Online forums are often filled with discussions about crypto mining (or crypto mining). Bitcoin, Dash, Ethereum, and other cryptocurrencies have probably been featured in videos and articles. It is common for cryptocurrency mining to be discussed in those pieces of content. However, all of this may have left you wondering, “What is Bitcoin mining?” or “What is crypto mining?”
Essentially, cryptocurrency mining refers to the process of gathering cryptocurrency in exchange for work that you have done. The process is called Bitcoin mining if you are mining Bitcoins specifically. But why do people crypto mine? Other sources of income are important to some people. Others seek greater financial freedom without the interference of governments or banks. It’s no secret that cryptophytes, investors, and cyber criminals are all interested in cryptocurrencies. How does cryptocurrency mining work (in a more technical sense)? Let’s break it down.
What Is Crypto Mining?
Crypto mining is a type of digital currency that operates using the blockchain, a distributed ledger that enables a peer-to-peer network of computers to transact and record transactions. It is an alternative to traditional banking and financial institutions. Crypto mining is the process by which miners solve cryptographic puzzles, which require computing power to do so. They then reward themselves with coins in exchange for their efforts. As such, mining is a form of competitive problem-solving where participants are rewarded for their efforts. In this sense, it is similar to a lottery.
Traditional Banks Are Centralized Systems
A centralized record (ledger) is controlled, maintained, and updated by a central authority in traditional banking. Therefore, every single transaction must go through the central banking system, where it is recorded and verified. Furthermore, only a small number of organizations (banks) are allowed to connect directly to the centralized banking system.
This limits the scalability of the traditional centralized banking system. In contrast, blockchain technology offers an alternative distributed and decentralized record (ledger). The ledger is maintained by a network of computers that automatically updates and verifies all transactions without any human intervention. Blockchain technology enables any organization or individual to connect directly to the blockchain system to read and write data. This enables a scalable decentralized financial system with reduced cost and increased efficiency. However, the current blockchain implementations suffer from various limitations.
For example, Bitcoin has a limited number of coins and transaction capacity. The transactions per second (TPS) are low, and it takes more than 10 minutes for a transaction to confirm. The Ethereum network is also experiencing scalability issues. The TPS of Ethereum is about 15-20 compared to the TPS of Visa, which is about 30,000. A blockchain-based decentralized financial system has a solution to these challenges. It will be able to provide higher throughput, reduce transaction costs, and improve transparency.
Cryptocurrencies Use Decentralized, Distributed Systems
There is no central authority or centralized ledger with cryptocurrencies. Because cryptocurrencies operate in a decentralized system with a distributed ledger called blockchain, they operate in a decentralized system. In contrast to traditional banking systems, cryptocurrency “systems” allow anyone to access and participate. Payments can be sent and received without going through a central bank. The reason it’s called a decentralized digital currency is that it’s not centralized.
However, cryptocurrency is also a distributed system, in addition to being decentralized. Records (ledgers) of all transactions are accessible to the public and stored on a variety of computers. This is a decentralized system compared to the traditional banks we mentioned earlier.
Read Also: How To Make Money with Bitcoins
The problem is, how do transactions get verified before they are added to the ledger without a central bank? Cryptocurrency uses cryptographic algorithms to verify transactions instead of relying on central banks to verify them (for example, making sure the sender has enough money to send payment).