A Deep Understanding of Crypto Mining: The Core Relationship Between Miners and Blockchain

Key Points Overview

• The dual meaning of mining: it is both a transaction confirmation mechanism and the only way to generate new coins.
• Mission of Miners: To maintain network security and decentralization through high-intensity computational resource investment.
• Workflow: Collect pending transactions → Pack into blocks → Solve cryptographic puzzles → Receive rewards
• Profit Variables: Hardware performance, electricity costs, price fluctuations, and protocol changes all directly affect profitability.

What is Mining? Why are Miners So Important?

Imagine a globally distributed ledger where every cryptocurrency transaction is permanently recorded. The accuracy and security of this ledger depend on a group of miners.

Miners use specialized computing equipment to complete a daunting task: to find combinations of numbers that meet specific conditions through repeated attempts, thereby validating and organizing the transactions waiting to be processed. The first miner to crack the puzzle will receive a reward in the form of cryptocurrency.

The PoW blockchain represented by Bitcoin (BTC) relies entirely on the mining mechanism for its security. When miners compete to validate user transactions, these transactions are added to the public blockchain ledger. Mining is the cornerstone of the decentralized operation of the Bitcoin network—it is precisely because there is no central management that a distributed group of miners can reach consensus through proof of work.

At the same time, mining also takes on the responsibility of generating new coins. Although it sounds like “printing money,” the generation of cryptocurrency is constrained by strict protocol rules—these rules are encoded into the underlying code and enforced by the entire distributed network. Miners contribute value to the system by investing computational power to solve cryptographic challenges, rather than arbitrarily creating new coins out of thin air. Successful miners add their validated blocks to the chain and receive rewards for those blocks.

How Do Miners Work? Complete Process Analysis

Simplified Process

Step 1: Transactions are grouped When users send or receive cryptocurrencies, these pending transactions are merged into a “block” waiting for network validation.

Step Two: Miners Solve Problems Miners' computers continuously attempt a special value called nonce, with the goal of making this value combined with the block data fall within a preset range. It's like a lottery ticket that comes with a password puzzle.

Step 3: Blockchain Entry The first miner to find a valid hash has the right to write the block into the blockchain. Other miners then validate the validity of this block.

Step Four: Miner Profit Winning miners are rewarded with newly generated cryptocurrency along with transaction fees.

Detailed Technical Process

Trading Begins: Entering the Memory Pool

All newly generated blockchain transactions are first sent to the mempool. The validating nodes in the network review the validity of these transactions. The miners' task is to collect these unconfirmed transactions and organize them into blocks.

It is worth noting that some miners run validation nodes at the same time, but from a technical perspective, the functions of mining nodes and validation nodes are separate. One can think of a block as a page of a ledger, which records several transactions and other data. The responsibility of mining nodes is to extract unconfirmed transactions from the memory pool and combine them into a candidate block. Subsequently, miners attempt to convert this candidate block into a validated block, which requires solving an extremely complex mathematical problem that consumes a large amount of computational resources. For each block successfully created, miners receive a block reward—composed of new coins and transaction fees.

Step 1: Hash Calculation and Transaction Encoding

The first stage of block mining is to process the transactions in the memory pool one by one through a hash function. Each hashing operation produces a fixed-length output, known as a hash value—usually a string composed of numbers and letters, serving as the unique identity of that transaction. This hash value contains all the information of the original transaction.

In addition to the individual hashes and validations for each transaction, miners also create a special transaction—sending the block reward to themselves. This transaction is called a coinbase transaction, and it is the only source that can generate new coins. Typically, the coinbase transaction is recorded as the first transaction in the new block, followed by a queue of other transactions waiting for confirmation.

Step 2: Build the Merkle tree structure

After each transaction is hashed, these hash values are organized into a tree structure called a Merkle Tree (or hash tree). The construction method of the Merkle Tree is as follows: the hash values are paired up and then hashed again. Subsequently, the newly generated hash values are paired up again and hashed once more. This process is repeated until only one hash value remains. This final hash value is referred to as the root hash (Merkle root), which essentially contains information about all the previous hash values generated during the process.

