The fiat currencies that we use come under the domain of centralized authorities. Whereas, cryptocurrencies are of a decentralized nature. Thus, you cannot find cryptocurrencies at a particular location like banks, etc.
Cryptocurrency mining is the process of earning cryptocurrency. Through this the miners gain cryptocurrency as a reward for their work. Rather than actually paying for it. The idea of owning a cryptocurrency by working for it has made crypto mining popular.
As cryptocurrency is getting famous, it is catching everyone’s attention. By everyone, we mean even the cybercriminals. They manipulate the hidden nature of a cryptocurrency for criminal activities. Nonetheless, crypto mining is getting popular day by day.
Now, you must be wondering what do these miners do to get paid in cryptocurrency.
Crucial Components of Cryptocurrency Mining
Every new transaction leads to the process of crypto mining. After this process the transaction gets recorded in the Blockchain. Let’s take a look at the elements that are a part of the cryptocurrency mining process.
· Nodes: We know about the decentralized nature of crypto and its distribution in a network. So, the individuals or devices that are a part of this network are nodes.
· Miners: Miners are also a part of the crypto network only. So, in a sense, they are also nodes. But, these are specific nodes that are responsible for verifying a transaction. We will discuss the process of mining further in the second half of this blog.
· Transactions: In simple words, a transaction is what kickstarts the mining process. When a crypto transaction occurs, there arises a need of verifying it and adding it to a block. This is where mining comes into the picture.
· Hashes: A hash is an integral cryptographic function. The miners use function for verifying the transactions. Thus, it is a crucial element of every block present in a blockchain. The formation of a hash takes place using the header data from the last block in the blockchain.
How does Cryptocurrency Mining Work?
Any transaction involves two parties, a buyer and seller.. Unlike fiat currencies that involve an institution like a bank etc.
The transaction details do not get shared with any central authority, like a bank. Rather, all the people on the crypto network get the details. Thus, leading to decentralization. The transaction details get stored in a Block, which are evenly distributed in the entire network.
The information inside the block gets shared with the entire network using the DLT. Every 10 mins a new block of a transaction gets created. After this, the block joins the existing chain of similar blocks known as Blockchain.
But, the lack of a central authority can sometimes be troublesome. Simply because it can increase the risk of fraudulent transactions. So, it becomes important to verify every piece of block before adding it to the Blockchain. This verification work is what people commonly know as crypto mining.
Before the block gets added into the blockchain, one has to verify it. Now, a part of the network that has the right technology starts verifying the transaction. This verification is usually done by solving highly complex math calculations. Yet, the reward of mining i.e., cryptocurrency is quite lucrative. Due to this, there might be millions of miners trying to verify the transaction.
Though, this helps in ensuring that a particular part of the crypto network is not able to manipulate the entire market. To make this competition of mining fair and equal, the problem gets tougher as more and more miners join.
For doing so the miners have to solve very complex mathematical calculations. Thus, the process can take time and effort. The first network or miner that verifies the block gets Cryptocurrency coins. This verified block is official and gets added back into the blockchain.
Benefits of Cryptocurrency Mining
- Earn crypto as a reward: Mining gives the miners a chance to earn a cryptocurrency without paying for it.
- Extra Income: A lot of people who do crypto mining do it for the sake of an alternate source of income.
- Financial Freedom: Cryptocurrencies gives people a sense of financial freedom. Simply because there is no interference of banks or other authorities.
Limitations of Cryptocurrency Mining
· Resource Intensive: Not every node of the blockchain can do cryptocurrency mining. This is because it requires a lot of resources. This includes an intensive computer and other resources. Since a majority of people are not equipped with them, they can’t do crypto mining.
· Expensive: The competition among crypto miners has increased a lot. So, to compete with other miners you have to set up more resources. So, you need multiple computers and the right source of power. This increases the cost of mining and makes it expensive.
· Geographical barriers: A few countries have started banning cryptocurrency. Due to which the citizens of those countries cannot do crypto mining.