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Mining is the process by which users in a distributed ledger network attempt to create new digital tokens. It is simultaneously the process by which those users process transactions involving cryptocurrency between users.


The process may vary from token to token, but many use similar mining methods to the original bitcoin model. In this model, mining cryptocurrency is the process by which users, or nodes within a blockchain network, generate new digital tokens by calculating the validity of a cryptocurrency transaction, which involves using enormous amounts of computing power to solve a cryptographic problem by trial and error. Once the problem is solved, another "block," or cluster of data, is added to the blockchain. Once it's there, it can be viewed by anyone with an Internet connection.[1] As an incentive for contributing to the overall computational power of the blockchain network by verifying transactions, users are sometimes rewarded with cryptocurrency "tokens" or "coins," such as a bitcoin, (if bitcoin's blockchain is the one the user was mining for). If they were mining for ethereum, they would get ethereum's token, ether. In the case of most cryptocurrencies, there are a finite number of these coins that can exist, and as time passes they become harder to mine. This ensures that at any given time, everyone in the network knows exactly how many units of a cryptocurrency exist. It also creates scarcity, which contributes to the coin's value. The term "mining" is used because, similar to gold mining, cryptocurrency such as bitcoin must be discovered.[2]

Becoming a miner

Anyone with a sufficiently powerful computer can become a cryptocurrency miner. To do so, you need to download the mining software that pertains to the cryptocurrency you wish to mine, install it on a computer, connect to the Internet, and let it run. As it is running, your computer (or "node") will help the blockchain network verify transactions by attempting to decipher a hash relevant to a specific transaction made on the blockchain.[3][4]

Currently, it is extremely difficult to mine bitcoin with a standard desktop computer - even one with exceptional hardware. Most successful miners use specialized PCs like Avalon ASICs.[5]

Verifying transactions

Verifying transactions and recording them on the blockchain is no small task, requiring a significant amount of time, computing power, or both. For example, to verify a transaction for bitcoin, a node must find a number that, when combined with the data in the block and passed through a hash function (a cryptographic function relating to blockchain data), produces a result that is within a certain range. This creates a sort of contest between bitcoin miners to see who can guess a correct hash first. The bitcoin network increases the difficulty of this task in proportion to how many miners there are in the network, in order to keep the time between blocks created in the blockchain constant at around 10 minutes or so.[6][7]

If your node is the first of many to "solve" this problem, you may be rewarded with bitcoins you can keep, provided you have mined at least 1 MB of data (as of January 29th, 2018, the reward rate was 12.5 bitcoins).[8] If you do not meet these conditions, you will not be rewarded with anything.[9][10] Miners are also paid in user fees. They are thus incentivized to give priority to users who pay fees for their service. [11]

Although it involves using mathematical functions to produce exact results, the variability of the functions' products is considerable. There's no way of knowing which number will work because two consecutive integers will usually give wildly varying results. This necessitates computational effort on a level that is mathematically and physically staggering; computers capable of mining cryptocurrency must have, at a bare minimum, around 145 GB of free storage space. [12] This has dramatically increased demand for high-performance personal computers, leading to a significant increase in cost as suppliers scramble to meet it. This has led many to consider international markets for purchasing crypto-mining hardware.[13] The demand for mining-ready computers has become so significant, in fact, it has begun affecting other groups that rely on high-performance computer hardware, including PC gamers and astronomers.[14]

Some companies have begun developing and selling specialized cryptocurrency mining PCs, such as the Avalon ASIC.[15][16]

Cryptocurrency Mining Simplified

Four people decide to play a game: Person A picks a random number between one and twenty, and Person X, Person Y, and Person Z all try to guess what number Person A is thinking of. To win, their guesses don't have to be exact. They simply have to be the first player to guess a number less than or equal to Person A's number.

In this analogy, Person A represents someone making a cryptocurrency transaction, while Persons X, Y, and Z represent nodes attempting to verify this transaction. In order to verify, they must guess what number Person A was thinking of.

Person A chose 19.

1st - Person Y chose 12. 2nd - Person X chose 20. 3rd - Person Z chose 15.

Although Person X was closest, they do not win because they went over Person A's number.

Although person Z was the next closest without exceeding the value of Person A's number, they do not win because they guessed their number last.

Person Y wins, because they were the first to produce a number equal to or less than Person A's number. As long as they have played at least 5 of these games in their life, they are awarded a shiny gold coin, which they can trade with other players, or cash in for fiat currency.[17]

Mining loses profitability

In early 2018, cryptocurrency mining experienced a boom. Later that year, the cryptocurrency market experienced a significant decrease in market cap and prices for all cryptocurrencies. This, combined with the rapidly-decreasing supply of bitcoins that had not yet been mined caused mining to lost much of its profitability. This caused many mining operations to deactivate a large number of mining rigs, close down some of their mining "farms," or even declare bankruptcy.[18]