashrate

Hashrate is a unit of measurement for the processing power of the hardware that is used to mine cryptocurrencies. The higher the hashrate, the more hashing operations the equipment can perform per unit of time.
Simply put, hash rate is the speed at which the hardware can solve cryptographic tasks. These tasks involve creating new blocks in the blockchain that contain transactions and other data. Hash rate is measured in hashes per second (H/s). One hash is the result of a calculation, which is a unique string of characters.
For example, a hash rate of 100 MH/s means that the hardware can perform 100 million hashes per second. Hash rate is important to mining because it determines how fast a miner can find a new block. Miners who have a higher hash rate have a better chance of finding a new block and being rewarded with cryptocurrency.
As of 2/15/2024, Bitcoin's hash rate is 600 Eh/s. This means that there are 600 quintillion hashes per second per second.

CPU mining

Types of cryptocurrency mining

There are several different methods of cryptocurrency mining, each providing participants with different ways to participate in the process of creating new blocks and securing cryptocurrency networks. The variety of mining methods reflects differences in specific cryptocurrency algorithms and approaches to decentralization and security. Let's take a look at the main types of mining that allow participants to contribute to cryptocurrency networks.

CPU mining

cryptocurrency mining

CPU mining was one of the first methods of creating new blocks in cryptocurrency networks such as Bitcoin. In the early days of cryptocurrencies, processors (CPUs) were the primary tool for mining.

CPU mining was relatively easy and accessible to a wide audience, and users could run specialized programs on their computers to perform computational tasks and create new blocks. However, as time passed and computing power on the network increased, CPU-mining became inefficient. Processors could not compete with more powerful devices such as graphics processing units (GPUs) and asic miners.

Over time, CPU mining became rarely used and most miners switched to more efficient methods. However, it is still possible to mine crypto using CPUs, except that the efficiency of this method is inferior to the alternatives. In certain cases, it can be beneficial for those who have access to a large network of computers or clusters of servers.

GPU mining

GPU mining

Graphics processing units (GPUs) are powerful devices capable of performing parallel calculations, making them ideal for solving complex mathematical problems associated with cryptocurrency mining.

The main advantage of GPU mining is its ability to handle large amounts of computation, which allows miners to participate in the creation of new blocks and be rewarded for doing so. Many cryptocurrencies use algorithms that are optimized to work with GPUs, making this method of mining very popular and more efficient.

However, it is worth noting that as GPU mining became more popular, competition increased and more powerful and specialized GPUs were required for successful mining. This led to the development of mining using more specialized devices such as asic miners.

ASIC mining

ASIC mining

ASIC mining (mining using specialized integrated circuits) is a method of creating new blocks in cryptocurrency networks that uses highly specialized mining devices called asics. Asic miners are designed exclusively to perform specific computing tasks related to mining, making them much more efficient and powerful compared to central processing units (CPUs) and graphics processing units (GPUs).

Benefits of ASIC mining:

  • High performance. Asic miners are capable of handling huge amounts of computation, which allows them to create new blocks quickly and efficiently.
  • Cost-effectiveness. They consume much less power compared to CPUs and GPUs, making them cost-effective for large-scale mining farms.
  • Specialization. Asics are optimized to work with specific mining algorithms, making them ideal for mining specific cryptocurrencies.

However, ASIC mining has disadvantages: high cost and restriction to use only for certain cryptocurrencies that support the corresponding mining algorithms. Because of the limited access to asic miners, mining is in danger of centralization.

FGPA mining

FPGA mining is the process of mining cryptocurrency using programmable logic integrated circuits (FPGA). An FPGA is a type of chip that can be programmed to perform various tasks. In the context of cryptocurrency mining, an FPGA can be programmed to perform the hashing algorithm used to mine cryptocurrency.

One of the main advantages of FPGA mining is its flexibility. FPGAs can be reprogrammed to mine a variety of cryptocurrencies, while GPUs and ASICs, for example, are usually designed to mine one specific cryptocurrency. This means that FPGA miners can be more flexible and adapt to changes in the cryptocurrency market.

