What is Cryptocurrency mining?
Cryptocurrency is a form of digital currency which can be bought with actually money, traded online and exchanged for goods. It is commonly seen as a peer-to-peer (or person to person) version of electronic money.
Currently, there are over one thousand different cryptocurrencies, but the most popular are Bitcoin, Ethereum and Litecoin.
Cryptocurrencies operate on a decentralized system, so there is no single point like a high-street bank or a bank server oversee the transactions. Likewise, there is no official government or corporate control over the flow and exchange of the electronic currency.
Therefore, in the absence of central authority, cryptocurrencies require a system that records and validates every transaction. Otherwise, there would be no trust and it simply wouldn’t work. Those who carry out this task of authenticating each transaction are called miners. They do this by arranging and verifying transactions as clusters, turning them into ‘Blocks’. They then transfer them to the public ledger which is known as the Blockchain. This is no easy job, so miners are financially compensated by having the chance to earn new coins of the chosen cryptocurrency for their work. They do this by having their computers run a program that attempts to solve a complex mathematical equation. If successful, the miner receives or mines a new coin.
To prevent miners from building too many blocks, making lots of money and devaluing the cryptocurrency, mining is made harder to complete as more coins are mined.
What are hashes?
To make it harder still to build blocks, miners must match the cluster of transactions with a cryptographic hash (a very complicated number) that fulfils certain requirements. The only way to do this is to calculate as many transactions as possible and wait until you get a match. When the right hash is found, a new block is formed and the miner that found it is awarded with units of cryptocurrency.
Many cryptocurrencies have a limit on the number of units that can be generated. For example, there will only ever be 21 million Bitcoins in the world. After that, mining a new block will not generate any bitcoins at all. This is why today, mining requires highly specialized and expensive computer equipment to ensure only a select few have the resources and expertise to be successful.