What is cryptocurrency mining?
Mining is the process by which recent cryptocurrency transactions are checked and new blocks are added to the blockchain. Here’s a quick rundown of how both functions work.
Mining computers select a set of pending transactions from a pool and check each one carefully to ensure that the transaction is valid.
A first check confirms that the sender has sufficient funds to complete the transaction. This involves checking the transaction details against the transaction history stored in the blockchain. A second check confirms that the sender has authorised the transfer of funds.
When sending funds, a user must sign the transaction using a private key, which is then combined cryptographically with the transaction data to form a unique digital signature. Because of the mathematics involved, miners can use this digital signature to verify that the sender had access to the wallet’s private key – and therefore the funds contained within it – without the sender having to reveal their private key.
Creating a new block
Mining computers compile valid transactions into a new block and attempt to generate the cryptographic link to the previous block by finding a solution to a complex algorithm.
When a computer succeeds in generating the link, it adds the block to its version of the blockchain file and broadcasts the update across the network. Once a majority of machines in the network have verified that the new block is genuine and updated their copies of the blockchain file, the computer that mined the block is rewarded – either with some newly ‘mined’ cryptocurrency tokens (eg bitcoins), or transaction fees.
The difficulty of the algorithm can be – and is – regularly adjusted, with the aim of keeping block discovery constant, even as computing power improves. This means it resembles the rate at which commodities like gold hit the market – hence the name ‘mining’.