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What is crypto mining?

It is called mining, but it is all happening in the crypto, virtual world. Cryptocurrency mining is the process through which new coins or tokens are entered into circulation. It also plays a key role in maintaining and developing the blockchain ledger, which keeps track of crypto transactions. It validates data blocks and adds the transaction records to the blockchain system

Cryptocurrency mining serves two purposes:

  • creating new coins
  • maintaining a log of all verified transactions of existing digital tokens.

 

Cryptocurrency mining, including Bitcoin mining, is one way to make money, which is why it is attractive to some investors. Crypto miners are rewarded for “completing” blocks, meaning verifying 1MB (megabyte) worth of transactions which are then added to the blockchain. 

In principle, anyone can participate in cryptocurrency mining and maintaining the ledger. However, crypto mining is a costly, strenuous and resource-intensive task. To earn the crypto tokens, investors and crypto miners need computers with strong processing power to basically guess a random number generated by the system that solves a mathematical equation. The first to solve the math puzzle earns the reward and gets to add a new block of verified transactions to the blockchain. It means crypto miners with massive computing power and a large mining network have a better chance of earning crypto tokens. That is why crypto mining pools had been created: they connect their power and do computing together. The system is designed so that the more participants there are, the more difficult it becomes to guess the numeric problem. 

 

Crypto mining is also the only way to release new cryptocurrency into circulation, which makes mining similar to “minting” regular money. The miners’ reward plays an important role in maintaining the integrity of the decentralized system of blockchains and in keeping it running. Participants are incentivised to monitor and validate the legitimacy of cryptocurrency transactions.

This system also ensures that cryptocurrencies don’t need to rely on a central authority, such as a bank or a government. The crypto mining and validation process prevents users from “double spending”, i.e. using the same crypto coins twice. Miners also have a part in the decision-making of a cryptocurrency ecosystem. The system was designed by the founder of Bitcoin - the mysterious person or group of persons called Satoshi Nakamoto - who saw mining as central to making sure users are monitoring each other.

Some have argued to raise the current limit of 1MB blocks to accommodate more data, which would help decrease transaction fees and speed up the processing of transactions that currently cannot be fit into a block.

 

Some crypto currencies can still be mined with CPUs, the central processing unit in our laptops and PCs. However, most currencies, including Bitcoin, have high hash rates (meaning the total amount of computing power across the network) and can only be mined using the much faster GPU (graphics processing unit) to solve the increasingly complex math problems needed to verify the transactions on the blockchain. GPU-based mining led to the establishment of so-called mining rigs, basically a farm of hard-working networks of computers. 

Crypto mining has been criticized for using excessive amounts of electricity and therefore being environmentally harmful. The proof of work (PoW) consensus mechanisms Bitcoin uses to validate transactions and mint new coins is consuming large quantities of energy, as the decentralized mining rigs sometimes require thousands of computers working together. Not all virtual coins use PoW, though. Other coins - such as Binance Coin, Polkadot or Cardano - rely instead on larger coin owners to validate transactions (proof of stake), which is a less energy-intensive method.

Author of this article

Eszter Zalan

Author of this article

Eszter is a Brussels-based content editor and writer with over fifteen years of experience in journalism. She thrives in researching complicated issues and explain their essence in a plain and clear language to guide you through the world of finance.

Eszter Zalan

Content Editor

Eszter is a Brussels-based content editor and writer with over fifteen years of experience in journalism. She thrives in researching complicated issues and explain their essence in a plain and clear language to guide you through the world of finance.

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