BTC Topic

How Does Crypto Mining Work?

crypto mining

Cryptocurrency is mined in order to bring the tokens into circulation, just as the central banks mint legal currency to facilitate payments in the national economy. The protocols for mining crypto can be different for different blockchains. These protocols are defined based on the maximum capitalisation of the crypto and its intended use. Let us discuss how crypto mining works and the things to be remembered before indulging in the process.

How Does Bitcoin Mining Work?

Crypto mining, also popularly known as crypto mining, releases new tokens on the blockchain and adds new blocks to the chain. This was a simple process earlier when bitcoin was initially launched in 2009, owing to the less complex nature of algorithms that needed to be cracked to generate new tokens. As the number of tokens is nearing the capitalisation threshold, the complexity of mining is increasing in accordance with the increased scarcity in supply. The computing power required to mine one bitcoin in the USA is equivalent to 1,500 kWh, where the average cost per kWh is 13 cents.

You must have gotten an idea about the kind of resources and costs that go into mining bitcoin. Below mentioned are some of the common terminologies used in reference to crypto mining.

  • Hash Rate This is one of the most important aspects of mining crypto. The hash function, aka digest being the digital signature of a transaction, hash rate is how fast is the computing in terms of solving hashes. The higher the hash rate, the more time it takes to mine, and vice versa. Multiple users sign these hashes on the blockchain network to validate the transactions. The hashes have a part of the prior hash and the subsequent too, which acts as a connecting link for the hash in the block.
  • Security Protocol – The most widely used secure hash algorithms are SHA-256 and SHA-512 that are computed with 32-byte and 64-byte systems, respectively. These are uniquely generated, randomised functions that add the dimension of security to blockchain cryptography.

The critical features of SHA-2 are, firstly, converting an arbitrary length input to a fixed-length output; secondly, the input cannot be derived by the output; and thirdly, encrypting the data deterministically.

  • Rig – The computer system and the requisite processing units and their cooling mechanisms are combinedly called mining rigs, similar to gaming rigs. These were the regular computer systems earlier, but with the development of specialised technology for mining virtual currencies, the processors now in use are called ASICs. Cloud computing is also being used by people who do not have access to such intricate systems or want to leverage the sophisticated data centres of big mining pools.
  • Mining Pool – These attract mandatory participation these days for any individual who wants to start mining. These are groups of people who are connected virtually to serve as a pool of resources in order to make the mining process more efficient. This pooling makes the mining more deterministic and substantially profitable. The rewards are distributed among the members in accordance with the resources dedicated by the member in the mining process.

Network mining and microtasking are some of the unconventional ways of mining and earning tokens without actually getting your hands in the mining process.

 What is Altcoin Mining?

Altcoin mining is the mining of any cryptocurrency other than bitcoin. The process is the same as that for bitcoin in the case of Proof of Work. There are other ways of mining too, which could vary depending on the type of altcoin. A popular mining principle is Proof of Stake, where the miner is rewarded based on their crypto holding.

A vital selling point for mining altcoins is that they have a lower hash rate than bitcoin mining, making them more rewarding from the beginning. Another factor to be considered is the cost of electricity, which is essential in determining the cost of mining as the rig needs to run 24*7, including the cooling mechanism. Yet another important consideration is a stable and fast internet connection to provide uninterrupted service for real-time processing.

Apart from these general requirements for crypto mining, there are variations in some other specifications of mining different altcoins. The specifications include the market cap in circulation and the threshold, block approval period, security protocols in use and other stipulations such as computing software requirements.

Final Thoughts

Crypto is a new era of finance, and research is ongoing in this field even before the launch of bitcoin. But Bitcoin’s launch has brought this concept into the mainstream development process, contributed by the vast acceptance of bitcoin and some other altcoins. The success of cryptocurrency can be attributed to the need for decentralisation and transparency that blockchain technology meets. Mining new tokens should be a well-planned undertaking after a thorough understanding of the goals of the DAO promoting the altcoin. Investment in evolving markets such as cryptocurrency is a new gamble whose rules are not reasonably tested. Therefore, you need to rely on your prudence more than any indicator.