You’ve probably heard about mining cryptocurrency, so in this lesson we are going to dig into exactly what that means.
While preparing for this lesson, we conducted a short survey to find out what came to mind when people thought of mining. The top responses that came back were coal, iron, gold, digging… and Minecraft.
Believe it or not, Minecraft somehow made the top 5.
Even so, the word ‘mining’ tends to conjure up images of folks with a pickaxe and a miner’s lamp on their helmet digging for precious metals and other valuable, finite resources. It takes knowledge to know where to mine, skill to know how to mine, and effort to undertake the mining process.
Mining cryptocurrency is very similar, but instead of using a pickaxe, to maintain the analogy, miners use networks of computers to ‘mine’ new coins in cryptocurrencies, like Bitcoin, by verifying transactions. These computers form a decentralised network around the world that verify transactions by completing complex calculations, and compare transaction history against the others in the network to confirm and secure that history. Since no single computer alone owns the transaction history, this peer-to-peer network is known as a distributed ledger. It is virtually impossible to hack or manipulate.
Mining Rewards and Power Requirements
Due to the nature of the complex calculations being performed, the processing power required to verify transactions is significant. As a reward for contributing this processing power, miners earn new coins for each block they mine. This reward is the incentive that drives miners to provide the power required to maintain the integrity of the distributed ledger.
Just as mining in the physical world becomes more difficult over time as resources are gradually depleted, so it is for mining cryptocurrencies, like Bitcoin. As more Bitcoin is mined, it becomes increasingly more difficult to mine the next block (generally speaking). With more miners joining the network to compete for block rewards, difficulty increases. As difficulty increases, so does the amount of power required to mine a block. In fact, the power requirements at Bitcoin’s all-time high in May 2021 had increased as much as 25 TRILLION times from January 2009 when the first Bitcoin was mined!
Hash? Halving? Huh?
Part of the reason for this increasing difficulty is due to the set time frame to solve a block that is already built into the blockchain. As more miners join the network, more computers are attempting to solve the complex calculation for each block. More miners means more attempts per second, and given the set block mining duration, this means that each block requires more attempts to solve. Each of these attempts is called a “hash”. The number of attempts being made per second is called the “hash rate”. At the time of writing, the current Bitcoin hash rate is 153.16 EH/s (that’s Exahash per second, or 153 QUINTILLION attempts being made to solve a block every second!).
This is also amplified by the fact that Bitcoin reduces its mining rewards by half every 210,000 blocks (roughly every four years – known as ‘the halving’), making it that much harder to generate the same rewards. At the last halving (May 2020), rewards for successfully mining a Bitcoin block were reduced to 6.25BTC. This is a far cry from the hefty 50BTC per block when Bitcoin first arrived on the scene, so you can see how significant the halving can be over time.
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Now you understand the basics about mining cryptocurrency, you are probably wondering how you do it.
In the early days of Bitcoin mining, it was pretty easy to mine a block with just your PC. Unfortunately, as we discovered earlier, the power requirements are significantly higher now, making it impossible to mine Bitcoin with your standard personal computer. There are other cryptocurrencies, however, that you can still mine with your home computer, We will explore some of these in the next lesson.
To find out more about the different ways you can mine cryptocurrency, including Bitcoin, head to the next lesson here.