Mining

tl;dr: Mining is the process by which cryptocurrency transactions are collected, verified, and added to the blockchain. Miners ensure network integrity, enforce protocol rules, and introduce new coins into the system. The mining process involves gathering unconfirmed transactions, creating a coinbase transaction, forming a Merkle tree, generating a block hash, and performing Proof of Work to find a valid hash. Block rewards, which decrease over time, incentivize miners to participate in the process.

As of 14th April 2023, the Bitcoin block reward is 6.25 BTC, halving every 210,000 blocks. Mining has evolved from individuals using personal computers to large-scale operations with dedicated mining farms and advanced equipment like ASICs and GPUs. Miners are crucial for maintaining security, integrity, and decentralization in many cryptocurrency ecosystems.


What Is Mining?

Mining is the process through which cryptocurrency transactions are gathered, verified, and recorded into a digital ledger known as the blockchain. Miners play a crucial role in maintaining the integrity of the network, ensuring transactions follow the protocol's rules, and introducing new coins into the system.

The mining process consists of the following steps:

  1. Gathering unconfirmed transactions: Miners collect unconfirmed transactions from the memory pool and organize them into a candidate block.
  2. Creating a coinbase transaction: The miner includes a coinbase transaction in the candidate block, which is a transaction where they send the block reward to themselves. This transaction is often the first to be recorded in a block.
  3. Forming a Merkle tree: Transactions in the candidate block are hashed, and their outputs are organized into pairs. These pairs are then hashed, producing new outputs that are also organized into pairs and hashed once again. This process is repeated until a single root hash, also known as the Merkle tree root, is produced.
  4. Generating a block hash: The root hash is combined with the hash of the previously confirmed block, along with a pseudo-random number called nonce (plus some other parameters). These elements are then hashed, producing the block hash for the candidate block.
  5. Proof of Work: Miners must find a block hash below a predetermined value (target) through trial and error by performing numerous hashing functions with different nonces. The first miner to find a valid hash validates their candidate block, adds it to the blockchain, and receives the block reward. In Bitcoin, this consensus algorithm is known as Proof of Work.

Block rewards are defined by the cryptocurrency's protocol and typically decrease over time. For example, in Bitcoin, the block reward started at 50 BTC and is as of 14th April 2023 6.25 BTC. The reward is halved every 210,000 blocks (approximately every four years).

Mining requires specialized hardware and significant amounts of electricity. Over time, it has evolved from individuals using personal computers to large-scale operations with dedicated mining farms and advanced equipment, such as Application-Specific Integrated Circuits (ASICs) and graphics processing units (GPUs).

By participating in the mining process, miners not only maintain the security and integrity of the cryptocurrency network but also facilitate the decentralized issuance of new coins, making it a critical component of many cryptocurrencies' ecosystems.