Step 3: Find a valid block header

The block header serves as an identifier for each independent block – each block has a unique hash value. When creating a new block, miners combine the hash of the previous block with the root hash of the current candidate block to obtain a new block hash. Additionally, they add a random number nonce. Therefore, when verifying the candidate block, miners must combine the root hash, the previous block hash, and the nonce value, then hash them. This process is repeated until a valid hash that meets the criteria is found.

Since the root hash and the previous block hash are immutable, the only means for miners is to continuously adjust the nonce value until they find a valid hash that meets the conditions. In the Bitcoin network, this target hash must start with a specific number of zeros—this condition is known as mining difficulty.

Step 4: Broadcast the new block to the network

As mentioned earlier, miners need to hash the block header multiple times, each time trying a different nonce value. Once a miner discovers a valid block hash, they immediately broadcast that block to the entire network. At this point, all other nodes validate the legitimacy of this new block. If the validation is successful, the nodes will add it to their respective copies of the blockchain. At this moment, the candidate block is upgraded to a validated block, and all miners turn to mining the next block. Those miners who fail to find a valid hash in time abandon the current candidate block and start mining a new block.

The Emergence of Orphan Blocks: When Two Miners Succeed Simultaneously

Occasionally, two different miners will successfully broadcast valid blocks at almost the same time. At this point, the network temporarily splits, resulting in two competing versions of the blockchain. Users tend to continue mining based on the block they first receive. This state of competition persists until the next new block is mined. Once a new block is produced and gains network acknowledgment, one of the previous blocks will be declared the winner. The blocks from the losing miners are referred to as orphan blocks or detached blocks. Miners who chose the losing block will switch to the winning block and continue mining based on it.

The Secret of Difficulty Adjustment: Keeping the Time Rhythm Stable

The protocol continuously adjusts the mining difficulty to maintain a stable rate of new block production, ensuring the predictability of the currency issuance. The difficulty value fluctuates with changes in the network's hash rate (total computational power). When new miners join the network and competition intensifies, the hash difficulty increases to prevent the average block time from shortening. Conversely, when a large number of miners go offline, the difficulty decreases, making the production of new blocks relatively easier. This dynamic adjustment ensures that, regardless of changes in the total network computing power, the block time remains stable.

Various Routes of Cryptocurrency Mining

With the evolution of technology, the tools and methods for mining are constantly being updated. The emergence of new hardware and new consensus algorithms provides miners with diverse options. Typically, miners use specialized computing equipment to solve complex cryptographic equations. Below are the most common mining methods.

CPU mining: has become history

Mining using Central Processing Unit (CPU) involves utilizing the processor of a regular computer to perform hash calculations in the Proof of Work (PoW) model. In the early days of Bitcoin, the cost of mining was low and the entry barrier was not high—an ordinary computer's CPU was sufficient to handle the difficulty. At that time, anyone could attempt to start a mining business.

However, with the surge in the number of miners and the continuous rise in network hash rate, the difficulty of profitable mining has also increased significantly. The advent of specialized high-performance equipment has rendered CPU mining almost uncompetitive. Today, CPU mining is no longer viable, as the vast majority of miners have switched to specialized equipment.

GPU Mining: Retain Flexibility

Graphics Processing Units (GPUs) are designed to handle a large number of complex operations simultaneously. While they are commonly used in video games or image rendering, they can also be utilized for mining. In comparison, GPUs are more affordable and do not have the single-functionality limitations of specialized mining hardware—one GPU can handle multiple computational tasks.

Mining for some altcoins can still be achieved using GPUs, but the efficiency will depend on the specific hashing algorithm and mining difficulty.

ASIC mining: efficient but expensive

Application-Specific Integrated Circuit (ASIC) is a chip designed for a single specific function. In the cryptocurrency field, ASIC specifically refers to specialized hardware developed for mining. ASIC mining is the most efficient, at the cost of a considerable initial investment.

