There are currently three known ways in which cryptocurrency is circulated. One can either purchase them on exchange platforms, get paid for services in them, or mine them.
Of these three, some may wonder where cryptocurrencies in circulation are gotten from. What goes on behind the scenes to ensure that according to demand, cryptocurrencies are in proportional supply?
Like most things valuable, the process that keeps cryptocurrency available is the third option, Mining. What is Crypto mining? What goes into this process? Why is it of any importance? We will consider these questions among others in the course of this article.
Crypto Mining is a process that involves miners who work to produce new cryptocurrencies like Bitcoin. Not only are new coins produced, but new transactions are equally verified through this process. Mining is a cycle in the virtual world of cryptocurrency.
While miners constantly maintain and secure Blockchains, the cryptocurrency in question compensates the miners with a fraction of mined coins. For example, Bitcoin currently rewards 6.25 bitcoin to its miners, although this value is sure to decrease subsequently.
For miners to embark on the task before them, the following must first be available –
- A mining rig. This could easily cost up to $10,000.
- An ASIC (Application-Specific Integrated Circuit). Alternatively, a GPU (Graphics Processing Unit). Either of these is needed to set-up the purchased mining rig. Miners ensure to opt for one with a high hash rate for optimal mining success.
Individuals who have their mining rig set up (Miners) get to work, all trying to find the missing piece of the puzzle. This refers to a 64-hexadecimal digit (Hash) that is either equal to the target hash or close to it.
In this race to arrive at the right answer (a.k.a. Proof of Work), only the first is recognized. If there are several simultaneous answers, the individual with the most verified transactions (or the largest work covered) is rewarded.
In the true sense, miners do not straight up guess the hash, rather, they guess something smaller, a “number only used once”. This value is called a nonce and is about 32 bits, which in comparison to the 256 bits hash is much smaller. The right nonce generates the corresponding target hash or at least something less than but close.
In summary, arriving at the hash is more or less guesswork. However, the mining difficulty spans into trillions considering the numerous miners that are involved in the process. In other words, the target hash is one among nearly a trillion probabilities, a number that only increases with the increasing number of miners joining the network.
Mining is concluded as unprofitable when done from a single system or lone individual. Therefore, to cut costs and increase the chances of success, mining pools have been formed. With countless mining rigs working together, a solution is more likely to be reached in lesser time.
- A major importance of mining for cryptocurrencies is that it constantly checks to ensure that double-spending is absent.
- Aside from verifying transactions, the job of miners is the same as minting with fiat currencies. Although, unlike fiat currencies, cryptocurrencies like Bitcoin have a predefined limit to how many will be released into circulation. Mining is the only avenue through which new cryptocurrency is released into circulation until that limit is reached. As of March 2022, nearly 19 million of the calculated 21 million had been released into circulation.
- Crypto mining is a means for the individual who arrives at the target hash to earn a fraction of the cryptocurrency mined without putting money down.
- Currencies like Bitcoin grant miners a measure of voting rights when changes are proposed by the BIP (Bitcoin Improvement Protocol). The voting rights of miners increase with higher hash power.
For cryptocurrencies whose consensus works with Proof of Work like Bitcoin, a lot of electricity is used by the systems running on the mining network. Although, currencies like Ethereum that use Proof of Stake (PoS) consume less power than the former. Currently, the environmental impact and carbon print of mining Bitcoin is a cause for alarm.
2. Is Crypto Mining Legal?
In regions where the acquisition and trade of cryptocurrencies are legal, mining is very much accepted. At the very least, no legal ban has been placed on this vital currency minting process.
A mobile device, even when part of a mining pool, can not provide the vast amount of power needed to support a mining rig. At least, it would most likely not be able to yield any returns.
The tremendous resource pumped into the mining process is sometimes sufficient to place large strains on the system in use. Therefore at times, there are cases of burnt-out GPUs and mining rigs. Although, a steady operation pace and sufficient electricity supply could avert this.
Crypto mining in itself is a difficult process, and the power input requirement is equally on the high side. When one also considers the equipment needed to embark on the arduous task of mining, some realize that this painstaking work is not cut out for them.
However, for what it is worth, the trillions of miners out there remain of great value in the world of virtual currencies. Although by 2140 (as estimated) the discovery of new Bitcoin would no longer be possible, miners will still prove very much valuable for blockchain verification.
With the mining system in place, you can rest assured that no individual makes copies of Bitcoin and spends the “counterfeit” while holding on to the original copy.