Cryptocurrency mining celebrates its 10th year of existence this year. What is mining though? It’s somewhat misunderstood as the process of “finding coins”, but it’s more complicated than that.
Each of the hundreds of cryptocurrencies in existence relies on the main concept of the blockchain. Cryptocurrency was designed to be decentralized, secure and unalterable – so every transaction is encrypted. Once that encrypted transaction happens, it’s added to a “block” until a fixed number of transactions have been recorded. That block then gets added to a chain which is publicly available, formally known as a blockchain.
Because of the power of decentralization, the location of the transactions and the person behind them can’t be found so that things can’t be manipulated or controlled by one person or entity.
Since these blocks are heavily encrypted, they’re sort of like complicated math puzzles that only powerful compute-capable hardware can solve. That’s where you need CPU, or Radeon and GeForce graphics cards*. Overall, the process of solving the math puzzles on these blocks and adding them to the public blockchain (think of it as a ledger) is roughly what mining is.
*Reminder: you can’t mine crypto-coins with your laptop or an average computer, they are not powerful enough. To learn more about requirements for mining, switch to the Genius article.
Miners verify the transactions, ensure they aren’t false, and keep the infrastructure humming along. The reward for doing so is a payment in that block’s coin (usually called a miner’s fee). The payment is based on how much their hardware contributed to solving that puzzle.
Where do the coins come from? By design, that’s exactly how the coins are created. The block is solved and coins and distributed fairly to miners. Thus increasing the coin’s supply.
THE GREATEST ANALOGY: GOOGLE DOCS
In 2016, William Mougayar wrote an exceptional piece explaining blockchain technology by leveraging something we all know about: word processing programs. He reminded us that when Microsoft Word was the only game in town, a person had to create a file, open it, then send it to another person to have it edited or updated. The similarity to banks is striking, and makes it clear why blockchain technology was created in the first place:
That’s how databases work today. Two owners can’t update the same record at once. That’s how banks maintain money balances and transfers; they briefly lock access (or decrease the balance) while they make a transfer, then update the other side, then re-open access (or update again).
With Google Docs (or Google Sheets), both parties have access to the same document at the same time, and the single version of that document is always visible to both of them. It is like a shared ledger, but it is a shared document. The distributed part comes into play when sharing involves a number of people. Imagine the number of legal documents that should be used that way.
~William Mougayar, Coindesk.com