There are numerous cryptocurrencies out there, and they slightly differ in their mining protocols. So, we’ll stick to bitcoin, and in this segment, we will further discuss bitcoin mining specifically.
Crypto mining brings new coins into circulation and authenticates ongoing transactions. It uses cryptography to check counterfeiting and double-spend.
To understand mining, first, we’ll have to know how blockchain works.
Suppose you’re using bitcoin to purchase dinnerware at Overstock.
What will you do? Simple, add your product to the cart and check out with bitcoin as the preferred payment method.
Behind the scenes, your transaction goes into the verification queue with other entries waiting to be verified and gets added into the next block. This latest block keeps taking entries until it is full. Each block is limited to 1 MB of data at present.
Formation of a block and verification of the transactions within carries a reward for the miner. After all, they use their resources (read electricity, equipment, etc.) to solve complex math problems to get your transaction onto the blockchain.
This ‘complex math problem’ refers to finding a 64-digit hexadecimal number, called a hash.
The incentive is usually paid in the cryptocurrency itself. But not every miner gets paid. Only the first one to come up with the correct hash receives the reward. Others get nothing but an electricity bill.
So, the process is risky and occasionally fruitful. And, it can be a time waster if you don’t have powerful computing at your disposal.