The process of creating new coins in a cryptocurrency network is referred to as "mining" because it is analogous to a digital version of the process by which gold is extracted from the earth and added to circulation.
In a decentralized blockchain network, miners are needed to validate transactions and preserve the integrity of the distributed digital ledger. Mining rewards are used as economic incentives to encourage people to participate in mining and to help secure the decentralized network. These rewards come in the form of transaction fees paid by users when they transfer funds as well as block rewards, which are transactions that send newly created coins to the cryptocurrency wallet of the miner.
The process of cryptocurrency mining can vary greatly in how it's implemented from both a software and hardware perspective.
Cryptocurrency Mining Incentives
The different software implementations amount to different methods of incentivizing miners to be honest by making it profitable to mine according to the network consensus rules, and at the same time making it cost prohibitive to attempt an attack that breaks the network consensus rules. In other words, the goal is to ensure that the rational participants in the network act in their own best interest by only validating legitimate transactions and by casting out (i.e. ignoring and disconnecting from) dishonest miners. Legitimate transactions are those in which the sender in the transaction has enough funds in their cryptocurrency wallet to cover the amount they are sending.
Cryptographic hash functions and public key cryptography are critical technologies used in tandem in order to enforce the network rules and maintain the integrity of the blockchain without requiring users to trust the miners.
Types of Cryptocurrency Mining Consensus Mechanisms
Some examples of different types of mining implementations are:
- Proof-of-work (PoW)
- Proof-of-stake (PoS)
- Proof-of-activity (PoA)
- Proof-of-capacity (PoC or PoS for proof-of-space)
- Proof-of-spacetime (PoST)
- Proof of proof-of-work (PoPoW)
- Proof-of-burn (PoB)
- Delegated proof-of-stake (DPoS)
Types of Hardware Used to Mine Cryptocurrencies
The different types of hardware involved in cryptocurrency mining vary depending on the specific network architecture of the cryptocurrency in question.
Some networks, such as Bitcoin, are mined almost exclusively with specialized hardware called ASICs (Application Specific Integrated Circuit). Attempting to mine Bitcoin with any hardware that isn't specially designed for the task will most likely not be profitable.
Other networks, such as Vertcoin, are intended to be ASIC-resistant, meaning that they can be mined profitably without specialized hardware. However, full ASIC resistance is only theoretical. In reality, cryptocurrencies that intend to be ASIC-resistant may have to change their mining algorithm one or more times in order to make ASICs developed for it obsolete.
The other types of hardware that have been most commonly used to mine cryptocurrencies are CPUs and GPUs, with GPUs typically being more effective than CPUs. In fact, cryptocurrency mining at one point resulted in sharp increases in demand for GPU chips, which subsequently caused a short supply and increase in prices from major chip manufacturers such as AMD and Nvidia.
Bitcoin: A Peer-to-Peer Electronic Cash System
Mining 101: An Introduction To Cryptocurrency Mining
The Evolution of Bitcoin Hardware
Michael Bedford Taylor
Documentaries, videos and podcasts
"How Bitcoin Mining Works?" - Andreas Antonopoulos
Princeton University Cryptocurrency Course - Bitcoin Mining
What is Bitcoin Mining?
- Cryptographic nonceArbitrary number used only once in a cryptographic communication.
- Cryptographic hash functionMathematical hash function that is cryptographically secure and has the properties of collision resistance, hiding, and puzzle friendliness
- Proof-of-work systemA proof-of-work (POW) system (or protocol, or function) is an economic measure to deter DOS attacks and other abuses (e.g. spam) on a network by requiring some work from the service requester, usually meaning processing time.
- Proof-of-stakeProof-of-stake (PoS) is a system by which a network (e.g., a cryptocurrency blockchain) aims to achieve distributed consensus.
- Proof-of-activity (PoA)Proof of activity is a hybrid between proof of stake and proof of work. Blocks are generated through PoW mining mechanisms and then a switch to a proof of stake style mechanism occurs where validator nodes stake tokens in order to be chosen to sign these mined blocks.
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