Blockchain 101: What is Cryptocurrency Mining?


Blockchain 101: What is Cryptocurrency Mining?
Remember “Blockchain technology represents a potential 3%-10% cost savings on every transaction that uses it as a medium of exchange”

If I had a Satoshi for every time someone asked me about mining, I would be a rich man. In this article, it’s safe to assume I am talking about Bitcoin’s blockchain when I mention specific numbers. Let’s get into it, mining is a process by which transactions are verified on a blockchain. The word “mining” is a poor way to describe it because it confuses people, making them think that people are literally digging underground for bitcoin. Don’t think about miners tunneling underground, instead, miners are specialized computer equipment that are very efficient at solving a mathematical problem. The machines consume huge amounts of power to run their computations. Every 10 minutes, a mining machine somewhere in the world solves the math problem correctly, verifying that all of the transactions over the past 10 minutes were the actual transactions that occurred. Once the problem is solved, the machine that solved it is rewarded with bitcoin or whatever other native currency is being mined. Today’s mining reward is 12.5 BTC per problem solved. In BTC’s core code, only 21 million BTC are ever allowed to be mined. This rule is implemented to try to mimic the scarcity property of gold and other commodity backed currencies.

Mining is like cracking a combination lock (I think they should use this analogy instead of mining altogether). Imagine you were trying to break into a 4-digit combination lock but you did not know what the passcode was. Instead of inputting a known code, you have to manually go through each possible combination. For a 4-digit combination lock there are 10,000 potential combinations that could be the correct one. As soon as you find that 1 in 10,000, it is instantly verifiable as the correct combination (by anyone with access to the same lock). The lock will open when you input the code. This is the same with mining. It takes a very long time to find the correct “combination” but once you have found it, anyone can instantly test whether it is correct or not.

Mining has become a massive industry. An estimated .32% (See link: of all of the world’s electric output is spent on mining cryptocurrencies. There are multinational companies that fill warehouses with mining machines in specific locations. Iceland and the Pacific Northwest have become two major cryptocurrency mining hubs. Both places offer temperate climates and cheap access to power. On top of this there are mining “pools” that work together to mine. When one machine in a large pool is the first to finish the mathematical problem, the payout is split among the pool.

TL;DR – Mining is the means by which most blockchains are secured. It costs a lot of money to operate a mining machine. These costs are usually outweighed by the value derived from the BTC that is rewarded when a machine wins the race to solving each problem. This difference represents a miner’s profit. Miners are incentivized to operate as efficiently as possible in order to maximize this profit.

There is much more to mining than this that I may cover in future articles. Topics like hash-rate vs. difficulty, security advantages to mining, security attacks that could come from mining, Advantages to mining vs staking, and others. Stay tuned.