Understanding Crypto Mining: A Comprehensive Guide on Its Functionality

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With the cryptocurrency craze in full swing, you can’t avoid hearing about the people mining these digital currencies—and destabilizing the graphics processor market . Here’s what “crypto mining” actually is.

What Is Crypto Mining?

In short, crypto mining is how new units of cryptocurrency -–usually called coins—are created. As you can imagine, this type of mining doesn’t involve callused hands gripping pickaxe handles. Instead, it’s computer processors that do all the hard work, chipping away at complex math problems.

Of course, you may wonder why these digital currencies even need to be mined: after all, it’s make-believe money with no backing except what people will pay for it. Real currency, the kind backed up by governments, can be created by turning on a money printer, so it stands to reason that crypto could do the same.

The Blockchain

The fact that supply couldn’t be restricted was the main hurdle for cryptocurrency for years: there were many ideas on how to create digital coins, but no way to ensure people wouldn’t simply duplicate them at will. Without an authority like a central bank—an institution that regulates the flow of currency—it becomes very tricky to manage the supply of any currency.

This issue confounded the creators of digital currencies for decades until Satoshi Nakamoto (most likely a pseudonym) invented something called the blockchain. The full theory of how these work is pretty complicated—we go into more depth in our article on explaining the “blockchain” -–but the easiest way to explain it is to picture it as a chain.

Related: What Is a “Blockchain”?

In this metaphor, each link is a block, and each block contains a set amount of cryptocurrency. For example, one block has 6.25 Bitcoin in it . To unlock a new block you need to solve a complicated mathematical equation, which validates the block and adds it to the chain. Also, because the blocks are chained in a linear fashion, you have to go from one to the next, you can’t pick one at random.

The Ledger

Every time a new coin is unlocked, it’s recorded in the cryptocurrency’s ledger, a massive file anybody can access at any time to see which coins were mined when and by whom. The ledger also shows when a coin changed hands, and who was involved in the transaction, putting the lie to the claim that Bitcoin is anonymous .

To summarize, the ledger records the creation and movement of coins in the blockchain. Mining is validating new blocks and gaining access to the coins within. Interestingly enough, since the blockchain has to be finite, it also means that most cryptocurrencies have a hard limit to how many can exist: Bitcoin for example has a cap of 21 million .

How Crypto Mining Works

To unlock a block in the chain, you need to validate it by solving a complicated equation, usually in the form of something called a hash. A hash is a random set of characters and numbers which, with the right key, reveals the original message; it’s a basic part of cryptography and is where the “crypto” part of “cryptocurrency’’ comes from.

In a way, crypto mining is really just solving these incredibly complicated mathematical puzzles. Do it fast enough, and the reward is a coin. If you’re slower than the competition, you don’t get one. This method is called “proof of work.”

However, hashes are, by their very nature, incredibly complicated puzzles to solve. The phone or laptop you’re most likely reading this article on would probably take millions of years to solve one.

DIY Supercomputers

Of course, if you don’t have a supercomputer, you can always build one. Plenty of people interested in making money from cryptocurrency—Bitcoin in particular—have started doing so, often by connecting several devices to each other to create powerful networks that can combine and amplify the processing power of each individual device.

The most powerful single component you can use in this case is a graphics processing unit, or GPU , the part of your computer that gives you the nice shiny graphics—if you’re on an advanced computer, that is. They’re generally more efficient and powerful than their cousin the central processing unit (CPU) , and putting enough of them together gives you some serious computing oomph.

This brings a new kind of equation into play, one where several savvy individuals calculated that the price of GPUs times the cost of electricity came out a lot less than what one Bitcoin would bring in. This created a kind of arms race where these outfits would create bigger and better rigs to beat their competitors.

On top of the competition between these groups, there is also the problem that each next block is more complicated to solve than the last, a failsafe built into the blockchain to prevent it from being all unlocked at once.

As a result, the market for GPUs was practically destroyed, with these groups buying all the units they could get their hands on—even stealing them in some cases—and making it so regular consumers had to pay massive prices even for badly outdated models. Though, as of late 2021, this arms race is quieting down thanks to a number of factors (including a crackdown on miners by China), the GPU market has yet to recover.

Mined vs. Non-Mined Cryptocurrencies

Interestingly enough, though, not all cryptocurrencies are mined. Rather than use proof of work, some currencies—like Cardano and Ripple -–use something called “proof of stake.” They still operate on blockchain for reasons of security, but instead of mining new blocks you “stake “ them instead, claiming them for yourself ahead of time.

The more you claim, the bigger the chances you’ll be awarded blocks. It’s a complicated system, even more so than mining, but it could very well be the future of cryptocurrency.

The Future of Mining

This brings us to an important final point: cryptocurrency does need a future beyond mining. Not only is it costly to mine new coins thanks to the price of electricity and GPUs, it’s also bad for the environment , as this article from the Columbia Climate School explains.

What that future will be is hard to say exactly: maybe it’s staking, maybe it’s any of the dozen other solutions crypto enthusiasts are undoubtedly thinking up as you read this. Time will tell.

TechiDaily

Understanding Crypto Mining: A Comprehensive Guide on Its Functionality