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Crypto Mining

What is crypto mining? How do you mine cryptos? Is crypto mining profitable?

What Do You Need To Know About Crypto Mining

With the recent boom in cryptocurrency markets you might've come across the subject of crypto mining often on either Google or maybe social media platforms.

If you're new to the industry and find the concepts of cryptocurrencies, and more specifically crypto mining complex, don't worry!

You're not the only one - it actually is quite complicated.

So let's see crypto mining is, how it works, and also try to look at its benefits in a simple and easy-to-understand manner.

Crypto mining is essentially a process where you solve a set of cryptographic equations in exchange for cryptocurrencies.

But let's take a step back and start from the beginning. To talk about crypto mining we first need to talk about the basics.

What is Cryptocurrency?

A cryptocurrency is a form of currency just like your regular money, except it's completely digital. It was first created in the year 2009, and its beauty was that it was decentralized.

Your regular money has a centralized system that the bank runs. They are your central authority that keeps track of all transactions, verifies and validates them.

With cryptocurrency, however, all these processes don't take place in one central system. All transactions get recorded in different systems on the internet. They are visible to and verified by the systems on the internet without interference from the government.

It is possible with the help of blockchain technology.

What is Blockchain?

A blockchain is essentially a set of transactions, where each transaction is stored in one block.

Let's just say there are three blocks in a chain. Each block has the following information:

  • Data: Transaction details such as the sender, receiver, amount, etc.
  • Hash: A hash is a digital signature that is unique to the block. It is derived from the transaction details.
  • Hash of the previous block: It is the signature of the previous block which has the previous transaction's record.

Each block/transaction points to the previous one, thus forming a chain. In the simplest of terms, this is blockchain technology.

Why is it used for cryptocurrencies?

Blockchain is known to be highly confidential. You cannot tamper with one block's data without making it evident to the other users on the internet. Thus, it is a safe mechanism to exchange cryptocurrency.

What is Crypto Mining?

Crypto mining is a process where you verify and validate if a transaction made is legitimate or not.  

When someone makes a transaction, it gets added to a list of unverified transactions. Once the list is big enough, it gets bundled into an unverified block, visible to the various systems, aka, nodes on the internet.

The data of each transaction is made confidential with the help of cryptography. A crypto miner solves these cryptographic equations to find out the hash, i.e., the digital signature of the block. Once they do so, they announce on the network to the other nodes that they've mined the hash, and it shows the transaction is legitimate.

How does the hash prove the transaction's legitimacy?

Every transaction has the sender's address, the receiver's address, the amount exchanged, and a hash, as mentioned above.

This hash is derived from the data of the transaction, plus an addition known as the nonce. A nonce is a random, non-repeating number. Thus, your hash gets created with the data itself. If anyone tries to change the data, the hash will automatically change.

The data also includes the previous block's hash. It means, if one hash changes, the previous hash will change too. This way, there'll be a chain reaction, and this is what makes blockchain so reliable.

Hence, if a hash is found and checks out, the transaction is found to be legitimate.

Once the miner announces their breakthrough, others on the network will verify the same to ensure it has been adequately done. The miner then adds the verified transaction onto the chain of verified blocks.

This makes the chain a ledger and a proof of work, showing that all transactions made are legitimate.

Benefits of Crypto Mining

  • It makes the entire system decentralized where different miners store the ledger on different systems across the internet.
  • The miners gain cryptocurrencies in exchange for them validating and verifying these transactions. So, mining gives people an alternate source of income.
  • There are no third parties involved in the transaction, making it immediate for both parties.
  • The system is highly confidential, and the cryptographic techniques employed also make it almost impossible to tamper with the data.
  • There is transparency achieved, where everyone has eyes on everything.

Setbacks of Crypto Mining

  • It is an exhaustive process that takes a lot of time.
  • The quality and quantity of resources required will burn a hole in your pocket.
  • The returns you get are often not proportionate to the time, energy, and money you invest.
  • By he end of the day, this too involves people, and there are several cases where people have committed fraud and leaked sensitive info such as digital signatures.

Crypto mining – the conclusion

Despite the challenges crypto mining faces, it is pretty advantageous for the current business and finance ecosystem. It's still in its nascent stages and is said to play a crucial role in transforming business, finance, and economies across the world.

Siim Einfeldt photo
Author: Siim Einfeldt
I became interested in cryptocurrencies only a bit more than two years ago. Since then I have been in investing in cryptos using different exchanges. And I also launched Cryptolorium.com when I started trading, just to share my crypto journey and my results.