Understanding the process of crypto mining: the mechanism and steps

Main Topics

• Cryptocurrency mining is a fundamental process that ensures the integrity and security of blockchain networks, where miners verify and organize transactions.
• The mining process contributes to the release of new monetary units within the currency's economic cycle.
• Mining requires the use of massive computing power, which enhances the network's protection against potential attacks. Miners collect pending transactions into blocks that are broadcasted on the network, and upon their confirmation, they receive rewards.
• The feasibility of mining is affected by several factors, including equipment efficiency, energy costs, market fluctuations, and protocol developments.

What is meant by the process of cryptocurrency mining?

Imagine a global distributed financial ledger that lists all cryptocurrency transactions. Mining ensures the accuracy and reliability of this ledger. Miners use advanced computer hardware to solve complex mathematical problems primarily for the purpose of organizing and validating pending transactions. The winner of the problem receives a monetary reward.

The mining process represents the mechanism that ensures the security of Bitcoin and other cryptocurrencies. Through it, the validity of transactions between users is verified and added to the public ledger of the blockchain. Mining is a critical element that enables Bitcoin networks to operate in a decentralized manner, meaning without a central authority controlling it.

Mining activity also contributes to the generation of new currency units. Although this may seem similar to printing money, cryptocurrency mining is governed by strict software protocols that regulate the entire process and prevent the random creation of new units. These rules are enforced through a distributed network of nodes.

To produce new coins, miners harness computing resources to solve complex cryptographic puzzles. The first miner to find the solution gets the right to add a new block of transactions to the blockchain and broadcast it across the network.

How Cryptocurrency Mining Works

( the brief explanation

1. Collecting transactions into blocks When a user sends or receives cryptocurrency, pending transactions are temporarily stored in a “block” awaiting confirmation.

2. The riddle solved by the miners Miners use computers to find a special random number called nonce )Nonce###, and when combined with block information, it results in a value less than the specified target. It is similar to a digital lottery ticket that contains a puzzle.

3. Adding the block to the chain The first miner to solve the puzzle is entitled to add their block to the blockchain. Other miners verify the validity of the block.

4. Getting Rewards The winning miner receives a reward that includes newly created cryptocurrencies as well as transaction fees from the block.

( the detailed explanation

When new transactions are made on the blockchain, they are sent to a waiting area called the mempool. The nodes responsible for verification assess the validity of these transactions. The role of the miner is to collect the pending transactions and arrange them into blocks. It is worth noting that some miners also run verification nodes, but these are technically different functions.

A block represents a page from the blockchain ledger containing several transactions and additional data. More specifically, it is the responsibility of the mining node to collect unconfirmed transactions from the memory pool and assemble them into a candidate block. The miner attempts to convert this candidate block into a validated block by solving a complex mathematical equation that requires significant computational power. When a block is successfully mined, the miner receives a block reward that includes new digital coins as well as transaction fees.

) Step 1: Process transactions in batches

The first stage of block mining involves taking pending transactions from the memory pool and processing them one by one using a hashing function. Each time data is passed through the hashing function, it produces outputs of a fixed length called the hash value.

The hash value for each transaction consists of a series of numbers and letters that serves as a unique identifier. This value reflects all the information contained in the transaction. Alongside the hash of each transaction, the miner includes a special transaction through which they convert a reward for themselves known as the coinbase transaction, which creates entirely new currency units. This transaction usually comes first in any new block, followed by all pending transactions.

Step 2: Building a Merkle Tree

After hashing each transaction, the hash values are arranged in a structure known as a Merkle tree ### or hash tree ###. The Merkle tree is built by pairing the hash values of the transactions and then hashing them together. The resulting hash outputs are again paired and hashed, and this process repeats until a single hash value is reached. This final value is called the root hash, and it succinctly represents all the previous hash values used to construct it.

( Step Three: Searching for the correct hash value of the block

The block hash value acts as a unique identifier for each block. When creating a new block, miners combine the previous block's hash with the root hash of the candidate block to produce a new block hash. A random number known as a nonce must also be added. So when the miner tries to verify their candidate block, they combine the root hash, the previous block's hash, and the nonce and pass it through the hash function. The goal is to repeat this until they can produce a valid hash.

Since the root hash and the previous block hash are fixed, miners must adjust the nonce value multiple times until they find the appropriate hash. The resulting hash must be less than a certain target defined by the protocol. In the context of Bitcoin mining, the block hash must start with a specific number of zeros — this target is defined as mining difficulty.

Step Four: Publish the mined block

As we have seen, miners must hash their block repeatedly using different nonce values until they find the correct hash. When a miner finds a valid block hash, they broadcast this block to the network. After that, all other nodes verify the validity of the block, and if it is valid, they add the new block to their copy of the blockchain.

The candidate block at this stage becomes a verified block, and all miners move on to mine the next block. Miners who did not find a valid hash in time abandon their candidate block and the race starts over.

Status: Mining two blocks at the same time

Rarely, miners may broadcast two valid blocks at the same time, which leads the network to face two competing blocks. All miners start mining the next block based on which one they received first, causing the network to temporarily split into two different versions of the blockchain.

The competition between the two blocks continues until the next block is mined on one of them. When a new block appears, the block that preceded it is considered the winner. The rejected block is called an invalid or orphaned block, prompting miners who chose this branch to retry mining the correct chain.

