Abstract

• Cryptocurrency mining verifies blockchain transactions and is the process of creating new units of cryptocurrency.

• Miners require a large amount of computing resources, which also ensures the security of the blockchain network.

What is encryption Currency mining?

Cryptocurrency mining is based on the Proof of Work (PoW) consensus mechanism to ensure the security and decentralization of cryptocurrencies such as Bitcoin. change. Mining is the process of validating user transactions and adding them to the blockchain’s public ledger. Therefore, mining is a key element for Bitcoin to function normally without a central authority.

Mining operations are also responsible for introducing new coins into the existing circulating supply. However, cryptocurrency mining follows a set of hard-coded rules that govern the mining process and prevent someone from randomly creating new coins. These rules are built into the underlying cryptocurrency protocol and are enforced by an entire network of thousands of nodes.

To create new cryptocurrency units, miners use their computing power to solve complex cryptographic puzzles. The first miner to successfully solve the puzzle has the right to add a new block of transactions to the blockchain and publish it to the network.

How does Ethereum mining work?

After a new blockchain transaction is completed, it will be sent to the mining pool called the "memory pool". The miner's job is to verify the validity of these pending transactions and integrate them into blocks.

A block can be regarded as a page of the blockchain ledger, which records several transactions and other data. Specifically, mining nodes are responsible for collecting unconfirmed transactions from the mempool and integrating them into candidate blocks.

The miner then attempts to convert the candidate block into a valid confirmed block. To make this transition, miners must solve complex mathematical problems, a process that requires significant computing resources. However, for each successfully mined block, the miner will receive a block reward, which includes newly created cryptocurrency and transaction fees. How mining works is explained further below.

Step 1: Hash Transaction

Step 1 of block mining is to pull pending transactions from the mempool and submit them one by one through the hash function. Each time a piece of data is run through a hash function, a fixed-size output is produced called a "hash value."

During the mining process, the hash value of each transaction consists of a string of numbers and letters, which is used as an identifier. The transaction hash represents all the information contained in that transaction.

In addition to hashing and single-column each transaction, miners also add custom transactions to send blocks to themselves award. This transaction is called a "coinbase transaction", which means a new coin is created. In most cases, this transaction is the first transaction recorded in a new block, and all subsequent transactions are pending transactions waiting to be verified.

Step 2: Create Merkle tree

After each transaction is hashed, these hash values are combined into a "Merkle tree" (also called a "hash tree"). Transaction hashes are combined into pairs and then hashed to generate a Merkle tree.

After the new hash output is combined into pairs, it is hashed again and the entire process is repeated until a single hash is created. hope. The last hash created is also called the "root hash (or Merkle root)" and basically represents all the hashes previously used to generate the root hash.

Step 3: Find Valid block header (block hash value)

The block header is used as an identifier for each independent block, representing each Each block has a unique hash value. When creating a new block, miners combine the hash of the previous block with the root hash of the candidate block to generate a new block hash. In addition, the miner must add a random number called a "nonce".

Therefore, when miners try to verify a candidate block, they need to combine the root hash, the hash of the previous block, and the nonce Integrate them together and process them through a hash function. The purpose of this iteration is to create a valid hash.

The root hash cannot be changed from the hash of the previous block, so miners must change the nonce multiple times until they find a valid Hash. The output (block hash) must be less than a certain target value determined by the protocol to be considered valid. In Bitcoin mining, the block hash must start with multiple zeros, which is called the “mining difficulty.”

Step 4: Release the mined block

As we can see, the miner must repeatedly hash the block header using different nonce values until a valid block hash is found. The miner who finds the hash can publish the block to the network. All other nodes will check whether the block and its hash are valid. If valid, the new block will be added to the copy of the blockchain.

The candidate block now becomes a confirmed block, and all miners will continue to mine the next block. Miners who fail to find a valid hash value in time will abandon their candidate blocks and enter the mining competition again.

What if two blocks are mined at the same time?

Sometimes two miners will publish a valid block at the same time, and the network will end up with two competing blocks. Miners will start mining the next block based on the block they received first, causing the network to be temporarily divided into two different versions of the blockchain.

The competition between blocks will continue until a new block is mined based on any competing block. The first block to mine a new block will be deemed the winner. The discarded block is called an "orphan block" or a "stale block", and all miners who select this block will move to the chain where the winning block is located to continue mining.

What is mining difficulty?

The mining difficulty is regularly adjusted by the protocol to ensure that the creation rate of new blocks remains unchanged, thereby stabilizing the issuance of new coins as planned. Difficulty scales proportionally to the computing power (hash rate) put into the network.

Therefore, every time a new miner joins the network, competition will intensify, the difficulty of hashing operations will increase accordingly, and the average block time will increase. Cannot be shortened. On the contrary, if most miners leave the network and the hashing difficulty decreases, it will be easier to mine new blocks. After the difficulty is adjusted, the block generation time will not be affected by the overall hash power of the network and will always remain unchanged.

Types of cryptocurrency mining

There are many ways to mine cryptocurrency Diverse. New hardware and consensus algorithms are constantly emerging, and equipment and processes are being optimized. Miners often use specialized computing devices to solve complex cryptographic equations. Let’s take some of the most common mining methods as examples.

