The generation of cryptocurrencies is not like that of regular money. There is no central authority that issues new currencies but instead, are generated through a process known as ‘mining’. So, what is cryptocurrency mining and how does it work?
The mining of cryptocurrencies and the chain of blocks
To know how cryptocurrency mining works, you must first understand the idea of blockchain. The blockchain is the technology that supports virtually to all cryptocurrencies and basically works as a decentralized record of all transactions that have been made with a given cryptocurrency.
The transactions are collected in ‘blocks‘, which are then authenticated (verifying that all transactions are real and legitimate) by ‘miners’ (who verify that the same currency has not been spent before the transaction has been settled and that the entry and the exit amounts match) and the next subsequent transaction block is linked to it. This forms the basis on which cryptocurrencies are built, but it is also the way in which new units of these currencies are generated.
Mining new blocks
Without a central authority, someone needs to collect all transactions made with a cryptocurrency to form a new block. The network nodes that do this are identified as ‘miners’. Each time a set of transactions is collected in a block, it is added to the blockchain, and whoever joined the block is paid with units of the cryptocurrency.
But, to prevent the currency from being devalued by miners who create large volumes of new blocks, the task of creating a block becomes artificially more complicated. This is done by requiring the miners to solve a complex mathematical problem called “proof of work”.
Calculation of hashes
To accurately create a block, it must be accompanied by an encrypted hash that meets certain conditions. The only feasible way to get to a hash that matches the correct criteria is to simply calculate as many as possible and wait until you get a matching hash. When the correct hash is found, a new block is formed and the miner who found it receives cryptocurrency units.
Think of it as one of those contests in which you have to guess the weight of a fruit, you only get unlimited guesses and the first to send a correct answer wins. Who can make guesses at the fastest pace has more chances to win.
Cryptocurrency mining limits
In practice, this means that the miners compete with each other to calculate as many hashes as possible, hoping to become the first to reach the correct one to form a block and get their payment of cryptocurrencies.
However, the challenge of calculating hashes also increases, each new block of bitcoins becomes more difficult to extract. In theory, this ensures that the speed at which new blocks are created remains stable. Many cryptocurrencies also have a finite limit on the number of units that can be generated. For example, there will only be 21 million Bitcoins in the world. After that, extracting a new block will not generate any bitcoins at all.
Cryptocurrency mining requirements
While it was possible to extract your own cryptocurrencies using a common PC, for the most part, this is no longer the case. As more people start to extract, the hardware needed to mine effectively increases; from a moderately powerful processor to a high-end GPU, with several GPUs working together, to specialized chips designed specifically for mining.
To successfully extract most of the modern cryptocurrencies, you must spend at least US $ 1,350 in hardware, as well as pay the important electricity bill that will generate having it running 24 hours a day, 7 days a week. In fact, most of the miners spend the vast majority of their mining revenues to cover the operating costs of their equipment.
Now that the Bitcoin growth is in full swing, certain companies and groups have begun to put money behind it seriously, with large warehouses full of expensive graphics cards, which do nothing but try to extract new units of Bitcoin, Litecoin, Ether and the others.
By context, the Bitcoin network processes 5.5 quintillion hashes per second. Unless you have a team that can process a large number of calculations in a very short space of time, your chances of competing with large mining operations are infinitely small. This is why many miners join forces, joining together to create ‘mining groups’, sharing their computing power and any return generated by their efforts.