Due to ASIC devices representing the technological frontier of mining hardware, the cost of these machines is significantly higher than that of CPUs or GPUs. Moreover, with the evolution of ASIC technology, older models quickly become obsolete. Therefore, while ASIC mining is the most cost-effective, it requires miners to have sustained financial capability to upgrade equipment to remain competitive. Only large-scale mining operations can ensure the long-term profitability of ASIC mining.

Mining Pool: The Survival Path for Small Miners

As the rewards for each block only go to the first successful miner, the probability of independent miners discovering the next block is extremely low. Miners with limited computational power have almost no chance of independently finding a new block. To address this dilemma, mining pools have emerged.

A mining pool is a consortium of miners who combine their resources—namely hashing power—to increase the probability of discovering blocks and share the rewards. When a mining pool successfully finds a block, the rewards are distributed among the pool's miners according to their respective contributions. For independent miners, the appeal of a mining pool lies in the ability to share hardware and electricity costs. However, the dominance of large mining pools also brings risks—an increased level of network centralization, which raises the potential for a 51% attack.

Cloud Mining: Convenient but Dangerous

Cloud mining users do not need to purchase hardware themselves, but instead rent computing power from a cloud service provider. This is a more convenient way to start mining, but it comes with risks of fraud and profit reduction. If you choose to try cloud mining, be sure to select a reputable service provider.

A Special Perspective on Bitcoin Mining

Bitcoin, as the most famous cryptocurrency tested by time, is mined based on the Proof of Work (PoW) consensus algorithm. PoW is a blockchain consensus mechanism creatively proposed by Satoshi Nakamoto in the 2008 white paper. This mechanism specifies how a distributed blockchain network can reach an agreement among all participants without the intervention of a third-party intermediary.

Attackers find it difficult to compromise such a network, as it requires a massive investment of power and computational resources. As mentioned earlier, in a PoW network, pending transactions are organized and verified in order by competing miners, who use specialized equipment to race to solve puzzles. The first miner to find the solution gains the right to write their block into the blockchain. Once the validating node approves the block, the miner receives a block reward.

The amount of cryptocurrency rewards varies among different blockchains. Taking Bitcoin as an example, as of December 2024, miners can earn 3.125 BTC for successfully verifying one block. Bitcoin implements a halving mechanism, where the BTC block reward is halved every 210,000 blocks mined (approximately every four years).

The Reality of Mining Profits: Knowing Yourself and Your Opponent to Gain Profits

Profiting from mining is entirely feasible, provided that you have a deep understanding of the process, manage risks properly, and conduct thorough research. Wise capital investment, equipment cost assessment, response to price fluctuations, and risks from protocol changes must all be taken into account. Experienced miners adopt risk management strategies and carefully calculate potential costs and benefits.

Multiple factors jointly determine the profitability of mining. One of them is the volatility of cryptocurrency prices—when prices rise, the fiat value of mining rewards increases accordingly; conversely, a drop in prices directly compresses profits.

The performance efficiency of mining hardware is a decisive factor in profitability. The investment in mining equipment is substantial, and miners must find a balance between acquisition costs and expected returns. Electricity costs are another key cost factor—excessively high power expenses can eat into profits, making mining unprofitable.

Additionally, mining hardware needs to be updated regularly. The rapid aging of equipment means that new models perform better, and miners lacking the financial resources to upgrade will lose competitiveness. Last but not least, significant changes may occur at the protocol level. Bitcoin's halving event will directly cut block rewards in half, affecting mining revenues. In some cases, mining may even be replaced by other validation methods—as was the case in September 2022, when Ethereum migrated from the PoW consensus mechanism to Proof of Stake (PoS), completely removing the mining component from the network.

Conclusion

Cryptocurrency mining is the lifeline of Bitcoin and other PoW-based blockchains, ensuring network security while promoting a stable supply of new coins. Mining has its pros and cons. The most obvious benefit is the continuous stream of block reward income. However, mining profits are constrained by various factors—electricity costs, market conditions, and other factors can reshape your profit plans. If you are interested in cryptocurrency mining, you should do your homework first and thoroughly assess the potential risks and opportunities.