Mining – A Simple Explanation
Mining is a complex process in which computers are used to verify transactions on a network and ensure its security. In this process, digital currency is rewarded to miners. Essentially, during mining, new cryptocurrencies are generated and released to the network.
To explain mining in simple terms, decentralized networks lack a central computer. The task of verifying transactions and serving the network is done by all the computers in the network. These devices solve complex computational puzzles not only to verify transactions but also to secure the network.
In fact, computers that provide security to the Bitcoin network in exchange for rewards are called “miners.”
It is important to note that in order to maintain the security of the blockchain network, miners are required to solve complex computational puzzles. The miner who can solve the puzzle first receives a reward from the network.
What is a Decentralized Network?
A decentralized network refers to networks that are not managed or controlled by a central server. In decentralized networks like Bitcoin, the processing of information is done by computers known as nodes or peers. These computers, each having a copy of the latest changes in the decentralized system, reach a consensus to verify the transactions that have occurred in the network. If the changes are confirmed by all the computers in the network, the transaction is validated.
The Limited Supply of Bitcoin and the Meaning of Mining
One reason why the term “mining” is used for processing and verifying transactions in the network and solving complex mathematical problems is the limited number of Bitcoins. Just as natural resources in mines are limited, the total number of Bitcoins is capped at 21 million units. Therefore, miners strive to solve the complex problems presented by the network faster than other miners, using energy, so they can receive Bitcoin as a reward.
What is a Distributed Ledger?
A distributed ledger is a collection of computers in decentralized networks that store and manage information. This ledger is essentially a decentralized database where information is equally distributed among all members of the network. Computers that are part of this ledger verify and store information within the network. Thus, the information in the distributed ledger is not controlled by any centralized entity. A well-known type of such ledger is blockchain.
What is Blockchain?
Blockchain is a type of distributed ledger where processed information is stored in blocks in an encrypted form. You might wonder why this decentralized network is called “Blockchain,” meaning a chain of blocks. The reason is that each block contains a summary of the previous block’s information in an encrypted form. Therefore, any change to the information in one block would make all the information in the blockchain invalid. This increases the security of the blockchain network, which is why the name “blockchain” is used.
What is Mining in Blockchain?
In blockchain networks, information is stored in a distributed manner. Since there is no central server for processing and storing information in a blockchain network, miners who are part of the blockchain network must process the information and store updated versions of it. This process is referred to as mining.
How Does the Process of Mining or Cryptocurrency Mining Work?
The mining process or cryptocurrency extraction consists of a series of complex and interconnected steps performed by miners. This process includes receiving transactions, verifying their validity, solving a mathematical problem, and finally, creating and adding a new block to the blockchain.
Initially, miners collect the transactions in the mempool (memory pool). They then verify the validity of each transaction by checking digital signatures and ensuring that there are no duplicate transactions in previous blocks. Once validated, the legitimate transactions are placed into a candidate block.
The next step is finding the hash (a unique code) needed to close the block. Miners use their processing power to constantly try different hashes to find one that matches the criteria set by the network. This process is called Proof of Work (PoW) and is essential for ensuring security and preventing fraud.
What Does Hashing Mean?
Hashing refers to a process where a mathematical operator called a hash function converts input data such as letters, numbers, or images into encrypted output. The output of the hash function is called a “hash,” and the process of using the hash function to create the hash is called “hashing.”
How to Start Cryptocurrency Mining?
To start cryptocurrency mining, preparation and planning are needed. Here are the steps to follow:
- Choose a Cryptocurrency: First, choose which cryptocurrency you want to mine. Important factors to consider include profitability, Proof of Work algorithm, network difficulty, and price volatility.
- Prepare Necessary Hardware: Depending on your chosen cryptocurrency, mining hardware can be a powerful GPU (graphics card), an ASIC device, or even a dedicated server. When selecting hardware, consider price, energy efficiency, and processing power.
- Install and Configure Software: After acquiring the hardware, download and install the appropriate mining software. Popular software includes CGMiner, BFGMiner, and EasyMiner. Configure the software settings as per the provided guide.
- Join a Mining Pool: Due to the difficulty and high competition of solo mining, most miners join mining pools. Pools combine miners’ resources and divide the rewards based on each miner’s contribution.
- Set Up a Wallet: To receive mining rewards, you need a cryptocurrency wallet. Create a wallet and enter its address in the mining software and pool settings.
- Start Mining: Once the above steps are completed, you can begin mining by running the software. You can track your mining status, shares, and rewards from the software or the pool dashboard.
What is a Mining Pool and Its Purpose?
As mining becomes more competitive, miners combine their resources into mining pools. A mining pool is like a team where each miner acts like a player. Although rewards from mined blocks are divided among all members, due to the higher chances of consistently discovering blocks, each miner’s share is paid continuously, ensuring a more stable long-term income.
Mining Revenue and Economic Efficiency
Mining cryptocurrency has both technical and economic importance. Miners’ income comes from two main sources:
- Block Reward: When a new block is created, the miner who solves the mathematical problem and discovers the block receives a set amount of cryptocurrency as a reward. This reward is determined by the network and decreases over time, such as in Bitcoin’s halving event.
- Transaction Fees: Users pay transaction fees to have their transactions recorded in the block. These fees go to the miner who mined the block. With increasing transactions in the network, transaction fees form a significant portion of miners’ income.
Factors Affecting Miner Income
- Hardware Costs: Buying, upgrading, and maintaining mining equipment, especially ASIC devices, requires significant initial investment.
- Energy Costs: Mining is energy-intensive, and electricity costs can significantly affect profitability.
- Cryptocurrency Price: Due to market volatility, the value of block rewards and transaction fees fluctuates. When the cryptocurrency’s price drops, miners’ income is severely impacted.
- Network Difficulty: As the number of miners increases, so does the difficulty of mining. This means that winning in the mining competition becomes harder, reducing potential profits.
- Hardware Efficiency: As technology advances, newer and better devices are introduced to the market. Miners must continuously upgrade their equipment to stay competitive.
Types of Mining
Cryptocurrency mining can be categorized based on the type of hardware and techniques used.
- ASIC Mining: This is the most common method, where specialized hardware known as ASICs is used to mine cryptocurrencies. ASIC devices are optimized for a specific algorithm, making them very efficient.
- GPU Mining: Before the advent of ASICs, graphics cards (GPUs) were the primary choice for cryptocurrency mining. GPUs can process complex calculations and are more versatile in terms of supporting different cryptocurrencies.
- CPU Mining: In the early days of cryptocurrency, it was possible to mine with regular computer CPUs, but it is no longer profitable or viable today due to the increased difficulty of mining.
Cloud Mining
Cloud mining is a model where miners lease processing power from a service provider instead of purchasing and maintaining hardware. Users pay for the hash rate and mine cryptocurrency remotely.
Best Cryptocurrency for Mining
To choose the best cryptocurrency for mining, factors such as profitability, mining algorithm, block rewards, and hardware compatibility must be considered.
Is Mining Legal in Iran?
Yes, cryptocurrency mining is legal in Iran, provided miners obtain a license from the Ministry of Industry, Mine, and Trade and receive industrial electricity from the Ministry of Power. Unlicensed mining is illegal and subject to fines.
Best Mining Pool
Some of the best-known mining pools today are AntPool, F2Pool, Slush Pool, and ViaBTC. Pools like BTC.com and Poolin are also good options.
Best Bitcoin Mining Device
The best Bitcoin mining device depends on factors like processing power, energy efficiency, and user satisfaction. Currently, the BITMAIN Antminer T21 with a processing power of 190 TH/s is one of the top devices for mining Bitcoin.