Central Processing Unit (CPU) Mining

Central processing unit (CPU) mining refers to using a computer’s CPU to perform the hash functions required by the proof-of-work model. In the early days of Bitcoin, mining costs and barriers to entry were low, and ordinary CPUs were sufficient to handle its difficulty, so anyone could try mining Bitcoin and other cryptocurrencies.

However, as more and more people mine Bitcoin, the network hash rate is also increasing, and mining profits have become It's getting harder and harder. In addition, professional mining hardware with stronger processing capabilities is gradually becoming available, and CPU mining has almost become a thing of the past. Now that all miners use specialized hardware, CPU mining is no longer feasible.

GPU mining

Graphics processing units (GPUs) are designed to handle a variety of applications simultaneously, often used in video games or graphics rendering, but can also be used for mining.

Compared with popular application-specific integrated circuit (ASIC) mining hardware, GPUs are relatively cheap and flexible. Although users can still mine some altcoins with GPUs, mining efficiency is determined by the mining difficulty and algorithm.

ASIC mining

Application Specific Integrated Circuits (ASICs) are designed for a single specific goal. In the cryptocurrency world, this refers to specialized hardware developed for mining. As we all know, ASIC mining is efficient but expensive. ASIC mining machines use cutting-edge mining technology, and the equipment cost is much higher than that of CPU or GPU.

In addition, ASIC technology is developing rapidly and old models are no longer profitable, so mining machines need to be replaced regularly. Even excluding electricity costs, ASIC mining is still one of the most expensive mining methods.

Mining Pool

The block reward is awarded to the first miner to succeed, so the probability of finding the correct hash is extremely low. If a miner's mining ability is weak, it will be difficult to discover the next block opportunity on his own. Mining pools solve this problem.

Mining pools are composed of groups of miners who pool their resources (hash power) to increase the block rewards they win. probability. After the mining pool successfully finds the block, the miners will share the rewards according to their contribution to the mining pool.

Individual miners participating in mining pools enjoy hardware and electricity cost advantages, but once mining pool mining becomes dominant, people will be worried There is a possibility of 51% attack on the network.

What is Bitcoin mining and how does it work?

Bitcoin is the hottest and most complete example of a cryptocurrency that can be mined. Bitcoin mining is based on workload consensus. algorithm.

Proof-of-work is the earliest blockchain consensus mechanism created by Satoshi Nakamoto and was published in the Bitcoin white paper in 2018 Introduction to the outside world. Simply put, Proof of Work determines how a blockchain network reaches consensus among all distributed participants without a third-party intermediary. This mechanism requires a lot of computing power to reach consensus to prevent malicious behavior.

As we can see, in a proof-of-work network, transactions are verified by miners. They compete to solve complex cryptographic puzzles with specialized mining hardware. If the miner successfully finds an effective solution first, he can publish the transaction block to the blockchain and earn block rewards.

The number of cryptocurrency blocks rewarded in different blockchains varies. For example, as of March 2023, miners can earn 6.25 Bitcoin block rewards in the Bitcoin blockchain. According to the Bitcoin halving mechanism, every 210,000 blocks are generated (approximately every four years), the number of Bitcoins rewarded by the block will be halved.

Will cryptocurrency mining still be profitable in 2023?

Cryptocurrency mining still has the potential to be profitable, but it requires careful thought, risk management, and careful research. Mining also involves investment and risks, such as hardware costs, cryptocurrency price volatility, and cryptocurrency protocol changes. To reduce the above risks, miners typically implement risk management measures and evaluate potential costs and benefits before mining begins.

The profitability of cryptocurrency depends on several factors. One of these is the price movement of cryptocurrencies. When cryptocurrency prices rise, the fiat value of mining rewards rises with it. On the contrary, falling prices will cause profitability to fall.

The efficiency of mining hardware is also a key factor in determining the profitability of mining. Mining hardware can be expensive, so miners must weigh the cost of the hardware against the rewards expected to be generated. Another factor to consider is the cost of electricity. If the cost of electricity is too high and exceeds the revenue, mining will be unprofitable.

In addition, mining hardware may become obsolete quickly, so it needs to be upgraded more frequently. New models perform better than older models, making it difficult for miners to remain competitive if they cannot afford to upgrade their mining rigs.

Finally, the protocol may also change. For example, the Bitcoin halving will cut the mining block reward in half, thus affecting the profitability of mining. In addition, Ethereum will completely switch from proof-of-work to proof-of-stake (PoS) consensus mechanism in September 2022, making mining dispensable.

Conclusion

Cryptocurrency mining is a key component of Bitcoin and other proof-of-work blockchains, helping to maintain network security and ensure the stable issuance of new coins. Additionally, mining can generate passive income for miners. For detailed step-by-step instructions on the above, read our article Cryptocurrency Mining Guide.

Mining has both pros and cons. The most significant benefit is the potential income from block rewards. However, this will be affected by multiple factors such as electricity costs and market prices. Therefore, before getting involved in cryptocurrency mining, be sure to do your own research (DYOR) and fully assess the potential risks.

Further reading

• What is permission type Blockchain vs permissionless blockchain?

• What is cryptocurrency staking?

• What is a non-fungible token (NFT)?

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