In 2020, the global crypto market was valued at US$ 1.49 billion and is expected to touch US$ 4.94 billion by the year 2030 at a CAGR of 12.8% [1]. The first cryptocurrency (Bitcoin) came into light and was mined in 2009. And today, cryptocurrencies have entered the mainstream as more and more peoples and organizations develop keen interest in the world of blockchain technology.
While having a conversation about cryptocurrency with your tech enthusiast friends, you might have heard them drop a few words like ‘crypto mining’ or ‘proof-of-work’. If you want to understand what cryptocurrency mining is and how it works, you’ve come to the right place.
What is cryptocurrency mining
In simple words, cryptocurrency mining (or “crypto mining”) refers to the process of collecting cryptocurrency as a prize or a reward for the tasks and work you complete. Crypto mining essentially means gathering cryptocurrencies through the process of solving complex cryptographic equations with the help of computers.
Mining is a method of ‘validating’ transactions on the blockchain. Meaning: a process in which cryptocurrency transactions are verified and added to the ‘blockchain digital ledger’ post verification. In the last 10 years, interest in using cryptocurrency as well as mining cryptocurrency has increased dramatically.
Here’s how crypto mining works
During the process of crypto mining, coders (called “crypto miners”) compete against one another to solve complex mathematical problems. These problems aren’t solved manually but with the help of high-performance computers.
Each mathematical problem uses cryptographic ‘hash functions’. A hash is basically a truncated digital signature of a piece of data. These are generated in order to secure data transferred on a public network.
The first crypto miner/coder who is able to crack the problem is rewarded by being able to authorize the transaction. And in return for this service provided, the winning crypto miner earns a small amount of crypto of their own.
Finally, once the crypto miner solves the problem and validates the transaction information, the data is added to the public blockchain ledger.
SEE ALSO: The need for cryptocurrency insurance policies and coverage
What is proof-of-work in crypto mining
Miners are supposed to validate transactions on the blockchain viz-a-viz a process called ‘proof of work’. Proof of work for any given transaction is data which is tough to be duplicated but can be easily verified by others.
The computer would be performing certain tasks which are needed to be able to obtain the slightest amounts of cryptocurrency and these certain tasks, called ‘Proof of Work, are designed for leveling the playing field for all the miners out there.
What do you need for mining crypto?
1. Coin Wallet for crypto mining
For mining cryptocurrency successfully and storing your rewards, you need a cryptocurrency wallet. There are multiple types of crypto wallets, including web wallets, desktop wallets, mobile wallets, hardware wallets as well as paper wallets. Some good wallets are Coinbase, GreenAddress, Ledger Nano S and Bitaddress.
2. Crypto mining software
After picking the right wallet for you, what you need next is a crypto mining software. These software take ‘work’ to mining hardware and back to the blockchain and mining pool. It also displays statistics such as hash rate, temperature, fan speed, etc.
3. A membership of mining pool
Members pool the power of their computer to form a ‘mining pool’, which ultimately results in splitting of profits among the members. When members combine their hash rate, a pool has a collective higher hashrate and this increases the chance of finding the correct nonce or a block.
4. A dependable internet connection
This one goes without saying. You need a reliable, high-speed internet connection for real-time communication with the blockchain.
5. Online exchange
You can sign up If you want to sell yfr an online exchange if you wish to sell your mined cryptocurrency. Some famous exchanges are Coinbase (a user-friendly app but has higher fees), Bitfinex and Binance (cryptocurrency only).
6. Crypto mining hardware
You might need varying types of mining hardware depending on the cryptocurrency you wish to mine. For example, for mining Bitcoin, you need an ASIC (to be profitable). As for other cryptocurrencies, mining will be possible using your own computer.
7. Cooling Equipment
For successfully mining cryptocurrencies, you might need cooling equipment like fan(s).
8. Knowledge
Researching and learning about how crypto mining works and what are the concepts behind mining cryptocurrency is much easier than doing it for real. Honestly, it is quite a challenging operation. Before going all in on crypto mining, you must know how to mine crypto, set up equipment, as well manage the mining process. You will also need to be on the top of your game and know about the latest, promising cryptocurrency and crypto developments.
SEE ALSO: 6 Different types of cryptocurrencies and why governments fear them
Is crypto mining legal
Generally speaking, mining cryptocurrency is legal. However, knowing for sure whether crypto mining is legal (or not) depends on two key aspects:
- Your location
- Whether you use legal means to mine crypto
Where people commence treading into the territory of illegal activities is when they use illicit means for crypto mining.
There are some cybercriminals who use Javascript in web browsers, or even install malware on unsuspecting user devices, for taking control of their devices’ computing power. This is called cryptojacking and is, obviously, illegal.
It is also crucial to note that cryptocurrency mining is seen differently by governments around the world. The United States Library of Congress published a report which stated that in Germany, mining Bitcoin is seen as “fulfilling a service” that is at the heart of the Bitcoin crypto system.
However, other countries, like China don’t really support Bitcoin mining and this has led to many organizations to stop mining Bitcoin. Governments of some countries view crypto mining profits as being ‘taxable’ while some countries see it as non-taxable income.
SEE ALSO: What is NFT & how does it work – Everything you need to know
For more latest IT news and updates, keep readin iTMunch
Sources
[1] Valuates Reports (2021) “Cryptocurrency Market By Offering (Hardware [ASIC, GPU, FPGA, and Others] and Software), Process (Mining and Transaction), Type (Bitcoin [BTC], Ethereum [ETH], Tether [USDT], Binance Coin [BNB], Cardano [ADA], Ripple [XRP], and Others), and End User (Trading, Retail & E-commerce, Banking, and Others): Global Opportunity Analysis and Industry Forecast, 2021–2030” [Online] Available from: https://reports.valuates.com/market-reports/ALLI-Manu-2G71/cryptocurrency [Accessed October 2021]
Image Courtesy
Featured Image: Image by Sergei Tokmakov Terms.Law from Pixabay
