How Cryptocurrency Mining Works

There are three main ways to get cryptocurrency: buying on an exchange, selling something for crypto, and mining. Mining is a way to make money from the cryptocurrency (along with speculation, investment, and raising money through ICOs). Such earnings depend on the cost of extracting the next coin. Mining is a fascinating social phenomenon.

Want to know more? Hey, this is Alex, the cryptocurrency expert and blockchain researcher. In an attempt to explain the concept of mining, its principles, and ways of development in simple words, this article was born. Hope you’ll find it helpful.

What is Cryptocurrency Mining

Mining is processing transactions in a digital currency system in which records of current crypto transactions (blocks) are added to information about past transactions (blockchain). This happens when a miner closes a block. To do this, it uses powerful hardware to perform particular calculations to solve mathematical problems.

If the solution is successful, the block is closed, and the miner is rewarded in cryptocurrency. Thanks to mining, the entire work of the network are ensured:

  • confirmation of transactions;
  • protection against the introduction of false information and duplication of transactions;
  • protection against attacks;
  • ensuring decentralization of the network.

Some countries have banned mining altogether (Egypt, India) and cryptocurrencies in general. The more advanced legal states have long ago hopped up and created a regulatory framework for the crypto industry or even tax/tariff exemptions that any mining farm in the country can get. However, in most states, the legal status of cryptocurrencies is still undefined.

Work Algorithms of Cryptocurrency Mining

As you know, every digital currency is created using a specific encryption algorithm. It is decrypted by the mining equipment, ensuring the processing of transactions on the network and bringing the miner a reward. The table below shows the most popular mining algorithms.

SHA-256Secure Hash Algorithm. It generates a 256-bit (32-byte) signature for a text string. The processing time of a block is usually about seven minutes. The Bitcoin network uses this mining algorithm.Bitcoin, Bytecoin, Joulecoin, Devcoin, Ixcoin, Terracoin, Battlecoin, 21Coin, Peercoin, Namecoin, Unobtanium, Betacoin
ETHASHThe proof-of-work hashing algorithm of the Ethereum network. The main feature of the algorithm is the higher GPU memory requirements for mining. Recently, the algorithm has been available for ASIC miners. It uses the Keccak hash function, standardized in SHA-3.Ethereum, Ethereum Classic, KodakCoin, Ubiq
SCRYPTThe Proof-of-Work algorithm used by many coins. It was first introduced for Tenebrix (in September 2011) and became the basis for Litecoin and Dogecoin. Scrypt is simpler and faster than SHA-256. Its hash rate is measured in kilohashes per second.Dogecoin, Gulden, Litecoin, PotCoin, FeatherCoin, Bitmark, TagCoin, Ekrona, MidasCoin
EQUIHASHA mining algorithm that allows people to mine on ordinary computers.Zcash, Zcoin, Zclassic, Bitcoin Gold, Komodo, ZenCash
CRYPTONIGHTThe Proof-of-Work algorithm designed for conventional computer CPUs.Bytecoin, Monero, Dashcoin, DigitalNote
X11The algorithm was created by the developers of Dash. It made the coin one of the safest.MonetaryUnit, Karmacoin, StartCoin, Dash, XCurrency

How to Mine Cryptocurrency?

The mining industry is changing at breakneck speed, and shortly, the process of mining cryptocurrencies may change dramatically. For example, initially, anyone could take part in confirming bitcoin transactions using their CPU (though, at that time, not many people knew what mining and cryptocurrencies in general were).

However, less than three years after the first cryptocurrency appeared, it was no longer profitable. The types of mining began to change: GPU-mining appeared, which then was replaced by ASIC-mining. Now the golden age of bitcoin is leaving, and more and more miners start to earn from mining altcoins. You will need powerful equipment, including:

  • Video cards (GPUs): the more powerful they are, the more efficient the mining will be. Bitcoin and Litecoin mining will not work with video cards – you need particular ASIC miners for that.
  • A powerful computer with the maximum possible number of video card slots. Keep in mind that farms are quite loud and require a powerful cooling system and power supplies.
  • Internet connection via cable or Wi-Fi with a good ping.
  • You also need to register a wallet where the mined coins will be stored.

It is worth noting that some types of mining do not require special equipment: browser mining, hidden mining, cloud mining.

Among the recent trends in the development of mining, experts highlight the following:

Moving in Search of Cheap Electricity

While in 2016-2017, most of the farms were based in China, by the end of 2017, the cost of doing such business in the country has increased dramatically with the increase in electricity tariffs and taxation. So, since 2018, many mining companies have partially or wholly relocated. The main destinations for them were Eastern Europe, Canada, and Iceland.

Favorable Jurisdictions

Some countries have banned their citizens from mining altogether (India, Egypt). Several others are raising taxes or doubling electricity rates for mining farms to drive them out of the country. Thus, miners have to seek not only jurisdictions with cheap energy but also relatively benign countries in terms of regulation.

Switching to the Proof-of-Stake Algorithm

The way of mining cryptocurrencies is changing dramatically – it no longer requires expensive equipment. Proof-of-Stake uses a system where miners are chosen at random or according to a particular scheme. There are also no rewards for blocks in this system, but some miners can receive a network commission.

What Next

Well, let’s summarize. Mining is a way of obtaining cryptocurrency based on computers solving mathematical problems. The essence of mining is that computers located in various places on Earth solve mathematical issues due to which bitcoins are created. A single production center does not control the mining process, and the distributed nature ensures security.

Suppose you are interested in mining and decided to go deeper into the world of cryptocurrency. In that case, we advise you to read our other materials, for example, about cryptocurrency or about Gemini cryptocurrency exchange, to understand the subject more deeply.

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