In a traditional banking system, governments print and distribute fiat money to financial institutions. But, this is not the case for cryptocurrencies. The issuance of new coins is not in the hands of any central authority. The network creates new cryptocurrencies through an activity called “mining.” The name derives its reference because it refers to the process of generating new coins by applying computational efforts. However, unlike gold mining which yields the discovery of new gold, it is a process that adds much more value to the network.  

Mining facilitates access to virtual currencies and acts as an incentive for nodes or participants to maintain an honest network. 

This lesson will explain the basics of the cryptocurrency mining process. 

Contents

• What is cryptocurrency mining?
• How does mining work?
• Types of crypto mining

What is cryptocurrency mining?

Crypto mining is the process of verifying transactions and adding new blocks to the blockchain network. Miners gather, verify, and record cryptocurrency transactions into the digital ledger, blockchain. 

In return, miners receive new coins as a reward for their efforts in maintaining the blockchain network. Mining becomes an integral part of maintaining the rules of a decentralized network and the release of new digital currencies. 

How does mining work?

In our conventional systems, banks authorize financial transactions. Blockchain networks like Bitcoin do not have any intermediaries and are operated by their nodes or members. To verify transactions, miners solve complex mathematical puzzles. They also build the blockchain by adding new blocks. To incentivize miners for performing honest work, the network releases a block of rewards in the form of new coins. In short, this process of building the blockchain and the release of new coins constitutes mining. 

Mining serves two essential purposes: 

1. It keeps miners incentivized to perform honest work while verifying transactions. 
2. It continues to build and operate the blockchain without any third-party or centralized authority. 

In 2009, it was possible to mine Bitcoins on your local computer or laptop. However, those days are long gone. Mining digital currency like Bitcoin requires advanced computational hardware equipment such as ASICs. 

Authentication of transactions and building the blockchain require considerable energy and resources. Miners use a consensus mechanism called ‘Proof of Work’ to validate transactions and mine coins using energy. 

Proof of Work (PoW) is one of the mechanisms used in mining to process cryptocurrency transactions securely without third-party intermediaries. As more miners join the network, the requirement of energy and resources to mine increases. Hence, mining a prominent currency like Bitcoin requires more computation resources, while mining a coin like Dash demands less power. 

Types of crypto mining

There are three types of cryptocurrency mining.

• Solo Mining - This is independent mining that requires installation and setting of mining. In this case, resources, transaction fees, and rewards belong to the individual miner. 
• Pool Mining - A pool combines the computational power of miners to increase its capacity to get new rewards. Block rewards and transaction fees are shared amongst the miners of the group. 
• Cloud Mining - With cloud mining, you rent the computational power of a company engaged in mining. You need not invest in hardware or software equipment. 

That is all about the crypto mining process. We will discuss mining pools in more detail in the next article guide.