Over the past few years, cryptocurrencies have become a very popular form of payment and investment, especially for those who mostly shop online. Bitcoin price volatility, following a record low following a record high, shows encouraging signs of recovery, attracting those who not only invest but mine their own tokens.
However, creating cryptocurrencies is not as simple as printing banknotes directly. Fiat money is heavily regulated and operates under a central authority that issues new banknotes and destroys old ones. Bitcoin and most other cryptocurrencies on the market are generated through a process called “mining.”
Cryptocurrency mining and blockchain
Let’s take Bitcoin as an example. Given that bitcoins cannot be printed like fiat currencies, the only way to create more coins is to “mine” them.
The complexity behind creating Bitcoin all stems from its blockchain. This public ledger is designed to support Bitcoin’s activities and record every transaction on its network. For a complete guide on how blockchain works, go to our interpreter.
Every time Bitcoin is bought or sold, the blockchain creates a record, which is assembled into a continuous connected “block”. In order for transactions to be valid and pass, they must be verified by other users on the network. This verification process is critical to the integrity of Bitcoin as it avoids the problem of “double spending”, in which case individuals will attempt to initiate multiple transactions using the same Bitcoin.
Cryptocurrency mining is actually the process of rewarding network users with Bitcoin to verify these transactions.
Mining new coins
The user or “network node” performing this task is called a “miner”. Every time a large number of transactions are aggregated into a block, it is added to the blockchain. In order for miners to receive Bitcoin rewards, they need to perform two tasks: verify transactions worth 1MB, and be the first to guess the unique 64-digit hexadecimal number (hash).
Since the blockchain keeps a record of every transaction, so does every network user or “node.” Whenever a node is notified of a new transaction, they can perform a series of verification checks to ensure that the transaction is legal. These measures include checking that the only cryptographic signature attached to the transaction created at the start of the process is indeed a valid signature.
Every miner wants to verify these transactions, which are worth 1MB, in order to have the opportunity to get new Bitcoin. The next step is to successfully solve a digital problem called “proof of work.”
Any user who can successfully generate a 64-bit hexadecimal number (called a “hash”) will receive a bitcoin reward that is less than or equal to the target hash associated with the block. Unfortunately, the only feasible way to reach a hash value that matches the correct conditions is to simply calculate as many values as possible and then wait until you get a matching hash value.
This is where the high computational cost of mining comes into play, because to have a chance to guess the hash first, you need to have a high hash rate or hashes per second. The more powerful the settings, the more hash values you can filter out. Think of it as one of the contests where you have to guess the weight of the cake-only if you get unlimited guesses, and the first contest to submit the correct answer is the winner. Those who can guess at the fastest speed are more likely to win.