Mining Difficulty: Continuous Adjustment

The protocol regularly adjusts the mining difficulty to ensure a consistent rate of new block production, which in turn leads to the release of new coins in a regular and predictable manner. The difficulty level is adjusted in accordance with the total computing power ) hash rate ### dedicated to the network.

As new miners join and competition increases, the mining difficulty rises, preventing a decrease in the average block time. Conversely, if a number of miners leave the network, the difficulty decreases, making it easier to mine a new block. These adjustments maintain the stability of the average block time regardless of the total hash power of the network.

Different Methods of Cryptocurrency Mining

There are several different methods for mining cryptocurrencies, and they are constantly evolving with the emergence of new hardware and consensus algorithms. Miners typically rely on specialized computers to solve complex cryptographic equations. Let's review the most common methods.

( mining with CPU units )CPU###

CPU mining is limited to using the central processing unit of a regular computer to perform the required hashing functions. In the early days of Bitcoin, mining costs were low and barriers were very few, and a regular processor was capable of handling the difficulty. Anyone could attempt mining during that time.

However, with more participants joining and the overall hash rate increasing, profitable mining has become much more difficult. Furthermore, the emergence of advanced mining equipment with higher computational power has made CPU mining almost impossible. Today, CPU mining is not considered a practical option as all miners are using specialized equipment.

( mining with graphics processing units )GPU###

Graphics processing units are designed to handle multiple applications concurrently. Although their primary use relates to video games and computer graphics, they are also suitable for mining. Graphics processing units tend to be relatively cheaper and more flexible compared to highly specialized mining equipment. While they are used in mining some alternative currencies, their effectiveness depends on the mining difficulty and the algorithm used.

Mining using ASIC circuits

ASICs designed for the application ( are built to perform a very specific function. In the context of cryptocurrencies, it refers to specialized equipment designed solely for mining. ASIC mining is characterized by high efficiency but is relatively expensive. Since ASIC equipment represents the pinnacle of technology, the cost per unit is much higher than that of CPUs or GPUs. Moreover, the continuous evolution of ASIC technology may quickly render older models unprofitable. This makes ASIC mining one of the most costly methods, yet it is the most effective and can be very profitable when applied on a large scale.

) Mining Pools

Since the block reward is only granted to the first successful miner, the likelihood of mining the next block on your own is very low. Miners with a small share of the hashing power have a very slim chance of winning alone.

Mining pools provide a solution to this problem. They are groups of miners who combine their mining resources ###hash power( to increase the chance of winning block rewards. When the pool successfully finds a block, the members share the reward according to the amount of effort each contributed.

Mining pools can provide benefits to individual miners in terms of equipment and electricity costs, but their control over mining raises concerns about centralization and the risk of attacks aimed at taking over the network.

) cloud mining

Instead of purchasing equipment, miners rent computing power from specialized service providers in a cloud mining model. It is a simplified way to start mining, but it carries risks such as fraud or reduced profits. If you decide to try cloud mining, be sure to choose a reputable provider.

Bitcoin Mining: The Most Prominent Case

Bitcoin is the most famous and clear example of mineable digital currencies, and its mining relies on a consensus algorithm called Proof of Work ###PoW(.

Proof of Work is the original consensus mechanism for blockchain networks created by Satoshi Nakamoto and presented in the Bitcoin white paper in 2008. In short, Proof of Work determines how the blockchain network reaches consensus among distributed participants without an external intermediary, by requiring massive investments in energy and computational power to deter malicious actors.

As we have seen, pending transactions on the Bitcoin network are organized and added to blocks by miners competing to solve puzzles with advanced equipment. The first miner to reach a correct solution has the right to broadcast their block to the blockchain, and if it is accepted by the validating nodes, they receive the block reward.

The value of cryptocurrencies in block rewards varies from one blockchain to another. In the case of Bitcoin, miners can receive 3.125 BTC as a block reward ) starting from December 2024###. Due to Bitcoin's halving mechanism, the amount of BTC in the block reward is halved every 210,000 blocks, approximately every four years (.

Does mining yield profits?

Although it is possible to earn income from mining, it requires careful study, risk management, and in-depth research. Risks include equipment costs, currency price fluctuations, and protocol updates. Miners typically apply risk management strategies when weighing costs against potential benefits.

The viability of mining depends on multiple factors. One of them is the volatility of cryptocurrency prices. When prices rise, the value of the rewards received increases. Conversely, profits decrease when prices fall.

The efficiency of mining equipment also significantly affects profitability. Equipment can be expensive, so miners must balance its costs with expected returns. Another critical factor is electricity costs; if they rise too much, they may exceed potential profits, making mining unprofitable.

Moreover, mining equipment may require periodic upgrades as it becomes obsolete relatively quickly. If you do not have the budget to update your devices, you may find it difficult to compete.

Finally, significant protocol developments may occur. For example, the Bitcoin halving affects profitability by reducing rewards by half. In other cases, a new consensus mechanism may replace mining. For instance, the Ethereum network fully transitioned from proof of work to proof of stake )PoS### in September 2022, making mining unnecessary.

Summary

Mining is a crucial element of the Bitcoin network and other blockchain chains that use proof-of-work mechanisms, as it maintains the security of the network and facilitates the regular issuance of new coins.

Mining has its pros and cons. The most notable advantage is the potential income from block rewards. However, mining profits are affected by various factors, including electricity costs and market prices.

Therefore, before starting cryptocurrency mining, you should conduct your own research and assess all the risks associated with this activity.