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What is Cryptocurrency Mining? Everything you need to know about Mining!

In this article we are going to explain step by step what cryptocurrency mining is. For many people this is still a very vague concept. And that’s understandable, because the process isn’t exactly easy. It is therefore not easy to explain it simply. We’re going to try that today!

How does a blockchain work?

First, let’s explain how a blockchain works. That is the basis for the explanation of how crypto mining works.

A blockchain is a chain of blocks. Participants of the blockchain are called nodes. These are machines that contain a copy of the blockchain and actively participate in growing the chain of blocks. Because every node has a copy of the blockchain, it is a decentralized network.

The blockchain is not stored in one central place. The advantage is that this is much more secure than a central system. When someone loses the copy, or the copy is hacked, nothing is lost. There are still plenty of nodes that also have a copy of the blockchain. This also makes committing fraud impossible.

What is crypto mining?

The moment you perform a transaction on the Bitcoin blockchain, this transaction ends up in a block. The so-called miners then get to work to validate all transactions.

When validating the transactions, it is checked whether a transaction is valid. For example, it is checked whether you have enough Bitcoin in your account to carry out the transaction. This check is done through a mathematical puzzle. The miner who is the first to solve this mathematical puzzle will be the winner and will receive a reward. In the case of Bitcoin, the winner will get Bitcoin.

Crypto mining is thus validating transactions and adding blocks to the blockchain. Miners do this because they get a reward for doing so. So it provides money to mine.

There are different ways in which crypto can be mined. This is determined by the consensus algorithm used by the blockchain.

The consensus algorithm

The consensus algorithm actually contains all the rules regarding the use of the blockchain. Blockchain participants will therefore have to adhere to this algorithm in order to successfully participate in the blockchain. Is a participant not doing this? Then there may be a penalty. The consensus algorithm also determines what this punishment looks like.

There are different types of consensus algorithms. The best known algorithm is used by Bitcoin and is called Proof-of-Work. However, there are also a lot of other algorithms that are used by other blockchains.

Proof of Work

The Proof-of-Work ( PoW ) algorithm is used by Bitcoin, among others. With this algorithm, miners are continuously adding blocks to the blockchain. Ultimately, only one miner can find the solution. The winner will receive Bitcoin as a reward.

Mining pools

One of the frequently mentioned drawbacks of this algorithm is that it is not scalable and requires a lot of energy. Many miners will lose and thus in fact waste energy. There are also groups of miners who work together in so-called mining pools. After all, this network is all about how quickly you can validate a block.

The more power your computer can provide, the more likely you are to find the solution and end up as the winner. By working together, you have a lot more computer power. However, this makes it impossible for newcomers to participate in a decent way.

Proof of Stake

The first cryptocurrency to use Proof-of-Stake (PoS) was Peercoin. With Proof of Stake , nodes must first put in money (stake) in order to participate. With this algorithm there is therefore a much higher threshold to participate. This ensures that completely other miners will also participate in this blockchain. Here miners are called strikers.

A striker who does not follow the rules will lose all his stake. This is an extra reason for strikers to do their best and to satisfy the network.

Why crypto mining is necessary

You may be wondering why crypto mining is necessary. Are there other ways to solve this? After all, with a central system you don’t need that many people to keep it running.

However, mining cryptocurrency is exactly what makes a blockchain so strong. Mining is done by different miners. This makes the network decentralized. A decentralized network is much stronger than a central system.

Suppose Facebook ‘s server is hacked. That would mean that no one in the world would be able to access Facebook anymore. If Facebook were to run on a decentralized system, there would still be enough copies of the blockchain, so that Facebook would always remain accessible. It is impossible for hackers to hack all participants of the blockchain at the same time. This is because nodes work in groups, and these groups are then linked back together.

However, no one knows exactly what those groups look like. It is also impossible to find out. Blockchain is therefore extremely secure.

How can you mine crypto yourself?

It is also possible to mine crypto yourself. This way you can earn money yourself by using your computer power. Every blockchain has different rules when it comes to crypto mining. That is why it is best to check the blockchain website to find out how you can mine crypto on their blockchain.

Keep in mind that with some blockchain you have to put in a lot of money to participate. There are also blockchains where you have to be chosen to work as a miner (for example at Proof-of-Delegate (PoD). Elections are held here and the nodes with the best ‘election program’ can work as so-called delegates. .


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