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What is cryptocurrency mining?

Cryptocurrency mining ensures the security and decentralization of cryptocurrencies such as Bitcoin based on the Proof of Work (PoW) consensus mechanism. Mining is the process of verifying transactions between users and adding them to the public ledger of the blockchain.

Mining is a key concept in the cryptocurrency world. This process involves solving mathematical problems to verify transactions and add transaction records to the blockchain. The main purpose of mining is to ensure the security and reliability of transactions while creating new currency units. By solving complex mathematical puzzles, miners are able to verify transactions and add them to the blockchain's decentralized record.

Mining operations are also responsible for introducing new coins into existing circulation. However, cryptocurrency mining follows a set of hard-coded rules that govern the mining process and prevent anyone from arbitrarily creating new coins. These rules are built into the foundation of the cryptocurrency protocol and enforced by a complete network of thousands of nodes.

How does cryptocurrency mining work?

When a new blockchain transaction is made, the transaction is sent to a mining pool called the "mempool." The miner's job is to verify the validity of pending transactions and organize transactions into blocks.

You can think of a block as a page on the blockchain ledger where a number of transactions are recorded (along with other information). More specifically, mining nodes are responsible for collecting unconfirmed transactions from the mempool and forming them into a candidate block.

After this, miners try to convert the candidate block into a valid, confirmed block. To do this, miners use massive amounts of computing resources to solve complex mathematical puzzles. However, for each successfully mined block, miners receive a block reward consisting of newly minted cryptocurrency and transaction fees. Let's see how it works:

Step 1: Hash Transaction

The first step in mining a block is to obtain pending transactions from the mempool and submit them one by one through the hash function. Each time a piece of data is submitted through the hash function, there will be a fixed-size output, called a hash.

In mining, the hash of each transaction consists of a string of numbers and letters that serve as an identification code.The transaction hash represents all the information contained within the transaction.

In addition to processing the hash and listing each transaction individually, miners also add a custom transaction to send their own block reward. This transaction is called a "coinbase transaction" and it creates a completely new token. In most cases, a Coinbase transaction is the first transaction recorded in a new block, followed by all transactions pending verification.

Step 2: Build the hash tree

After each transaction is hashed, the hash is then organized into a hash tree, also known as a Merkle tree. A hash tree is formed by hashing transactions into pairs and then hashing them.

The new hash outputs are then organized into transaction pairs and hashed, and the process is repeated until a single hash is created. The last hash is also called the root hash (or Merkle root), which basically means all the previous hashes used to generate it.

Step 3: Find a valid block header (block hash)

The block header serves as an identification code for each individual block, indicating that each block has a unique hash. When creating a new block, miners combine the hash of the previous block with the root hash of the candidate block to generate a new block hash. They also need to add an arbitrary number called a nonounce.

Therefore, when trying to validate their candidate block, miners need to combine the root hash, the previous block hash, and the nonce and submit it all through the hash function. Their goal is to repeat this step until a valid hash is built.

The root hash and the hash of the previous block cannot be changed, so the miner needs to change the nonce value multiple times until a valid hash is found. In order to be considered valid, the output (block hash) must be less than a specific target value established by the protocol. In Bitcoin mining, the block hash must start with a certain number of zeros. —This is called mining difficulty.

Step 4: Push the mined block

As we just saw, miners need to hash the block header over and over again using different nonce values. They will repeat this process until they find a valid block hash. Miners who discover the hash then push it to blocks on the network. All other nodes will check whether the block and hash are valid, and if so, add the new block to their copy of the blockchain.

At this point, the candidate block becomes a confirmed block, and all miners will continue mining the next block. All miners who cannot find a valid hash in time will discard the candidate block and the mining competition begins again.

The cryptocurrency amount of block rewards varies between different blockchains. For example, on the Bitcoin blockchain, miners receive a block reward of 6.25 BTC (as of March 2023). Due to the Bitcoin halving mechanism, the BTC block reward amount is reduced by half every 210,000 blocks (approximately every four years).

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