Another advantage of FPGA mining is its energy efficiency. FPGAs typically consume less power than GPUs or ASICs. This can lead to lower mining costs and a lower environmental impact of mining.

However, FPGA mining also has disadvantages. One of the major disadvantages is its complexity. In addition, FPGA miners are more expensive than GPUs or ASICs.

FPGA mining is an efficient and flexible method of cryptocurrency mining. However, it is more expensive and technically complex.

Cloud mining

FGPA mining

Can I mine without hardware? Cloud mining is the process of mining cryptocurrency using a remote data center. This type of mining allows users to mine BTC or alternative cryptocurrencies without having to purchase and set up expensive equipment.

Cloud mining works as follows:

  1. A user enters into a contract with a cloud mining service.
  2. The service gives the user access to the processing power of its farms.
  3. The user uses this processing power to mine cryptocurrency.

Cloud mining has several advantages over traditional mining:

  • Convenience. Users do not need to purchase and maintain mining equipment.
  • Affordability. Cloud mining is available to users from anywhere in the world, the main thing -- the presence of the Internet.
  • Security. Cloud mining services usually offer a high level of security.

However, cloud mining also has some disadvantages:

  • Cost. Cloud mining can be more expensive than traditional mining.
  • Risk. Cloud mining users have no control over the equipment and the mining process.

Mining pools

Mining pools (or mining pools) are cooperative groups or organizations of miners who pool their computing resources to increase their chances of creating new blocks and earning rewards. The basic idea behind mining pools is to allow miners to work together rather than compete with each other.

The benefits of mining pools include:

  • Increased probability of finding blocks. Pools pool the processing power of multiple miners, which increases the chances of creating new blocks and earning rewards.
  • Even distribution of revenue. In mining pools, revenue is distributed among participants in proportion to their processing power and contribution, providing a more stable income.
  • Reduced volatility. By working in a pool, miners can avoid the significant volatility associated with solo mining, where payouts can be irregular.

Mining pools have disadvantages: such as the commissions they charge miners and the loss of some degree of decentralization, as control of the mining process is partially transferred to the pool.
Nevertheless, mining pools remain a popular choice for most individual miners, especially for cryptocurrencies with high mining complexity.

Cloud mining

Solo mining

Solo mining is the process of mining cryptocurrency without the participation of a pool of miners. In this case, the miner independently performs all the calculations necessary to find a new block in the blockchain.

Solo mining has advantages. First, the miner receives all the rewards for the block found, not just his share, as in the case of a pool. Second, the miner has full control over his equipment and the mining process.

However, the probability of finding a new block alone is very low. In addition, the miner is fully responsible for all costs associated with mining, such as electricity and equipment maintenance.

Pros and cons of mining

Advantages of mining:

  • Opportunity to earn rewards. Mining is a way to earn money by mining cryptocurrency. It's simple: mine the crypto, sell it, make a profit.
  • Growth potential. The very process of mining provides the potential for growth in the price of the crypto chosen for mining. But at the same time, mining does not guarantee that the price will always only go up.
  • Maintaining the ecosystem. In addition to material rewards, miners also receive some kind of moral reward by supporting their favorite project and helping it grow.

Disadvantages of mining:

  • High cost. Mining requires expensive equipment. The cost of mining can be higher than the potential profit.
  • Energy consumption. Mining consumes a huge amount of electricity. In addition to exorbitant electricity bills, it also puts a strain on the power grid, requiring more from power plants, which in turn can be harmful to the environment (e.g. if it is a CHP plant).
  • Technical complexities. Mining is a complex process. Buying equipment, assembling it into one system, configuring and connecting the necessary programs - all this requires certain knowledge and skills.
  • Technical waste. Mining equipment usually does not last very long, after which it is simply thrown away, because it is not suitable for normal work due to almost 100% wear and tear. This creates huge technical dumps with video cards, processors and other equipment used for mining. This problem is especially acute in China and some other Asian countries.

