Cryptocurrency Mining & How Does It Work?

For people who are not aware of cryptocurrency mining, it seems the way to get rich without investment. Cryptocurrency mining may sound like an option for “Easy money” but certainly it is not. You can rather compare it with finding hidden treasure. Many people devote their time and efforts to reach the treasure, but not all are lucky enough to get it.

There must be lots of questions popping up in your mind, so let us start by answering each question one by one.

What is cryptocurrency mining?

Before elaborating on the process of mining, let us have a look at regular currency circulation.

You must be knowing that whenever required local currency tokens are produced and added to the previously circulating currency in the market.

Did you notice? Who are the responsible authorities to create new local currency tokens and their circulation?

Yes! You are right …

Depending on the countries, respective central banks and govt authorities are responsible for issuing new currency tokens and their circulation in the market.

Now comes the question that one of the significant features of cryptocurrency is decentralisation then who is responsible for creating new cryptocurrency tokens? How new cryptocurrency tokens are being created?

Here comes the role of miners. In the process of cryptocurrency mining, miners verify the transactions and get rewarded with cryptocurrency tokens that’s how new tokens are being generated. Miners are not just auditors of crypto-transactions but they are creators too. This entire process of transaction verification and generation of the new cryptocurrency tokens is known as cryptocurrency mining.

So, does it mean one should be a miner to own cryptocurrency tokens?

Not really! Miners do get rewards in the form of cryptocurrency tokens but that’s not the only way to get it. You can buy cryptocurrency tokens with a credit card, bank transfer, or fiat currency. There are many websites available that facilitate the exchange of local currency with cryptocurrency tokens. You need to check the available cryptocurrency options and mode of payments offered by various websites. Binance, Coinbase, CoinMama, Bitfinex, etc are some popular cryptocurrency exchanges around the globe.

Is mining always a win-win situation for miners?

Before getting straight to answer, let us have an overview of what actually a miner does! A miner is a node in the crypto-network that collects transaction data, verify, organize, and hash them. It completes a block and adds this new block to the blockchain public ledger. As a reward for verifying the transaction and adding a block, the miner receives cryptocurrency tokens.

To add this new block in the chain, miners need to solve a complex mathematical puzzle(Hash) which needs high computational power. Chances of reaching the solution are directly proportional to the computational power you are investing in. The more computational power you have, the more is your chances to get the reward.

Still, sounding easy?

Remember you are not alone, there are millions of people who might be mining at the same time as you are. Even after investing in high computational power and paying huge bills of electricity, there are chances that someone else solves the puzzle earlier than you. If that happens you might end up losing your precious time and money. So now you know that mining is not always a win-win situation!

What do I require to do cryptocurrency mining?

As we have already discussed that chances of solving the mathematical puzzle in order to get mining reward entirely depends upon the computational power of your computer. The complexity of the puzzle is also variable. Rate of producing new cryptocurrency tokens is fixed that’s why at any point in time, the complexity depends upon the no. of miners working on the puzzle. More competition leads to high complexity.

Due to increased competition, you need to invest in high computational power equipment. You may purchase GPU(Graphics processing unit) or ASIC(Application Specific Integrated circuit) to increase your computational power. It may cost you from 500$ to thousand of dollars.

How much commission does a miner earn?

Commission of mining varies for various currencies. Let’s discuss the most renowned cryptocurrency bitcoin. The rate of producing bitcoin is fixed and that’s why the algorithm works in a manner that after every 4 years the reward gets halved. In 2009 the commission on mining was 50 BTC per block which eventually get halved by every four years and after the recent halving on 11th May 2020 it came down to 6.25 BTC per block.

Mining commission is not the same for all cryptocurrency tokens. For bitcoin, it is 6.25 BTC per block whereas for Ethereum it is 5 Ether per block, and so on.

What do you mean by mining pool?

As we have repeatedly mentioned that chances to be successful in mining is directly proportional to the computational power one is investing. Many people form groups to efficiently mine cryptocurrency tokens with combined computational resources. If they get successful in mining the reward gets distributed among the group in the ratio of computational power contribution or as per the set protocol. These groups of miners are known as the mining pool.

Are all cryptocurrency tokens are mineable?

Not really! Not all the cryptocurrency tokens are mineable, there are many cryptocurrencies which are non-mineable.

Let’s have a look at few popular mineable as well as non-mineable cryptocurrencies:

Mineable cryptocurrencies:

1. Bitcoin

2. Dogecoin

3. Litecoin

4. Monero

5. Grin

6. Zcash

Non-mineable cryptocurrencies

1. Ripple

2. Tezos

3. IOTA

4. Cardano

5. NEO

6. WAVES

7. EOS

Unlike mineable cryptocurrencies, non-mineable cryptocurrencies work on proof of stake model. One does not need to mine in order to verify transactions and it does not involve high computational power. Users are required to purchase coins and the more coins they hold in their wallets for a long time, the more is their probability to verify the transaction. On verifying every transaction, users get the reward in the form of cryptocurrency tokens, that’s how new coins get generated.

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