What is blockchain mining?

Bitstamp
Bitstamp
Oct 22 · 5 min read
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In the cryptocurrency industry, mining means adding new blocks of data to a blockchain. Cryptocurrency miners have to find a solution to a complex mathematical problem before they can create a new block. They are then rewarded with newly-created coins of cryptocurrency.

When blockchains first emerged, miners could use ordinary desktop computers. But as blockchain’s popularity grew, the difficulty and cost of mining increased. Today, a single desktop computer is no longer enough and solo mining is not nearly as effective as it used to be. Most miners use enormous purpose-built systems and combine their computing power in mining pools.

MINING ESSENTIALS

  • The process of adding a new block of data to a blockchain by solving a cryptographic puzzle.
  • Miners receive a reward for mining new blocks.
  • Miners charge a fee for adding transactions to the blockchain.
  • The total amount of most cryptocurrencies to be mined is often limited.
  • Mining secures the network as it requires a lot of energy.

Why is it called mining?

There is a reason why it’s called mining: the process of mining cryptocurrency is similar (in a way) to mining minerals. With most major cryptocurrencies, the amount of coins is limited, just like there is a limited amount of gold hidden underground. And just like a gold miner strikes lumps of rock to find a gold vein, a cryptocurrency miner hits the algorithm with potential solutions to mine a new block. In other words, what cryptocurrency miners do is extract units of cryptocurrency from the protocol.

But what exactly does the mining process look like? In essence, miners try to find a number called a nonce. When combined with the block data and passed through the hashing algorithm, this nonce will produce a certain result required by the blockchain’s code. The tricky part is finding the nonce, and the only way to find it is to guess. There is a huge amount of possible nonces, which means miners need to guess billions and billions of times before they get it right. While it is often referred to as solving a puzzle, it in fact relies more on computing power, time and also luck.

Mining rewards and fees

To further spice things up, mining is a race. All miners compete against one another in guessing to find the nonce. Only the first miner to find any given nonce receives a mining reward (or block reward) for mining a new block. In the Bitcoin protocol, this reward currently amounts to 6.25 BTC and is cut in half after every 210,000 blocks are mined, or approximately every 4 years. Other cryptocurrencies have different block reward sizes.

Miners also receive a mining fee for adding new transactions to the blockchain. This fee is paid by users whose transactions are added to a new block. It functions as a compensation for the work of the miners. The higher fee you offer, the faster the miners will pick your transaction and include it in their block (historically, Bitcoin fees have averaged in a range of 0.1 to 5 USD per transaction). Once a solution to the latest block is found, the winning miner announces their victory by propagating the mined block to the network. The entire mining community then moves on to mine the next block.

Why is mining important?

Mining blocks by solving complex cryptographic puzzles is not necessary only to add information to the blockchain. The point of mining is to secure the blockchain.

Cryptocurrencies like Bitcoin (though not all cryptocurrencies) use mining power as a safety feature. If you want to change anything on the Bitcoin blockchain, you would have to re-mine the block that contains the information you want to alter, as well as every block after that, up to the present.

Because mining a block takes a lot of computational power, it requires a lot of energy. Energy directly translates into money. Therefore, it would be very expensive and difficult to change any information stored on the blockchain, as you would have to do all the mining over again. If it were easy to add blocks to the blockchain, it would also be easy to hack the information.

This process is called proof of work. Mining essentially means finding the solution to a complex problem specified by proof of work mechanism — the solution proves that you’ve done the work. Other ways of securing the blockchain also exist. The most well-known is proof of stake. But if there’s no proof of work, then there’s no mining.

The evolution of mining

While luck is a major factor in mining, the computing power of a miner also plays a very important role. More processing power means that a miner (with the help of the miner’s computer) can guess at a faster rate, which increases their chances of solving the puzzle. Because of this, miners are always investing time and money into upgrading their systems.

While the first miners could make a profit using ordinary desktop computers and their CPUs (a computer’s central processor), today’s mining is shifting to a more grand-scale approach. With the use of high-power ASICs (application-specific integrated circuits), mining is becoming increasingly centralized. This means that the majority of the hashing power is going into the hands of individual mining companies.

To combat the trend, individual miners (and there are hundreds of thousands of them around the world) are on the lookout to increase their processing power. They can do so by forming mining networks referred to as mining pools. Mining pools don’t only share their computational power, but also the block reward. If a given mining pool beats other miners to the solution, each of the contributing miners in the winning pool receives a share of the cryptocurrency reward.

Ecological aspects of mining

Mining is a very complex computational process. As such, its biggest downside is the amount of energy required to run the mining rigs. As mining difficulty increases, the energy needed to mine a new block increases, as well. Since the dawn of Bitcoin in 2009, the cost of mining new units of cryptocurrency has skyrocketed. For this reason, the mining community is always on the lookout for new ways to lower the cost of their work.

One of the solutions is moving to a location with cheap energy. Iceland and Russia, for example, have cheaper electricity than Belgium. The cost of mining one bitcoin is nearly three times as high in Belgium as it is in Iceland or Russia. The latter two are, therefore, more cost-efficient for a mining business.

But setting up your mining business would require a huge starting investment. An easier and much cheaper option for those who wish to enter this market is to join a cryptocurrency exchange. It’s analogous to setting up your own gold mine, or just investing via a gold exchange platform. So you can grab your virtual pickaxe or let others do the heavy lifting and invest from the comfort of your home.

Bitstamp Blog

World’s longest-standing bitcoin exchange.

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