Mining Bitcoin meaning is the process in which cryptocurrency (or Bitcoin) transactions between users are validated and added to the blockchain public ledger. The mining operations also introduce new coins into the existing circulating supply.
Mining is one of the main reasons that enable crypto blockchains like Bitcoin to work as a distributed ledger. All transactions are recorded in a peer-to-peer network without the need for a central authority.
How does mining work?
Now that we know cryptocurrency mining meaning, let us find out how mining works.
When new blockchain transactions are made, these transactions are sent to a memory pool. A mining node is then tasked with collecting unconfirmed transactions from the memory pool and assembling them into a candidate block. After that, the miner will try to convert this candidate block into a valid, confirmed block. But to do so, they need to find a solution for a complex mathematical problem. This would need a lot of computational resources, but every successfully mined block will give the miner a block reward, consisting of newly created cryptocurrencies plus transaction fees.
Step 1: Hashing transactions
The first step of mining a block is to take pending transactions from the memory pool and submit them, one by one, through a hash function. Every time we submit a piece of data through a hash function, we will generate an output of fixed size called a hash. In the case of mining, the hash of each transaction consists of a string of numbers and letters that works as an identifier. The transaction hash represents all the information contained within that transaction.
Other than hashing and listing each transaction individually, the miner also adds a custom transaction, in which they send themselves the block reward. This transaction is referred to as the coinbase transaction and creates new coins for the miners. In most cases, the coinbase transaction is the first to be recorded in a new block, followed by all the pending transactions that they want to validate.
Step 2: Create a Merkle Tree
After every transaction is hashed, the hashes are then organised into a Merkle Tree. Also known as a hash tree, the Merkle Tree is formed by organising the transaction hashes into pairs and then hashing them. The new hash outputs are then organised into pairs and hashed once again, and the process is repeated until a single hash is created. This last hash is also called a root hash (or Merkle root) and is basically the hash that represents all the previous hashes that were used to generate it.
Step 3: Finding a valid block header (block hash)
Then, the miner would have to find an appropriate block header, which is an identifier for each individual block, meaning that each block has a unique hash. When creating a new block, miners combine the hash of the previous block with the root hash of their candidate block to generate a new block hash. In addition to these two values, they are also required to add another arbitrary number called nonce.
So, when trying to validate their candidate block, a miner needs to combine the root hash, the previous block’s hash, and a nonce and submit them all through a hash function. Their primary goal is to create a hash that is considered valid.
The root hash and the previous block’s hash can’t be changed, so miners need to change the nonce value until a valid hash is found.
In order to be considered valid, the output (block hash) must be less than a certain target value, which is determined by the protocol. In Bitcoin mining, the block hash must start with a certain number of zeros. This is what we deem as mining difficulty.
Following which, the successful miner would be able to broadcast the block to the network, while all other miners who failed to find a valid hash on time will discard their candidate block, and the mining race restarts again.
Can all cryptocurrencies be mined?
Not all cryptocurrencies are mineable. This is because typically only Proof of Work (PoW) cryptocurrencies can be mined, which is a consensus mechanism.
How to mine crypto?
In the past, miners used CPUs (Central Processing Unit) and GPUs (Graphics Processing Unit) to mine cryptocurrencies. Nowadays, as the mining difficulty and competition increase, miners typically use ASICs (Application-Specific Integrated Circuit) to mine crypto. ASIC mining is highly efficient but very costly.
Another way is to join mining pools, which are a group of miners who pool their computational power to increase the probability of winning block rewards. Miners will split the reward equally among everyone in the pool, proportional to the amount of work contributed.
In Conclusion
Cryptocurrency mining meaning is the process in which cryptocurrency transactions are validated and blocks are formed. This process is usually very costly in computational resources and power.
