What is cryptocurrency mining and how does it work?
With the cryptocurrency craze in full swing, you can't avoid hearing about people mining these cryptocurrencies – and destabilizing the graphics processor market. Here's what "cryptocurrency mining" actually is.
What is cryptocurrency mining?
In short, crypto mining is how new units of cryptocurrency, created coins called unusually. As you can imagine, this type of mining does not involve stiff hands holding the handles of the axe. Instead, it is computer processors that do all the hard work, moving away from complex arithmetic matters.
Of course, you may be wondering why these digital currencies need to be mined: after all, they are fake money without support except for what people will pay for it. Real currency, of the type subsidized by governments, can be created by turning on a money printer, so it makes sense that cryptocurrency can do the same.
Blockchain
The fact that supply cannot be restricted has been the main obstacle for cryptocurrencies for years: there have been many ideas on how to create digital currencies, but there is no way to ensure that people will not simply repeat them at will. Without such an authority as the Central Bank - an institution that regulates the flow of currency - it becomes very difficult to manage the supply of any currency.
This problem confused cryptocurrency creators for decades until Satoshi Nakamoto (probably a pseudonym) invented something called blockchain. The whole theory of how these things work is quite complex – we delve deeper into our article explaining "blockchain" – but the easiest way to explain them is to portray them as a chain.
In this metaphor, each link is a block, and each block contains a specific amount of cryptocurrency. For example, one block has 6.25 bitcoins. To open a new block, you need to solve a complex mathematical equation, which validates the mass and adds it to the series. Also, since blocks are chained in a linear manner, you have to move from one to the other, and you can't choose one randomly.
Passbook
Every time a new currency is opened, it is recorded in the cryptocurrency ledger, a huge file that anyone can access at any time to find out which coins have been mined, when, and by whom. The ledger also shows when a currency was traded, and who was involved in the transaction, which belies the claim that Bitcoin is anonymous.
To summarize, the ledger records the creation and movement of currencies in the blockchain. Mining is validating new blocks and getting the coins inside them. Interestingly, since blockchain must be limited, it also means that most cryptocurrencies have a strict limit on the number of currencies that can exist for example, Bitcoin has a maximum of 21 million.
How cryptocurrency mining works
To open a block in the chain, you need to validate it by solving a complex equation, usually in the form of something called hashing. Hashing is a random set of letters and numbers that, using the right key, reveal the original message; it is an essential part of cryptography and where the "crypto" part of the "cryptocurrency" comes from.
In a way, crypto mining is really just a solution to these incredibly complex mathematical puzzles. Do it quickly enough, and the reward is a coin. If you're slower than the competition, you won't get one. This method is called "proof of work".
However, hashes, by their very nature, are incredibly complex puzzles to solve. The phone or laptop you're reading this article on will probably take millions of years to solve.
DIY supercomputers
Of course, if you don't have a supercomputer, you can always create one. A lot of people interested in making money from cryptocurrencies – in particular Bitcoin – have started doing this, often by connecting multiple devices to each other to create powerful networks that can integrate and amplify the processing power of each individual device.
The single most powerful component you can use in this case is the GPU, or GPU, which is the part of your computer that gives you great glossy graphics – if you're using an advanced computer, that means. They're generally more efficient and powerful than their CPU and putting enough of them together gives you some serious computational appeal.
This brings a new kind of equation into effect, as many smart individuals calculated that the price of GPUs twice the cost of electricity came much lower than what a single coin would bring. Create bigger and better platforms to beat their competitors.
On top of the competition between these groups, there is also the problem that each next block is more complex to solve than the previous one, and is fail-safe built into the blockchain to prevent it from being opened once.
As a result, the GPU market was practically destroyed, as these groups bought all the units they could get - even stole them in some cases - which made regular consumers have to pay exorbitant prices even for older models badly. Although as of late 2021, this arms race is subsiding thanks to a number of factors (including China's crackdown on miners), the GPU market has yet to recover.
Cryptocurrencies mined against non-mined cryptocurrencies
Interestingly, not all cryptocurrencies are mined. Instead of using proof of work, some coins – like Cardano and Ripple – use something called "proof of stake." They are still working on blockchain for security reasons, but instead of mining new blocks, you can "stake" them instead, claiming them yourself ahead of time.
The more you claim, the higher the chances that you will get blocks. It's a complex system, even more than mining, but it could be the future of cryptocurrencies.
The Future of Mining
This brings us to one last important point: cryptocurrency needs a future beyond mining. Not only is mining new coins expensive thanks to the price of electricity and GPUs, but it's also bad for the environment, explains this article from the Colombia School of Climate.
It's hard to say what exactly this future will be: maybe it's a mortgage, maybe any of the dozens of other cryptocurrency enthusiasts are undoubtedly thinking as you read this. Time will tell.