What is the "51% attack" and how to protect against it

To talk about the 51% attack, we should start by talking a bit about the blockchain. In the vast majority of cases, changes are made to the blockchain only after more than 50% of "votes" have been received. "Votes", depending on the particular ecosystem, can be either those who hold the most specific coins or tokens (most typical of Proof-of-Stake systems) or those who hold the most computing power (most typical of Proof-of-Work systems). With few exceptions, other members of the ecosystem, such as validators, delegates, or custodians, can also vote.

Thus, if one person or group ends up with more than 51% of the "votes" in their hands, they can do almost anything to the blockchain. For example, they can withdraw all available coins or tokens to some wallet in a matter of minutes. After that, the coins were usually "laundered" through Tornado Cash (which, fortunately, was blocked at the end of 2022), anonymous exchanges or similar services. One of the clearest examples of such a hacking scheme is the Lazarus Group, a group of hackers working for the North Korean government. They often used the "51% attack". The exact amount of money they stole is unknown, but experts agree that we are talking about "billions of dollars".

There are several ways to defend against the 51% attack:

  1. Decentralization. This is quite logical - the more "votes" needed to successfully "vote", the harder it is to hack such a system. It is also possible to implement some sort of "ban" on holding too many "votes" in someone's hands, so that the number of those who can vote is as large as possible.
  2. Opting out of voting. As much as it may sound like it, decentralized cryptocurrencies are often very centralized. This happens because only those with the most coins or computing power in their hands can usually "vote". Abandoning such a system in favor of something more "democratic" or simply more secure may also be a solution.

In general, if such an attack on a system is possible, there is simply no reliable defense against it. After all, even if the system itself is protected from external interference, those who have the right to "vote" are ordinary people, and they can make mistakes and become victims of hacking.

Important about mining: Cryptology experts' opinion

Cryptocurrency mining is the first way to mine cryptocurrency. In addition, miners are responsible for the security of cryptocurrencies by verifying transactions and creating new blocks. Miners verify transactions and create new blocks that are added to the blockchain. Mining also helps decentralize cryptocurrencies. If mining were controlled by one organization, that organization could control and manipulate the network. However, mining also consumes a large amount of electricity, which is most often generated from fossil fuels. This leads to increased greenhouse gas emissions and pollution. It is because of the high electricity consumption that mining is now taking a back seat to cryptocurrency mining and its security and decentralization.

Most of the new crypto projects are built on the PoS (Proof-of-Stake) consensus algorithm, where the mining of new coins, security and blockchain operability is ensured through the process of steaking. Steaking, in turn, does not require special equipment and high power consumption like mining. For this reason, some projects are even starting to move from PoW to PoS, for example, Ethereum previously worked on the PoW (Proof-of-Work) algorithm, and in 2022 it switched to PoS: now miners cannot mine ETH using mining, and the operability of the blockchain and new coins is ensured by steaking. Nevertheless, BTC, for example, is mined exclusively by mining. Interestingly, it was not the eco-friendliness of BTC mining that influenced Tesla to stop accepting payments in this coin. In addition to this, the environmental issues arising from mining led to the banning of BTC mining in China in June 2021. China was the largest BTC mining center in the world, accounting for about 65% of global computing power. China's ban on mining has led to a dramatic reduction in BTC mining's energy consumption and greenhouse gas emissions. It is estimated that Bitcoin mining consumes as much electricity as the entire country of Sweden.

It is not as cost-effective to start mining now as it used to be, as it can take years to go to zero and work off the money invested in equipment and energy consumption. Most miners previously preferred to mine ETH because it was the most profitable. Now, ETH can be mined using staking, as many other projects do. For this reason, most crypto-enthusiasts prefer steaking - it is more profitable, does not require investments and additional equipment.

Frequently asked questions about cryptocurrency mining

What is cryptocurrency mining?

Cryptocurrency mining is the process of creating new blocks in the blockchain and confirming transactions. This is done using the processing power of computers that solve mathematical problems.

Which cryptocurrencies can be mined?

Coins that function on the Proof Of Work consensus algorithm are mined by mining.

Is it possible to mine cryptocurrency on a regular computer?

Mining Bitcoin and many other cryptocurrencies requires specialized equipment, and an ordinary computer is not capable of handling such a task. However, some cryptocurrencies can be mined using ordinary graphics cards.
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