What is cryptocurrency mining and what does it consist of?

Bitcoin, Monero, Litecoin, Ethereum… Nowadays everyone has already heard about the world of cryptocurrencies, in which many are already investing. Its great advantages are usually highlighted as a probable future digital currency or as an investment opportunity with which to earn a lot of money. Also its drawbacks: they are not backed by any official body and their volatility is high. However, less attention is paid to one specific aspect: Where do they come from? This is where to talk about cryptocurrency mining.

First of all, it is necessary to clarify some concepts: cryptocurrency o cryptocurrency is a digital asset that uses cryptographic encryption to guarantee its ownership. This ensures the security of transactions and prevents forgery. These digital currencies do not exist in physical form. They are actually stored in a digital wallet.

As we pointed out at the beginning, cryptocurrencies are not regulated or controlled by any institution. In addition, their transactions do not require intermediaries, since a decentralized database is used, called blockchain, which allows a shared accounting record.

Blockchain technology is often compared to a large ledger in which large amounts of information can be recorded and stored and shared on the network and cannot be changed or deleted.

What is cryptocurrency mining

The definition of cryptocurrencies is that of the process by which transactions of a network are validated and grouped, which will later be added to the blockchain. Thanks to this activity, cryptocurrencies such as Bitcoin, the most important and well-known of all.

Why is the word “mining” used? Obviously, it is a metaphorical term, but in essence the computational work to extract a value from the network is very similar to that of the miner who goes underground in search of gold, coal or any other valuable mineral.

The cryptocurrency miner does not use a pick and shovel, but computer hardware and software. The task is to put the processing power of one or more computers at the service of a network. The different cryptocurrency networks use these teams to confirm the validity of their users' transactions.

The mining process, step by step:

The fundamental part of the cryptocurrency mining process is verify and validate transactions. This is achieved through the so-called mining nodes, in charge of selecting the waiting transactions and adding them to a block template. The whole process, which forms a cycle, consists of five steps:

Verification

The full nodes they are the teams that are responsible for enforcing all the consensus rules of your network protocol. They are the element that provides security and stability to cryptocurrency networks. Its main function is to verify that the cryptocurrencies that are being sent have not previously been used for another transaction. In other words: that there is no double spending.

Transaction grouping

Then they come into action mining nodes. They group transactions that have already been verified into a template and add them to unconfirmed blocks.

Hash and control data

The next step is the registration of the essential information to mine cryptocurrencies and confirm the block. It is the preparation phase of all the necessary elements to execute the hash function and start the work of finding the identifier of the block that is being created. This task is also carried out by the mining nodes.

Decision

With the data provided by the mining node, the correct block identifier is generated, with which the transactions can be confirmed and the coins released. It is a process that can take more or less depending on the team used for the resolution or the number of miners who are working on the same task.

The block is added to the network

Finally, when a miner finds the solution of the hash function, a new block is generated that is permanently registered. All other pending transactions are automatically canceled to avoid the possibility of double spending. That is when the miner's reward is released.

From this moment on, the information contained within this blockchain can no longer be modified. In some networks, such as Bitcoin or Ethereum, their details can be consulted publicly.

rewards for miners

On the horizon of anyone who decides resources and efforts to mine cryptocurrencies, there is the possibility of getting their long-awaited reward. This is actually the engine that drives the entire process. By adding new blocks to the chain of a cryptocurrency, a reward is obtained, which can be of two types:

• In form of Commissions, paid by the users who participate in the transactions that make up the new added block.
• in new digital coins that are put into circulation.

What is needed to mine cryptocurrencies?

Surely after reading this, more than one of you has turned on the light bulb and the dollar symbol (or Bitcoin) has been drawn in your eyes. If only one computer is needed, why not mine cryptocurrencies from home?

Although this is possible, it is not as simple as it seems. Actually, cryptocurrency mining requires a lot of computing power. It is not enough to have a computer or a network of computers of a certain power, but it is also necessary a stable power grid. In fact, in this process stability is more important than speed.

If these requirements are met, the next step is to install specific software for solving mathematical problems (hashing). This must also incorporate the necessary verification system for the legal transaction that confirms that a block is a block. When the software resolves the transaction, the miner receives a certain amount of digital coins. The faster and more powerful the miner's hardware, the more chances of success there are.

Specific equipment and software

The system used to mine cryptocurrencies depends on the cryptocurrency that we want to mine. There are several options:

• Use a ASIC miner, which is a computer prepared to perform a single and exclusive function: extract a specific type of cryptocurrency.
• Use a computer equipped with a high-performance graphics card or GPU.

The most common is to have to resort to a different hardware for each type of coin. Many people have tried to mine cryptos without the proper hardware without success, also spending a lot of money on the wrong computer equipment and consuming large amounts of electricity in vain.

Why do we need such powerful equipment and specific software? It is best to explain it with an example: the hash function of networks like Bitcoin is made up of an alphanumeric combination of 64 characters. The laws of probability tell us that in such cases, finding the correct combination that releases the BTC and confirms the transactions is an unattainable task for the human brain. That's a job for machines, devices with great computing power capable of calculating an enormous variety of combinations in a matter of minutes.

In summary, it can be stated that the only thing a miner does is lending the system the computational power and electricity needed to perform these operations, getting a reward in return. In general, a payment in the cryptocurrency in which you work.

cryptocurrency mining farms

It is logical to think that the more and more powerful equipment we dedicate to mining cryptocurrencies, the greater the benefits. Unfortunately that means a huge investment that is not within the reach of an ordinary citizen. It also requires adequate facilities and a human team of technicians dedicated to monitoring operations 24 hours a day.

Some countries like Russia o United States (and until recently, also China) have invested heavily in cryptocurrency mining, creating gigantic facilities known as mining farms. The profitability of these farms is relative, not only because of the necessary investment, but also because it is subject to the constant fluctuation of the value of cryptocurrencies, which, as we have already seen, is very volatile.

Another issue that calls into question the profitability of mining farms is that, when the price of a cryptocurrency increases, more resources are used to mine it. And this has a consequence of increasing the difficulty when mining.

cloud-mining

Finally, we will refer to a cryptocurrency mining method available to anyone who does not have the necessary hardware. It's not meant to make big profits, but it works. The cloud mining is done through a shared and remote data processing center located in "Cloud". In this case, the miner only pays for the service provided to the provider.