How Does Cryptocurrency Mining Work? I will forgive you if you initially think this investment blog post is about smoking Cannabis and under-age sex. Where these digital asset experts get their subject matter names from, is beyond me. Being one of the last of the Baby Boomer generation, in my day mining meant the extraction of precious metals or coal. How times have changed as we meander through mankind’s third great revolution –the technological one. Before I describe how Cryptocurrency mining actually works, prudence dictates I should firstly cover what Cryptocurrency mining actually is.
What is Cryptocurrency Mining? Essentially, it is one of the key elements which allows digital currencies to work as a ‘’Peer-to-Peer’’ de-centralized network. It is a process by which transactions between users are verified and added to the Blockchain public ledger. It is also a process which is used to introduce new coins into the existing circulating supply. That is the basics out of the way; now let’s move onto how it works together with the ambiguous technical jargon associated with it.
How Does Cryptocurrency Mining Work?
The Miner This is a Node in the network who collects transactions and works to organize them into blocks. When transactions are made, Miner Nodes receive and verify transactions and add them into the memory pool, assembling them into a block of multiple transactions. Hash When mining a block you have to ’’Hash’’ each transaction in the blockchain’s memory pool. Before starting this process the miner node adds a transaction where they send themselves the mining reward.
How Does Cryptocurrency Mining Work? This transaction is commonly known as the ‘’Coin-base Transaction’’. This is where coins get created and is the first transaction in a new block. The Hash Tree After every transaction is hashed, these hashes are organized into a ‘’Hash Tree’’ meaning that the hashes are all organized into pairs, and then hashed again until the top of the tree is reached. This is called the ‘’Root Hash’’. Nonce The root hash along with the hash from a previous block and a random number called the ‘’Nonce’’ is then placed into the block’s header. The block’s header is then hashed producing an output that will serve as the block’s identifier. Please note, the block identifier must be less than a certain target value that is set by protocol. In other words, the block header hash must start with a certain number of zeros. Hashing Difficulty This target value which is also known as the ‘’Hashing Difficulty’’ scales ensuring that the rate at which new blocks are created remains proportionate to the amount of power in the hash network. The miners keep hashing the header over and over again through the nonce, until one miner in the network eventually produces a valid hash. The Founder Node When a valid hash is found, the founder node will broadcast the block to the network. All other nodes will check if the hash is valid, and add the block into their copy of the blockchain and move onto mining the next block. Competing Blocks Sometimes two miners broadcast a valid block at the same time and the network ends up with two competing blocks. When this happens miners start to mine the next block based on the block they received first.
How Does Cryptocurrency Mining Work? Orphan Block The competition between these blocks will continue until the next block is mined based on either one of the competing blocks. The block that gets abandoned is called the ‘’Orphan Block’’. The miners of this block will switch back to the miner of the winning block. While the block reward is awarded to the miner who discovers the valid hash first, the probability of finding the hash is equal to the proportion of the total mining power on the network. I bet you this all sounds decidedly complex? Do not despair as Capital Management Services have a digital currency team who understand this new market place and how to profit from it.