basics of crypto mining

The Basics of Crypto Mining – Part 1

Mining is where many who are learning about cryptocurrency start to get lost. The underpinnings of the process involve all the most technical aspects of how cryptocurrencies are able to create the novel beneficial features that make them an entirely new asset class. Overall, there is more than enough content for a book, or several, and in fact there are many books available on Bitcoin, cryptocurrencies and blockchain technology.

At the heart of what makes Bitcoin block tick every 10 minutes is the mining process. But more importantly, the heart of what makes this mining process tick probably isn’t what you expect, and doesn’t have to be so difficult to understand. The technical stuff is all a consequence of ideals a cryptocurrency like Bitcoin has achieved. Mining is an integral part of the process.

Here, we will get in-depth on the integral part, but not so much the process – we’ll get into how mining fits in to the cryptocurrency concept, why it’s even called mining and just generally, what the point of it all really is in the end… without bogging you down on the algorithms and coding terms too much. But maybe after this, you’ll want to go there with us in the next mining article.


Bitcoin didn’t start the fire

This protocol is based on concepts from coding and mathematics like hashing, SHA-256 algorithm, nodes and cryptographic signatures. By no surprise, that kind of language simply turns most people away. But ultimately, the theoretical purpose of mining is what came first, and is the reason the process was created. So, instead of working from what the technical details are, through how they work together, and why it all matters in the end – this breakdown will start right there – where all this started in the Bitcoin white paper:

“a purely peer-to-peer version of electronic cash…”

Those are the first words of the Bitcoin white paper, the report that detailed how Bitcoin would be created. It begins with a summary of why such a thing is important, followed by the technical processes to achieve the digital result of what makes cash, cash:

“… allow online payments to be sent directly from one party to another without going through a financial institution.”

Bitcoin was not the first ever digital currency, but was the first to pull together a number of coding and mathematical concepts that already existed in a way that was created the world’s first enduring decentralized currency. This idea is primary to the benefits Bitcoin and other public, decentralized cryptocurrencies. The technical processes, the Bitcoin protocol, were all a consequence of seeking a digital currency that transacts like physical cash.


What does mining have to do with electronic cash?

The problem with electronic cash at first glance is a way to avoid theft. If the currency is just data, can’t they simply be changed? Fundamentally, the essential result of mining is that it secures the network that is running the protocol to prevent that possibility. This set of rules is dependent on miners.

The genius built into the mining concept is that its self perpetuating. The process of securing the network is built into the same process that facilitates transactions and rewards the miner. In this way, it provides a major incentive to operate honestly and simultaneously ensures that the network cannot be cheated by others.


Security in Blocks

Mining groups all the peer-to-peer transactions together to be verified and condensed into the blocks of data that form the blockchain. This blocks are limited in size by data, rather than quantity of value. Moving $1 million is almost no different than moving $5. Transaction fees are determined by the market supply and demand. Freedom for network users to set their transaction fee is built into the protocol.

Bitcoin sources the foundation of this method from an earlier attempt at digital cash called HashCash. This is where “proof-of-work” comes from. Each new block contains a summary of the previous block, called a hash. Hashing is the method for condensing data, and forcing the miners to “work.” This process is second checked by the network as well. So each time just one new block is accepted as true by the majority of users, it actually means that it matches up with the entire history of transactions on that blockchain network.

These blocks are created every 10 minutes, meaning it takes 10 minutes of mining work. Those technical concepts come into play here as a means to maintain that 10 minute block time by adjusting how difficult the hashing process is.

What if a ton of really fast computers start mining? In 10 minutes, the network will make the process difficult enough to take 10 minutes.

What if a bunch of people start mining something else? In 10 minutes the network will make it easy enough to achieve a block in 10 minutes.

No matter how much electricity it takes for computers to engage this process, it will always be more profitable to mine authentic transactions, rather than attempt to re-write the blockchain with false transactions. Doing so would take the same amount of mining work, but yield no reward in the process, all while the rest of the network continues to build the chain of correct blocks faster than attackers could ever work backwards.


Why is it called mining?

This sounds nothing like actual mining right? No one specifically set out to create “mining.” Each successful new block produces a reward of bitcoins. This is where the term mining comes from, because it is how more bitcoins are made available to the network. It is a reference to an analogy used in the Bitcoin white paper, which is the only time the term is used:

“The steady addition… of new coins is analogous to gold miners expending resources to add gold to circulation.”

This is the basis of the incentive structure of most cryptocurrencies, and dictates the total available supply of the coin. In Bitcoin’s protocol, the total supply will be mined in roughly 100 years from now. Central authorities that facilitate the functionality of fiat currency are bypassed in this process, providing three of the most important facets of cryptocurrencies:

  • Peer-to-peer transactions – Miners are just making sure the movement of bitcoins are valid, rather than actually holding and transferring users’ bitcoin like a financial institution holds fiat money.
  • Automated currency supply – The rewards that control inflation of cryptocurrencies are coded into the underlying protocol that automates how a given blockchain network operates, rather than decisions made by a governing body. (Only every 10 minutes new BTC are created)
  • Immutable public ledger – The entire blockchain history, meaning every successful and unsuccessful transaction attempts are all viewable online on websites such as Block Explorer.


Hashing The Mining Concept

So, Bitcoin didn’t create everything, but was the first to pull many crucial developments together as one. The goal of that one thing was a true peer-to-peer electronic cash. Mining is the process that facilitates transactions for the network of users. As a consequence of how the system functions, each transaction is part of a block that verifies the entire blockchain when confirmed by the network. With each confirmation, BTC is awarded to the miner – every 10 minutes. Now let’s get into how each one of these steps is possible.


You have successfully subscribed to our mail list.

A user with this email address has already subscribed