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Cryptocurrency Mining Explained

Most people think of cryptocurrency mining as a modality to issue new coins. However, cryptocurrency mining implies validating each cryptocurrency transaction of a specific Blockchain and their addition to a distributed ledger.

Most importantly, cryptocurrency mining prevents a coin from being used twice on the Blockchain. In other words, it contains double-spending. Like bank registries, when a user pays or makes a transaction using cryptocurrency, the digital registry requires an update by debiting an account and lending to another.

However, digital currencies have a significant challenge — digital platforms can be easily manipulated. Thus, Blockchains allow only verified miners to update the transactions from the digital ledger. This situation offers miners an additional responsibility to secure the network against double-spending.

Furthermore, miners get rewarded with cryptocurrency for securing the Blockchain. This validation process is crucial because these digital registries do not have a central authority to supervise them.

How does cryptocurrency mining work?

Cryptocurrency mining differs depending on the specific Blockchain. For example, in the Bitcoin network, miners download the whole history of The Blockchain and gather valid transactions in blocks of data. Another stimulus to miners to reward them for their participation in this process is through transaction fees from users who send these transactions.

For example, Ethereum 2.0 is working on migrating the network toward a Proof-of-Stake mining algorithm. With Proof-of-Stake, a node can validate transactions depending on how many coins it holds. The more coins that node has, the more mining power it possesses. The steps for cryptocurrency mining differ from one Blockchain to another and from one method to another.

Cryptocurrency Mining Methods

There are multiple ways to mine cryptocurrency to issue new coins. Among them are:

  • ASIC: Miners use an integrated circuit specifically built for the ASIC. This type of device is made to mine a particular type of cryptocurrency, and it’s expensive but offers a tremendous mining hash power.
  • GPU: Miners use one or more processing units known as graphics cards. These offer a relatively high processing power but at a higher cost.
  • CPU: Probably the most known, where miners use the central processing unit. Even if it’s possible to mine cryptocurrencies using PC processors, they do not possess a processing power comparable with ASICs or GPUs.
  • Mining Pools: These pools are groups of miners that work together to mine cryptocurrencies and share the rewards, paying a small fee to the pool.
  • Solo: You can solo-mine, but it’s way harder to win rewards on your own.
  • Cloud: A way to mine cryptocurrency through the user pays a company to mine for themself with their mining equipment.

What does cryptocurrency mining rely on?

Cryptocurrency mining relies on different consensus algorithms. Consensus algorithms represent lists of conditions that need to be fulfilled by each mined block. Some examples:

1. The elimination of double-spending.
2. The correct formatting of a block.
3. It needs to contain some rewards for miners.

Blocks of data that do not meet these criteria will be rejected.

Proof of Work

Proof of Work is among the most common and robust consensus mechanisms in the Blockchain technology space. The miner needs to solve mathematical problems like complex puzzles on a new data block before the block is confirmed in the digital registry. After the problems are solved, the block is sent to other miners as well, and they verify it before accepted it in their copies of the registry. Still, the mathematical problems are complex and require substantial computing power that needs a lot of electrical power.

Do all Blockchains require mining?

Not every digital ledger needs validations, but some Blockchains have evolved thanks to Smart Contracts, where transactions are automatically executed when they meet certain conditions. For example, Smart Contracts are used to automatize the execution of a trade, so all participants can immediately be sure of the result, without the implication of a third party and without losing time, energy, or money. So, instead of talking about miners, we speak about validators, and instead of talking about the Proof of Work mechanism, we talk about Proof of Stake.

Are you interested in cryptocurrency mining as a possible way of earning money or are you satisfied with trading crypto? Either way, you still need a reliable and complete exchange platform to keep your assets and swap, convert, buy, sell and exchange. Your Friendly Crypto Exchange is the perfect place to do that. Register now on IXFI and leave all financial worries behind.

Disclaimer: The content of this article is not investment advice and does not constitute an offer or solicitation to offer or recommendation of any investment product. It is for general purposes only and does not take into account your individual needs, investment objectives and specific financial and fiscal circumstances.

Although the material contained in this article was prepared based on information from public and private sources that IXFI believes to be reliable, no representation, warranty or undertaking, stated or implied, is given as to the accuracy of the information contained herein, and IXFI expressly disclaims any liability for the accuracy and completeness of the information contained in this article.

Investment involves risk; any ideas or strategies discussed herein should therefore not be undertaken by any individual without prior consultation with a financial professional for the purpose of assessing whether the ideas or strategies that are discussed are suitable to you based on your own personal financial and fiscal objectives, needs and risk tolerance. IXFI expressly disclaims any liability or loss incurred by any person who acts on the information, ideas or strategies discussed herein.

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