Basics of Mining
In a decentralized network like the blockchain powering bitcoin, the original designer Satoshi Nakamoto developed a process of verification that would remove the need for a third party to oversee the transactions and would also solve the problem of how the currency is put into circulation.
“Mining” as it is known, is simply the process of verifying transactions that uncover new bitcoins hidden in the protocol’s design. It is similar to gold mining in that the bitcoins, like gold, have to be dug out of the blocks of code through a process of solving complex mathematical equations that help secure and verify the blockchain’s accuracy across the entire network.
Without miners, the whole system would break down and the value of the bitcoin network would essentially evaporate. Since there would be no one solving the cryptographic problems, no transactions would be added to the blockchain and everything would grind to a halt.
For curating the network and ensuring that transactions are confirmed and verified to be authentic, the miners are paid in a reward of newly issued bitcoins, an amount relative to the difficulty of the block.
Running the Software
The Bitcoin Network is like any other network, a series of powerful computers all running the same software which powers the blockchain. Each of these computers is called a node and they act as relay points that interlink the entire network in a decentralized way so there is no single point of control.
Some of these nodes are specifically run for mining purposes and they run special programs that race to solve complex problems, essentially is trying to guess a specific number in a range and apply that number to the data in the block to see if it solves the cryptographic equation. If it is successful, the block is verified and added to the blockchain while transactions in the block are confirmed and updated to every other computer in the network.
Once the miner successfully verifies a block, they are rewarded with newly created bitcoin which find their way back into circulation the same way fiat currency does, only this time there was no need for a central bank or mint to issue currency, it is instead handled by mathematics itself.
Proof of Work/Proof of Stake
There are two types of mining systems used by cryptocurrency networks to allocate blocks to miners in order to efficiently verify transactions and keep the system running smoothly.
Proof of Work (PoW) is a protocol that was designed well before the invention of Bitcoin, but Satoshi Nakamoto realized that it would be a perfect system to allocate reward coins to miners in the Bitcoin Network. Miners on the network compete to be the first to solve the cryptographic equations which confirm transactions and add them to the blockchain. When a miner solves the problem, they are awarded bitcoins and transaction fees as payment for solving the problem.
Proof of Stake (PoS) is different in that there is no longer a race to complete the equations because blocks are allocated in a deterministic way to miners, depending on the wealth and reputation for completing the equations (i.e. their processing capabilities). The more important a transaction is, the more likely it will be allocated to a miner with a record for solving the problems quickly due to the hardware they have available. PoS is the system now being used by the Ethereum Network to help mitigate mining costs and lower the energy consumption required to verify a single transaction, something that has created a great deal of downward pressure on the price of bitcoin and their continued use of PoW.
Hardware and Energy Consumption
There was a time when anyone with a computer and a few GPUs (Graphics Processing Units) could build a homemade mining rig and run it off the normal power from their home. Nowadays, with the price of bitcoin soaring, the days of do it yourself mining have sadly passed. However, other cryptocurrencies that don’t have mining processes that require extensive processing power have started attracting more small-time miners.
What makes the mining process so costly is the difficulty of the equations and the amount of information a mining operation wants to process and collect rewards from. Since the process of mining is at its heart is a competitive one, the nicer and more advanced your hardware is the more likely your pool will be selected more blocks more often.
Since processors have to run continuously and draw a substantial amount of power to operate, energy costs have become something that is starting to worry many in the community, forcing miners to find more efficient ways of powering their rigs. Renewable energy is likely to play a large role in the future of cryptocurrency since the energy requirements are far too taxing for oil and natural gas powered generators.