Cryptocurrency mining is the process in which miners use computing power (hash) to process transactions and obtain rewards, in this case cryptocurrencies. Put another way, it is the process of adding new transaction records as blocks to the blockchain, in exchange for a reward, delivered in the same type of cryptocurrency that is being mined. For example, if Bitcoin is mined, the reward is in BTC.
One of the main characteristics of mining is the concentration of resources. In other words, it requires a great computing power that can meet the mining demands. In addition to allowing all the participants of the mining network to agree on the efficiency and precision of the chain of blocks. In addition, not only a large computing power mining machine must be provided, but a stable electric power network must also be guaranteed. Mining requires specific software for mathematical problem solving, and legal transaction verification that confirms that a block is a block. These blocks are added to the blockchain approximately every 10 minutes. When the software settles the transaction, the miner will receive a certain amount of digital coins. The faster the miner's hardware can process those math problems, the more likely they are to verify the transactions and receive their rewards.
In the digital currency mining process we find two types:
1) PoW (Proof of Work): It is the most used system in mining currencies such as Bitcoin, Ethereum, Litecoin and Monero. This type of mining requires high-powered machines capable of solving a series of hash puzzles. Until these riddles are solved, it will not be possible to propose a new block to add to the Blockchain chain. Nor will the new miner reward digital coins be generated.
2) PoS (Proof of Stake): This model is based on the acquisition power of the miner. That is, the more cryptocurrencies you have in your possession, the more you can mine. And, it is a motivational mining model. And it was created as an alternative to PoW seeking to solve the drawbacks that it has presented. Currently there are many cryptocurrencies that use the PoS system because it helps to maintain its value in the market.
As new transactions are made on the blockchain, they are sent to a pool called a memory pool. A miner's job is to verify the validity of these pending transactions, as well as organize them into blocks. You can think of a block as a page in the blockchain ledger, on which a series of transactions (along with other data) are recorded.
More specifically, a mining node is responsible for collecting unconfirmed transactions from the memory pool and assembling them into a candidate block. The miner will then try to convert this candidate block into a valid and confirmed block. But for that, you need to find the solution to a complex mathematical problem. This requires a large amount of computational resources, but each successfully mined block will earn the miner a block reward, which will consist of newly created cryptocurrency, as well as transaction fees. Let's take a closer look at the mining process.
1) Transaction Hashing: As new transactions are made on the blockchain, they are sent to a pool called a memory pool. A miner's job is to verify the validity of these pending transactions, as well as organize them into blocks. You can think of a block as a page in the blockchain ledger, on which a series of transactions (along with other data) are recorded.
Apart from hashing and adding each transaction individually, the miner also adds a custom transaction, in which he sends the block reward to himself. This transaction is known as a coinbase transaction, and it is the one that creates new coins. In most cases, the coinbase transaction is the first to be recorded in a new block, followed by all pending transactions that you want to validate.
2) Create a Merkle Tree: After each transaction has been hashed, the hashes are organized into something called a Merkle Tree. Also known as a hash tree, the Merkle Tree is formed by organizing transaction hashes into pairs and then hashing them. New hash outputs are arranged in pairs and rehashed, and the process repeats until a single hash is created. This last hash is called the root hash (or Merkle Root) and is basically the 'root' hash that represents all the previous hashes that have been used to generate it.
The block header functions as an identifier for each individual block, which means that each block has a unique hash. When creating a new block, miners combine the hash of the previous block with the root hash of its candidate block, to generate the hash of a new block. Apart from these two elements, they must also add an arbitrary number called a nonce.
Therefore, when trying to validate its candidate block, a miner must combine the root hash, the hash of the previous block, and a nonce, and send it all through a hash function. Your goal is to create a hash that is considered valid.
The root hash and the hash of the previous block cannot be modified, so miners must change the value of the nonce multiple times until they find a valid hash.
To be considered valid, the output (block hash) must be less than a certain target value, which is determined by the protocol. In Bitcoin mining, the hash of the block must start with a certain number of zeros. This is what we call mining difficulty.
3) Propagate the mined block: As we just saw, miners must hash the block header over and over again, with different nonce values. They repeat this work until they find a valid block hash. The miner who finds it then propagates this block on the network. The rest of the nodes will check if the block and its hash are valid, and if so, they will add the new block in their copy of the blockchain.
At that point, the candidate block becomes a confirmed block, and all miners proceed to mine the next one. All the miners who couldn't find a valid hash in time discard their candidate block, and the race to mine is on again.
Cryptocurrency mining is a key component of Bitcoin and other PoW blockchains. It is one of the elements that keeps the network secure and the issuance of new coins constant. There are certain advantages and disadvantages to mining, with the most obvious benefit being the potential gains that can be made from block rewards. However, mining profits can be affected by a number of factors, including the cost of electricity and market prices.