What is cryptocurrency mining?

A cryptocurrency is a digital asset designed to work as a medium of exchange wherein individual coin ownership records are stored in a ledger existing in the form of a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins and to verify the transfer of coin ownership. It typically does not exist in physical form (like paper money) and is typically not issued by a central authority.

You may have heard the term mining concerning Bitcoin or cryptocurrency in general – but it isn’t quite obvious what it means in that context. Mining in the crypto world is the process of keeping blockchain data in check. It involves hard work (done by computers) and results in a slow accumulation of resources – just like mining for minerals. The first important thing to keep in mind is that cryptocurrency transactions are recorded on a blockchain. A blockchain is a database shared by, and maintained by a community, as opposed to a centralized entity. It is an umbrella term for a variety of technologies that distribute control across a large network of individual actors for security purposes. Mining is the process of validating and recording new transactions on a blockchain as well as hashing them to prevent shenanigans from sliding under the radar.

Validating and recording all the new transactions that come across the network is not an easy task. It’s the core responsibility of companies to convince random people to cooperate and work effectively. Satoshi Nakamoto incentivized people to maintain Bitcoin’s blockchain by rewarding them with newly-minted Bitcoin. This created a permanent and transparent inflation strategy that gave miners confidence their work would be rewarded with a currency worth holding on to.

Miners are the people who dedicate significant computational power (often entire networks of dedicated mining computers) to solving hashing puzzles to add new blocks to the blockchain. A blockchain is a chunk of data containing 2 things:

1. Some relevant data to be added to the database. (For example, all the bitcoin transactions that occurred within the last 10 minutes.)

2. The hash and ID of the block before it in the chain.

By including the hash of the block before it, each block is “chained” to the block before it – all the way back to the beginning. An edit to any historical block will require recomputing every hash that comes after it. To add a new block to the blockchain, a computational puzzle must be solved to compress the blocks data into a 256-bit hash. Mining is the act of solving this puzzle, or finding the hash – a task that is not so easy. The 1st miner to successfully hash the block, making it safe to share across the internet, is awarded Bitcoin for their work. The winner shares their results with all the other miners, who verify the encryption is safe and the work is done. This is called proof of work. Once verified by the other miners, the winner securely adds the new block to the existing chain, and all the other nodes update their copies.

The cryptocurrency industry is still young, and mining has a long way to go before reaching maturation. Nearly any industry this new and underdeveloped is likely to contain a lot of uncertainty, but with uncertainty comes the profit potential. Whether or not you should pursue an investment related to mining is up to your risk tolerance.

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