Much is being made of the fact that cryptocurrencies are not backed by anything physical: not gold, not the US dollar, nothing you can hold in your hand. So when you hear that cryptocurrency is “mined” you might be confused for a moment, but like so much in the tech world, “mining” is just a metaphor.
While actual gold comes into being when it is taken out of the Earth, cryptocurrency often comes into being through the process of mining, like the famous Bitcoins. The process of creating cryptocurrency is more complex than just digging and smelting, though. It involves a computer or, more commonly, entire racks (or even warehouses full) of computers, working away on extremely complicated mathematical equations. Once the equation is solved, one unit of cryptocurrency is produced. The owner of the machine who produced it is rewarded with a fraction of ownership in the cryptocurrency, which is how miners make their money, and why so many are interested in mining.
As more and more people learn about the benefits that can come from mining, they buy or build a setup and get to mining. But with a greater number of miners comes greater complexity, so the more who join, the harder the equations get. The end result is that the cryptocurrency is produced at a steady pace, regardless of how many people are mining it, and as more rush to mine, each gets less and less per unit of cryptocurrency, because each can produce less and less. The more powerful your computer, and the more optimized for mining it is, the more it can produce, so it generally pays to have the latest gear.
But what is the purpose of mining? The mining process is usually responsible for verifying transactions such as transfers from one crypto wallet to another. Every transaction is written into the blockchain, the public ledger of transactions, as it is confirmed. The confirmation process is farmed out to miners, and they are compensated with cryptocurrency for verifying transactions. The “block” in “blockchain” comes from a bundle of these verified transactions. When it’s got enough transactions and gets added to the blockchain, cryptocurrency is generated and part of that goes to the miner who added the block. Thus, the blockchain grows as long as the cryptocurrency exists and is traded.
The cryptocurrency that’s issued by adding a block to the blockchain is called the block reward. For Bitcoins this is halved every 4 years, meaning that those who began mining very early were able to generate much more profit than those who are only beginning now. With the extremely complicated equations come a need for extremely powerful computers, which is why today in the Bitcoin world, for instance, most of the mining is being done in warehouses full of dedicated mining computer rigs, owned by syndicates or corporations. The smaller miners can’t get in on the ground floor anymore, alas. Not in Bitcoin at least, but there are other cryptocurrencies that haven’t reached that level of maturity and competition yet, and offer opportunity to the would-be miner with his or her eyes open!
