If you are familiar with cryptocurrency, you must have heard about mining. This is the process of verifying transactions and adding them to the blockchain public ledger. Mining is also responsible for introducing new coins into the existing circulating supply. Without it, cryptocurrencies would be unable to function as a decentralized network. Instead, they would need help from a centralized third party.
Please note that not all cryptocurrencies are mineable. However, the majority of the largest coins can be mined.
How Does Crypto Mining Work?
The main task of a miner is to collect transactions and organize them into blocks. Whenever a Bitcoin transaction is conducted, miners receive the transaction to verify its validity. Upon verification, miners assemble the transactions into blocks. Each block must be properly mined by hashing transactions.
What is Hashing?
So, the new term — hashing. But what is it? Hashing is a process that involves converting a series of inputs (i.e. messages) into a fixed-size string of bytes. The string is called the hash value, or “digital fingerprint.” After every transaction is hashed, the hashes are properly organized into a hash tree. A hash tree is created by organizing the various transaction hashes into pairs. Each pair is then hashed into another digital fingerprint. The hashing continues until a root hash is formed, which represents all of the previous hashes.
An Overview of Bitcoin Mining
As you can see, crypto mining is a complex process. During the first few years of Bitcoin’s existence, mining used to be much easier. However, with time and an increase in demand for Bitcoin, mining got complicated. Of course, this is precisely how the mining process is intended to work according to the Bitcoin white paper. Satoshi Nakamoto is a genius when it comes to creating an incentive program designed to encourage the community to validate all transactions on the blockchain.
Nakamoto’s Mining Incentive Program
In Nakamoto’s white paper, they unveiled a unique mining reward schedule known as “Bitcoin halving.” Essentially, mining rewards are reduced by 50% every 4 years. For example, the initial mining reward was 50 Bitcoin per completed block. In November 2012, the reward was reduced by 50% to 25 Bitcoin. Four years later, in July 2016, miners watched as their mining reward was again cut in half to 12.5 Bitcoin. The most recent Bitcoin halving occurred on May 11, as the mining incentive was lowered to 6.25 Bitcoin per block. According to the white paper, the mining reward will continue to decline until all Bitcoins are released.
Bitcoin halving is a genius plan developed by Satoshi Nakamoto. By rewarding miners with Bitcoin based on each miner’s output, Nakamoto has guaranteed the continued success of Bitcoin ad infinitum. Cryptocurrency mining proves yet again that peer-to-peer payment systems are far superior to a centralized fiat money system designed to eventually destroy its purchasing power.
Brief Summary of Cryptocurrency Mining
- Crypto mining is the process of adding transactions to the blockchain public ledger.
- Mining is also responsible for introducing new coins into the existing circulating supply.
- The primary function of a miner is to collect transactions and organize them into blocks.
- Blocks must be mined by hashing each transaction.
- Hashing is the process of converting a series of inputs into a fixed-size string of bytes.
- The string is called the hash value, or “digital fingerprint.”
- Hashes are organized into a hash tree.
- Hashing continues until a hash root is formed, representing all previous hashes.
- Satoshi Nakamoto created a genius program for rewarding miners.
- The mining reward schedule is known as Bitcoin halving.
- The peer-to-peer payment system is superior to the centralized fiat money system.