crypto mining: from theory to practice

Why is crypto mining a central position in building decentralized networks?

Basic Principles:

Imagine you have a global financial system that does not require a central bank to oversee it. This is where crypto mining comes into play, which maintains the integrity of the distributed financial ledger. Miners use powerful computers to organize and confirm pending transactions on the blockchain network.

• Miners gather transactions into units called blocks and organize them in a way that ensures data integrity.
• This work requires massive computing resources, which is exactly what keeps the entire network secure.
• When the block is approved by the node network, the miner receives a reward in new coins and transaction fees.
• Profitability depends on the efficiency of the equipment, electricity costs, market fluctuations, and changes in network protocols.

Understanding the Mechanism of Crypto Mining

Crypto mining is not just a random process. It is a complex mechanism that ensures the security of the entire system. In Bitcoin and other similar cryptocurrencies, transactions are validated and added to the public ledger of the blockchain through the mining process.

Miners primarily work on solving complex cryptographic puzzles. The first one to successfully solve it gains the right to add a new block of transactions to the chain and broadcast it to the network. This system ensures Decentralization - there is no single authority controlling the network.

It is essential to understand that the process of creating new currencies is governed by strict programming rules. It is not like printing regular money - every new coin generated is according to a predefined protocol implemented by every part of the network.

The Practical Stages of Crypto Mining

Step 1: Collecting and Hashing Transactions

When you send or receive cryptocurrencies, your transaction enters a pending state (mempool). Miners select these pending transactions and pass them through a special hashing function, resulting in a unique key for each transaction.

In addition to regular transactions, the miner adds a special transaction for himself called the coinbase transaction - this is how new coins are generated. This is usually the first transaction in any new block.

Step Two: Build the Merkle Tree Structure

After hashing all transactions, they are organized in what is known as a Merkle tree (hash tree). This is done by taking the hash values in pairs, hashing them together, and repeating this process until we reach a single final hash value called the Merkle root. This root represents all the data in the block in a concise manner.

Step 3: Find the correct hash value

Here begins the real “race”. The miner takes the Merkle root, the previous block hash value, and a random number (nonce) and passes them through the hash function. The goal is to produce a hash value lower than a specified target number called “difficulty”.

Miners try different random numbers repeatedly until they find one that produces the desired value. In Bitcoin mining, the hash value must start with a certain number of zeros. This requires immense computational power.

Step Four: Broadcasting and Confirmation

When the miner finds the correct value, it broadcasts the block to the network. All other verifying nodes check its validity, and if it is correct, they add it to their copy of the chain. The block is now confirmed and everyone moves on to mine the next block.

All miners who did not succeed are eliminated from their attempts and the race starts again.

What happens when two blocks are mined at the same time?

Sometimes a real race occurs: two miners find correct solutions at almost the same time and broadcast their blocks. The network temporarily splits into two versions of the chain, with each miner choosing the block that they received first.

The competition continues until the next block is mined. The block that precedes the new block becomes the “winner”, and the other becomes an orphaned block (orphaned block). All miners who chose the losing path move to the winning chain.

How does mining difficulty change?

The protocol adjusts the mining difficulty regularly to ensure a steady rate of new block creation. If new miners join and competition increases, the difficulty rises. If many miners leave, it decreases.

This balance ensures that the average block creation time remains constant regardless of the total computing power in the network. It's a smart way to organize the process.

Different Forms of crypto mining

crypto mining with CPU (

In the early days of Bitcoin, anyone could use a regular computer processor for crypto mining. The costs were low and the barriers few. But as the number of miners increased and the difficulty of mining rose, this became impractical.

Today, mining with a regular processor does not yield significant profits. Competing miners have invested in much more powerful specialized devices.

) crypto mining with Graphics Processing Units ###GPU(

Graphics processing units are designed to handle multiple calculations at the same time. While they are commonly used in gaming, they can also be used in crypto mining.

The advantage of these units is that they are less expensive than specialized devices and more flexible. Their efficiency depends on the type of cryptocurrency and its mining difficulty.

) crypto mining with ASIC circuits

ASIC circuits are designed for one purpose only - mining. These are highly specialized devices with very high efficiency, but they are also very expensive.

Due to the rapid development in this field, old devices quickly become unprofitable. This means that mining with ASIC is expensive but the most efficient and profitable when mining on a large scale.

Mining pools

The probability of a single miner mining the next block is very low, especially if it has a small percentage of the total mining power.

Here come the mining pools. A group of miners combine their power together to increase their chances of winning. When the pool succeeds in finding a block, the reward is distributed among the members according to each one's contribution.

This reduces costs and risks for individual miners, but it raises concerns about decentralization and the possibility of attacks.

Cloud Mining

Instead of purchasing expensive equipment, miners can rent computing power from a service provider. This is simpler to start, but it carries risks such as fraud or reduced profitability.

If you choose this path, make sure to select a reputable service provider.

Bitcoin Mining: Practical Model

Bitcoin is the clearest example of mineable digital currencies. Mining relies on a consensus algorithm called “Proof of Work” ###Proof of Work - PoW(.

Proof of Work is the original mechanism introduced by Satoshi Nakamoto in 2008. It defines how the network reaches consensus among all distributed participants without a central intermediary. It does this by requiring massive investments in electricity and computing to make attacking the network uneconomical.

On the Bitcoin blockchain, successful miners currently receive 3.125 BTC as a reward ) as of December 2024(. Due to the “halving” mechanism, this amount decreases by half every 210,000 blocks, roughly every four years ).

Is crypto mining really profitable?

The answer is complicated. Yes, there is a possibility of making profits, but this requires thorough research and smart risk management.

Factors Affecting Profitability:

Price volatility plays a significant role. When cryptocurrency prices rise, the value of rewards increases. When they fall, profits also decrease.

The efficiency of the equipment is very important. An old device may not be worth the electricity it consumes.

Electricity costs - if they are too high, they may exceed your profits and turn mining into a loss instead of a gain. In areas with cheap electricity, mining is more feasible.

Technology is evolving rapidly. New devices are quickly surpassing the old ones. If you don't have a budget for continuous upgrades, you may find it difficult to stay competitive.

Protocol-level changes are very important. Bitcoin halving cuts rewards in half. In other cases, networks may completely switch from crypto mining methods to other methods.

Summary

Crypto mining is not a simple process, but it is essential for networks that use proof of work. It provides security, decentralization, and monetary stability.

Miners play a vital role in the survival of these systems, but profitability depends on many factors beyond your control.

Before you invest your time and money, understand all the factors we mentioned. Study your local market, calculate your costs accurately, and assess the risks. Only then decide whether crypto mining is right for you.