Understanding the crypto mining process: from the basics to practical application

Introduction: Why is everyone interested in Mining?

In the world of blockchain, mining is not just a purely technical process - it is the backbone that maintains the integrity and stability of the network. Miners act as data guardians, verifying the validity of transactions and ensuring that digital currencies are not duplicated. However, this important role comes with a golden opportunity: earning new coins as rewards.

How does mining actually work?

When you transfer cryptocurrencies from one wallet to another, the process does not occur immediately. Instead, your transaction goes to a waiting area called the mempool, where it sits with thousands of other transactions waiting for confirmation.

Miners take a set of these pending transactions and combine them into a single “block.” However, before adding this block to the chain, they must solve a very complex mathematical puzzle. The puzzle requires millions of attempts using immense computational power.

The first miner to find the correct solution receives the privilege of broadcasting the block on the network. After that, the other miners verify the validity of this block and add it to their copy of the blockchain.

Technical Steps for Mining in Detail

Phase One: Converting Data into Numbers

Every transaction goes through a cryptographic hash function, which converts it into a fixed-length string of letters and numbers. This value (hash) uniquely identifies the transaction - any change, even a small one, in the original data results in a completely different number.

The miner also adds a special transaction for himself at the beginning of the block (coinbase transaction), where he converts the block reward to himself. This is how new coins are created.

Phase Two: Building a Merkle Tree

Instead of keeping a long list of hash data, miners organize it hierarchically into a “tree”. Each pair of hash values is combined and hashed again, repeating the process until they obtain a single number at the top (root hash) that represents all transactions.

Stage Three: Searching for the Solution ###

Here the real work begins. The miner takes:

• Merkle root of the current block
• previous block hash
• A random number called nonce

It combines these elements together and tests the result. If the result is less than the target number (, which is determined by the protocol ), the solution is found! Otherwise, it changes the nonce and tries again… and so on millions of times.

Stage Four: Publishing on the Network

When the miner finds the correct solution, they immediately broadcast the block. The other miners quickly verify its validity, and if they approve it, they add it to the chain and everyone starts mining the next block.

What happens during a block conflict?

Sometimes, two different miners find the solution at almost the same moment, resulting in two competing valid blocks being broadcast. The network temporarily splits - some nodes follow one chain, while others follow the second chain.

The competition does not end until the next block is mined. The block that follows in the longest chain becomes the winning one, while the other is excluded (orphan block), and all the miners who worked on it return to the main chain.

Difficulty Level: How does the network maintain balance?

The protocol does not keep the mining difficulty constant. Instead, it continuously adjusts it based on how much computing power is available on the network (hash rate).

When new miners join and the hash rate increases, the difficulty increases - otherwise, blocks would be solved too quickly. And when miners leave, the difficulty decreases. In this way, the average block production time remains constant regardless of the size of the network.

Types of Devices Used

Mining by computer processor (CPU)

In the early days of Bitcoin, anyone could mine using a regular processor. But with the increasing difficulty and the number of miners, this has become completely unprofitable today.

Graphics Cards ( GPU )

Graphics processing units, commonly used for gaming, can also mine. They are less specialized and cheaper than advanced equipment, but they are still impractical for mining Bitcoin.

specialized ASIC mining

These devices are exclusively made for Mining. They have very high efficiency, but they are very expensive. Technology is evolving rapidly, making older devices quickly unprofitable.

Mining pools

An individual miner, especially with limited resources, has a very slim chance of finding a block on their own. Therefore, several miners pool their resources together in a single pool. When the pool finds a block, everyone shares the reward based on the effort contributed by each individual.

cloud mining

Instead of buying expensive equipment, the miner rents computing power from a service provider. This is easier to enter, but it comes with risks of fraud and lower profits.

Bitcoin Mining: The Most Famous Case

Bitcoin uses the “Proof of Work” algorithm (Proof of Work), which is the consensus mechanism invented by Satoshi Nakamoto in 2008.

In PoW, all participants need to invest computational power and real electricity. This makes it very difficult for any malicious actor to attack the network - because the attack would cost them millions of dollars.

Regarding the rewards: As of now, a Bitcoin miner receives 3.125 BTC for each block. However, there is a mechanism called “halving” (halving) - every 210,000 blocks (approximately every 4 years), the reward is halved.

Is mining profitable?

The answer: It depends on many factors.

Cryptocurrency Prices: When the price of Bitcoin rises ( as it is currently, trading at around $88,340 with an increase of 0.31% in 24 hours ), the value of the rewards you receive increases. Conversely, a drop in price means lower profits.

Device Efficiency: A new ASIC device will provide you with better returns than an old one, but you will pay more upfront.

Electricity Costs: Here lies the biggest problem. If your electricity bills are very high, they may eat up all your profits.

Protocol Developments: The halving reduces rewards by 50%, impacting profitability. Some cryptocurrencies, such as Ethereum, have completely abandoned Mining and transitioned to “Proof of Stake” (Proof of Stake) in September 2022.

Operating Volume: Large-scale mining reduces unit costs and improves profits.

Summary

Mining is an essential part of the world of Bitcoin and blockchain. Without miners, there is no secure network and no new currencies. But before you invest in it, understand all aspects - how much the hardware and electricity will cost you, what the expected profit is, and how your investments might be affected by market fluctuations and technological developments.

Do your own research and assess risks carefully before proceeding.