What is crypto mining and how does it work?

Cryptocurrency mining equipment.Mark Agnor/Shutterstock.com

With the cryptocurrency craze in full swing, you can’t help but hear about the people mining these digital currencies – and destabilizing the graphics processor market. This is what “crypto mining” really is.

What is crypto mining?

Basically, crypto mining is how new units of cryptocurrency – usually called coins – are created. As you can imagine, this type of mining does not involve callused hands gripping pickaxe handles. Instead, it’s computer processors that do all the hard work and solve complex math problems.

Of course, you might wonder why these digital currencies even need to be mined: after all, it’s fictitious money with no backing whatsoever except what people will pay for it. Real currency, the kind backed by governments, can be created by turning on a money printer, so it goes without saying that crypto could do the same.

The Blockchain

For many years, the inability to limit supply was the main hurdle for cryptocurrency: there were many ideas about creating digital coins, but there was no way to ensure that people wouldn’t just duplicate them at will. Without an authority such as a central bank – an institution that regulates the flow of money – it becomes very difficult to manage the supply of any currency.

This issue confused digital currency makers for decades until Satoshi Nakamoto (probably a pseudonym) invented something called the blockchain. The full theory of how this works is pretty complicated – we’ll dig into our article explaining the “blockchain” – but the easiest way to explain it is to imagine it as a chain.

In this metaphor, each link is a block and each block contains a certain amount of cryptocurrency. For example, one block contains 6.25 Bitcoin. To unlock a new block, you must solve a complicated math equation, which validates the block and adds it to the chain. Since the blocks are linearly chained together, you have to move from one to the other, you can’t pick one at random.

the ledger

Every time a new coin is unlocked, it is recorded in the cryptocurrency’s ledger, a huge file that anyone can access at any time to see which coins were mined when and by whom. The ledger also shows when a coin changed hands and who was involved in the transaction, thus beating the claim that Bitcoin is anonymous.

In summary, the ledger records the creation and movement of coins in the blockchain. Mining is validating new blocks and gaining access to the coins in them. Interestingly enough, since the blockchain must be finite, this also means that most cryptocurrencies have a hard limit on how many there can be: Bitcoin, for example, has a limit of 21 million.

How crypto mining works

To unlock a block in the chain, you need to validate it by solving a complicated equation, usually in the form of something called a hash. A hash is a random string of characters and numbers that, with the correct key, reveals the original message; it’s a basic part of cryptography and that’s where the “crypto” part of “cryptocurrency” comes from.

In a sense, crypto mining really just solves these incredibly complicated math puzzles. Do it fast enough, and the reward is a coin. If you’re slower than the competition, you won’t get one. This method is called ‘proof of work’.

However, hashes are incredibly complicated puzzles to solve by nature. The phone or laptop you’re probably reading this article on would probably take millions of years to fix one.

Homemade super computers

Of course, if you don’t have a supercomputer, you can always build one. Many people interested in making money with cryptocurrency, especially Bitcoin, have started this, often by connecting different devices together to create powerful networks that can combine and amplify the processing power of each individual device.

The most powerful single component you can use in this case is a graphics processing unit, or GPU, the part of your computer that gives you the nice glossy graphics, at least if you’re on a high-end computer. They are generally more efficient and powerful than their central processing unit (CPU) cousin, and if you put enough of them together, you get some serious computing power.

This brings into play a new kind of equation, one where several savvy individuals calculated that the price of GPUs times the cost of electricity was much lower than what a Bitcoin would yield. This created a kind of arms race where these outfits create bigger and better rigs to beat their competitors.

On top of the competition between these groups, there is also the problem that each successive block is more complicated to solve than the last, a failsafe built into the blockchain to prevent unlocking everything at once.

As a result, the GPU market was virtually wiped out, with these groups buying all the units they could get their hands on — in some cases stealing them — and forcing ordinary consumers to pay huge prices, even for severely outdated models. While this arms race will calm down by the end of 2021 thanks to a number of factors (including a crackdown on miners by China), the GPU market has yet to recover.

Mined vs Unmined Cryptocurrencies

Interestingly, however, not all cryptocurrencies are mined. Instead of using proof of work, some currencies, such as Cardano and Ripple, use something called “proof of stake”. They still work on blockchain for security reasons, but instead of mining new blocks, you “put” them instead, and claim them for yourself in advance.

The more you claim, the more likely you are to get blocks. It’s a complicated system, even more than mining, but it could very well be the future of cryptocurrency.

The future of mining

This brings us to an important final point: cryptocurrency needs a future beyond mining. Not only is it expensive to mine new coins thanks to the price of electricity and GPUs, it’s also bad for the environment, as this article from the Columbia Climate School explains.

What that future will be is hard to say exactly: maybe it’s staking, maybe it’s one of dozens of other solutions crypto enthusiasts are no doubt coming up with as you read this. Time will tell.

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