How Is Cryptocurrency Mined?

April 26th, 2018

Cryptocurrencies are becoming popular all around the world; people of all ages groups are excited about this new digital currency. Seeing its growing popularity, people are eager to know how digital currencies are created or mined. Some may envisage that digital currencies are dug out of the ground, but it isn’t a physical currency. Then the question arises, why is it called mining?

The process is quite similar to gold mining and in that system, Bitcoin exists in the protocol’s design similar to the gold existing underground, but it has yet to be brought to light, like as gold did before it was mined. The Bitcoin mining is capped at 21 million units, miners from around the world take the initiative to bring it out at a certain pace. Miners get a reward of digital currencies for creating blocks of validated transactions and then adding it in the blockchain.

Nodes

Nodes are powerful computers that run the digital currency software and help to keep cryptocurrencies running, by participating in the relaying of information. In a node anyone can run it, all you need is to download the Bitcoin software. The only drawback with the system is that it consumes storage space and energy. These nodes spread digital currency transactions around the network. A node will relay information to nodes which it knows, who will again relay the information to known nodes. These nodes add transactions into the blocks and finally into the blockchain. This process is done by solving complex mathematical puzzles and it is a part of the Bitcoin program. The complex mathematical puzzle is all about finding a number, which when combined with the data within a block and passed using a hash function, produces a result within a range. The process may sound easy but in reality, it’s quite difficult.

Solving The Puzzle

Finding the number is tough, but how is it done? Do they guess numbers at random? No. The hash function makes it tough to predict the output. Miners guess the mystery number and apply the hash function to the combination of data in the block and the guessed number.

The first miner who gets the resulting hash within the range, announces the victory to rest of the network. Soon all of the miners stop work on that block and start figuring out the mystery number for the next one. Every miner is rewarded with new digital currencies for their work.

Economics

Presently the reward of mining is 12.5 Bitcoin and its price is calculated based on the Bitcoin price for that particular day. It may sound like a profitable deal, but for many, it’s not the case. Lots of mining nodes are competing for the reward and there is a question of computing power and luck.

For mining, you need to use specialized and sophisticated mining devices. To have faster processors, than all your competitors you need to invest a huge sum of money. These devices also consume a large amount of electricity making the whole process quite expensive. When compared to such huge investment the outcome is not so satisfying.

One of the main issues for miners, is the time it takes for the number of Bitcoins awarded for solving a complex mathematical puzzle will keep decreasing. Presently it’s at 12.5 and it gets halved in every four years. The next halving is expected around 2020-21. In the next couple of years, the price of electricity may go up and comparatively the amount you will get as a reward won’t be as satisfying.

Many individuals are taking interest in Bitcoin mining; before you start the process make sure you understand the whole process.

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