What is mining?

TL;DR 

Mining is the process by which a proof-of-work (PoW) blockchain mints new coins and validates transactions by essentially “outsourcing” the computational power needed to run the entire blockchain. Participants who contribute in running the network are called “miners” and are compensated for their work with newly minted cryptocurrency. 

In cryptocurrency, mining is the process of creating coins while also verifying and recording all the transactions that take place within the blockchain. In other words, mining refers to a network’s computational upkeep and auditing process which is crucial to the sustainability of cryptocurrencies running on a Proof-of-Work (PoW) consensus protocol.  

Mining is what takes the place of a central bank when it comes to government-issued fiat currencies. For pesos and dollars, for example, a central authority decides when to mint and issue new money. But for cryptocurrencies, the task is distributed or “decentralized” across all the miners in the network. 

This is why cryptocurrency is often referred to as the “democratization of money” since it relies on the people themselves to maintain and safeguard its financial network instead of being dependent on government regulation and bank policies. 

Since a blockchain has no central data server, its entire infrastructure is reliant on the participation of individuals from around the world who voluntarily dedicate their computer hardware for the processing and authentication of transactions on the blockchain. Every time someone makes a payment using bitcoin for example, somewhere out there in the world is a Bitcoin miner whose computer is kept running for the purpose of processing and verifying that payment. 

Transaction data that have passed through validation are kept in “blocks” which are then linked one after another in a cryptographically secure chain. Thus, mining is also the process of adding more and more blocks to maintain an ever-growing public ledger of cryptocurrency transactions. 

In return, miners are incentivized by being rewarded with cryptocurrency as payment for the work they contribute to the blockchain. Hence, the “work” in the proof-of-work terminology. 

But how does the system ensure that miners are acting independently from one another, instead of colluding with each other for their own interests? How does a PoW blockchain keep itself decentralized?  

The answer is in the way the protocol is programmed so that miners have to compete with one another to earn the network rewards. Essentially, miners have to race to be the first to solve extremely difficult mathematical equations, packaged as “cryptographic hashes”. To put it simply, a hash is basically a randomly generated digital signature required to secure the next block in the chain. Whichever node gets to complete the equation first is then rewarded with the newly minted cryptocurrency.

It’s this process that allows the blockchain to grow with the newly created coins and entices more miners and users to participate in the network, all without the assistance of any authoritative body or institution and beyond the limitations and oversight of any regulation. 

Any individual with the appropriate hardware can mine their own coins. But it’s also worth noting that the hardware requirements for mining crypto can be very high, especially for very competitive blockchains such as Bitcoin or Ethereum. The higher the demand for a coin, the more difficult it is to mine. As such, the term mining is also a reference to the actual mining of valuable metals like gold or silver, which also requires substantial effort and energy to produce. 

There are two specific expenses that miners need to be mindful of: electricity costs and graphics cards. Mining requires keeping computers running 24/7 which can lead to incredibly high utility costs, while powerful graphics processing units (GPUs) which are not found in the average desktop computer are needed to be able to set up a Bitcoin or Ethereum node. Some miners even resort to high performance application-specific integrated circuit (ASIC) processors which are specifically designed for mining and are expensive and complex to set up. This huge demand for hardware is actually a major reason for the global supply shortage of GPUs, which only makes them even more expensive to acquire. 

The obvious benefits of mining include getting huge payouts, though mining is criticized heavily for its carbon footprint, which consumes more power than most small countries. As such, newer blockchains are resorting to other consensus protocols such as Proof-of-Stake (PoS) which uses significantly less energy.  

Bitcoin and Ethereum are on the top of the list when it comes to cryptocurrency mining, though there are other coins that also use a PoW consensus and may have less hardware requirements to be mined. Some of the coins listed on the PDAX exchange which can still be mined include Bitcoin Cash (BCH), LiteCoin (LTC), Aave (AAVE), Compound (COMP), and Dogecoin (DOGE).

Keep in mind though that a coin is only profitable if its value increases at a rate high enough to compensate for the expenses required to mine it. As the value of cryptocurrencies can be volatile, there are always some risks involved in mining. But as a coin becomes more popular and attracts more people willing to spend it, it only follows that the network will require more and more miners to keep its network running. 

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DISCLAIMER: The statements in this article do not constitute financial advice. PDAX does not guarantee the technical and financial integrity of the digital asset and its ecosystem. Any and all trading involving the digital asset is subject to the user’s risk and discretion and must be done after adequate and in-depth research and analysis.