Author: Irem Eren
Publication date: 09.11.2023
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The process of developing new cryptocurrencies is built by miners in the digital world. To understand cryptocurrency mining, one must first become acquainted with the concept of the "blockchain."
Blockchain
You can imagine a continuously growing chain of blocks, with each block storing transaction data like a digital ledger. This blockchain is decentralised, meaning no single entity has control, making transactions transparent.
Cryptocurrency mining
Cryptocurrency mining is a complicated way that helps digital currencies work properly. So, it is not just about making new coins but also about checking transactions and making sure everything is secure.
Steps in cryptocurrency mining
Transaction Verification
In this process, you encounter "Transaction Verification" as a first step. Here, miners pick out transactions that are waiting to be confirmed from a list, preparing to create a new record on the blockchain. This step makes sure that all transactions are made by actual people.
Proof of work method
Next, miners deal with "Proof of Work." This is a common method used in cryptocurrencies like Bitcoin. All of the miners compete against each other to solve a complex puzzle that needs a lot of computer power and energy. It is like a tough brain race where everyone is trying over and over to solve a hard mystery.
"Proof of Work" (PoW) is a consensus mechanism that validates transactions and adds new blocks to the blockchain.
Block Creation
Winning this race takes us to "Block Creation." The winning miner gets to add a group of checked transactions to the blockchain. Each new record is connected to the one before it using a secure digital code called a hash. This creates a strong link between the records, making the blockchain trustworthy. In addition to this, there is another crucial term "hash rate." It refers to the speed at which computers solve problems to complete digital currency transactions. The interesting part is that the more computers that get involved in this work, the higher the hash rate becomes.
Digital money
If we look back in the early days, you could mine and earn a whole bitcoin in just an hour. But now, we can say that it has a whole different process. There are two reasons behind this great change: First, we now need more transactions to keep the value of digital money stable. And second, as transactions increase, storing becomes a much tougher job.
Rewards
After the block creation, there are "Rewards." After transactions are added to the blockchain, miners get paid with cryptocurrency coins or fees. These prizes are important because they encourage miners to keep participating and maintaining the system.
Finally, this process creates "New Coins," slowly adding more coins to the system. Thanks to the hard work of the miners, the amount of digital currencies increases steadily and supports the whole system.
Halving
Bitcoin halving occurs every four years, which reduces the reward miners receive for mining a new block by half. The next halving is expected in the first or second quarter of 2024. Same in past years, miners will get the rewards from this system. Instead of the 6.25 bitcoins they currently receive as a reward, they will start earning 3.125 bitcoins. This is a big deal because it impacts the number of new bitcoins being introduced into circulation.
Proof of stake
Proof of Stake (PoS) is a type of consensus mechanism used by certain cryptocurrencies to secure the network. Apart from that, it validates transactions, and prevents fraudulent activities. In other words, it's an alternative to the Proof of Work (PoW) mechanism used by Bitcoin and some other cryptocurrencies. PoS addresses some of the issues associated with PoW, such as high energy consumption.
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