Though the name may evoke mental images of picks, pans and shovels, the reality is much more complex — and digital.
Crypto mining is a method by which new cryptocurrencies — Bitcoin, Ethereum, etc. — are entered into circulation, as well as how transactions are verified. The process is complex, entailing massive, decentralized networks of computers worldwide that verify and safeguard blockchains.
Mining is important because it’s the basis of how the crypto industry operates without central oversight, and prevents digital currencies from being double-spent. This is what’s known as a “consensus mechanism”, a fundamental aspect of all blockchains.
In 1997, British cryptographer and cypherpunk Dr. Adam Back invented Hashcash, the proof-of-work system used by Bitcoin and other cryptocurrencies as part of the mining algorithm. According to the Bitcoin whitepaper: “To implement a distributed timestamp server on a peer-to-peer basis, we will need to use a proof-of-work system similar to Adam Back’s Hashcash, rather than newspaper or Usenet posts.”
Bitcoin and other cryptocurrencies are a blockchain, which is a shared ledger that contains a history of every Bitcoin transaction that ever took place. The blockchain is composed of blocks, and each new block has the most recent validated transactions stored in it.
Crypto miners — the players in the ecosystem who execute proof-of-work — use software to solve transaction-related algorithms that check crypto transactions. Proof-of-work is the algorithm that secures many cryptocurrencies, including Bitcoin and Ethereum.
Miners attempt to assemble a new block by solving a computationally difficult problem while simultaneously checking transactions. Once they confirm a valid block, they send it to the network and add it to the blockchain. As they add blocks, miners earn crypto rewards, which are paid using transaction fees and through the creation of new crypto. Computers plug into the network and confirm the legitimacy of transactions by validating the blockchain with the most computing time spent in it.
By contributing their processing power, honest miners on the network are then rewarded with coins in exchange. This makes attacking expensive and difficult to maintain as attackers must out-compete the honest miners which not only costs them electricity, but has the opportunity costs of not mining honestly.
Proof-of-Work was the first blockchain consensus method and remains the most redundant and most decentralized consensus method available today. Many other methods are now available which are quite happy to inform people about how efficient or fast they are, while neglecting to inform them about occasional accidental or even intentional network halts, address-banning capabilities, and other Web 2.0 “Features”.
By contrast, A “51% Attack” refers to an attack on a blockchain by a group of miners controlling more than 50% of the network’s mining hash rate, or computing power. In that situation, the attackers would be able to delay new transactions from gaining confirmation, and possibly reverse transactions that were completed within the last hour or so, requiring them to be re-sent or waiting for extra confirmations. Inconvenient maybe, but not bad for a system that can’t help but treat everyone fairly under any circumstances.
But of course, the system is not without its disparagers. From an economic perspective, critics claim that mining is wasteful because it is performing useless computations, leading to squandered energy and money. But because hundreds of thousands of crypto users regularly pay miners fees and buy their newly minted bitcoin, from crypto is clearly worthwhile economically. There are assurances a system like this provides that can’t be obtained by any other method.
Not only that, but crypto mining is extremely competitive, which encourages energy-efficient practices. A large percentage of “hash power” is derived from regions with abundant renewable energy, mainly hydroelectric, that would otherwise not be marketable due to a lack of local demand. If Cryptocurrency is here to replace the banking system, being able to process that system in a remote location with easy renewable power is better than wasting resources transporting that power to a skyscraper downtown.
Mining allows the monetization of previously dormant natural resources and simultaneously creates economic and environmental value. It is peer-to-peer, secure, reliable and decentralized, which means transactions happen globally, without government restrictions and delays.
As Edmund C. Moy, the former director of the U.S. Mint — the government body responsible for producing the country’s physical coins — said in the early days of Bitcoin: “Bitcoin, and the ideas behind it, will be a disrupter to the traditional notions of currency. In the end, currency will be better for it.”
This is the cornerstone of technology, one that allows for a truly decentralized network, unrestricted by politics or borders.