What is cryptocurrency mining, exactly?

Mining is one of the most important steps in the creation of cryptocurrencies, the basis of blockchain, and one of the concepts that most often pop up when talking about industrial news. But what exactly is mining?

That my bitcoin requires energy »,« Ethereum miners grow in number »… In the world of cryptocurrencies, “ undermine does not mean digging the ground or extracting coal. The term relates to a crucial step and fundamental principle of cryptocurrencies. It is the action that makes it possible to ensure the integrity of the blockchain, to create new units of cryptocurrencies, and that makes the entire crypto ecosystem work.

But more specifically, what is mining? And what exactly is happening?

What is a blockchain?

Before answering mining questions, it is necessary to understand how a blockchain works.

Simply put, a blockchain is a kind of shared virtual diary that records all interactions between all diary participants. Everyone can write in the journal, and everyone has the same version of it. None of the participants has more authority than the others to keep the diary, and it is not only hosted in one place, for everyone has a copy. This is called a decentralized system.

A decentralized system has many advantages, including that no one has the upper hand over others, that security is guaranteed by the large number of blockchain users, and that the system is transparent. Nevertheless, such a decentralized system must respond to major problems: How do you ensure that all participants in the diary enter the same things? How can I be sure that the journal has not been tampered with? To guarantee the security of the blockchain, an information verification step has been introduced: it is precisely this step that will allow mining.

What is cryptocurrency mining, exactly?
How do you mine bitcoin? // Source: 株 木 混 株 cdd20 / Unsplash

What are we talking about when we talk about mining?

Mining refers to the process of validating transactions made on a blockchain (or, to take the newspaper’s example, the sentences written there). ” These transactions are validated per. group or per. blockexplains Claire Balva, director of the blockchain and crypto sectors at KPMG, in the interview with Numerama. The minors are then put in competition with each other by the system to know who has the right to validate them. ‘The validation of these operations is a key step for blockchains, and the process is referred to as the “consensus protocol” : this is what ensures that all registers have the same version.

There are different consensus protocols: the two most commonly used are proof of work (which pertains to bitcoin and many other cryptocurrencies) and proof of effort (Ethereum is preparing its transition to this model). If there are other protocols, they are not so prevalent, so this article will only mention the case of these two systems.

Mining with proof of work

In a blockchain that uses a proof of work protocol, an equation must be answered to validate transactions. ” This is a complex equationClaire Balva resumes, so the minors competing for the validation have to test a lot of options. They will have to use the computing power of their computer to get there – this is one of the reasons why the Bitcoin network uses energy. »

At some point, a miner will be able to find the correct answer to the equation. This answer is very difficult to find, but it is easy to check if it is correct. ” It’s as if you were standing in front of a building door without having the code to enterexplains Claire Balva. The code is hard to find because you have to try many combinations. But once we have found the right one, it is very easy for everyone to check that we have the right answer.. »

From the moment a transaction block is validated, the miner who has found the answer to the equation will be rewarded for his work with cryptocurrency units: miners receive 6.25 bitcoins per. validation on this blockchain. Mining therefore makes it possible to create new units of cryptocurrencies.

Hashrate and its impact on mining

Theoretically, all miners can validate the blocks, but in fact the necessary computing power (also called hashrate) is such that today only professionals can do it. This difficulty is due to one of the most important features of bitcoin: a new block is extracted every ten minutes. This number was determined by Satoshi Nakamoto, the creator of bitcoin, and is written into the blockchain code, so it is a constant for miners.

How to ensure this frequency in 10 minutes? ” By adapting the difficulty of the equation to the computing power that is on the network ”, says Claire Balva. Specifically, the hash rate has been steadily rising since the beginning of bitcoin, and the calculations have therefore become more difficult over time. But the reverse is also true: when the hash rate decreases, the equations adapt.

This is what happened in July 2021, when the majority of mine farms installed in China had to close, thus depriving the network of their computing power. At that time, the difficulty of the equation dropped by 28% to ensure that it did not take the computers more than 10 minutes to find the answer.

The degree of difficulty is readjusted approximately every two weeks. ” The network looks at the last blocks of the average time it took, then adjusts each 2016 block so that every other weekannounces Claire Balva. If the mining of the last 2016 blocks took more than 2 weeks to complete, the difficulty is reduced and vice versa. »

What is cryptocurrency mining, exactly?
Source: Editing Nino Barbey for Numerama

Mining with proof of effort

In systems that use proof of effort, consensus is not achieved by finding the answer to an equation. Instead, to validate a blockchain, you must invest part of your assets in cryptocurrency. For example, on the Ethereum blockchain, you will have to commit 32 ETH (ie more than 106,000 euros at the current price) to try to become a validator.

Once miners have passed this stage, “ validators will be selected at randomit is listed on the blockchain website, and the cryptocurrencies involved will be used to ensure good behavior among the validators. For example, if a validator goes offline while creating a block or does not validate it, they may lose some of their money to the detriment of others.. Upon successful block validation, miners will also be rewarded with ETH.

There are features in the proof of stake protocol used by different blockchains. For example, Ethereum will ask a selection of participants to verify that the validation performed is in order. Cardano blockchain uses Ouroboro’s proof of stake protocol, which divides blockchains into “slot” and “epoch”; Tezos uses a protocol that allows people who would not have enough cryptocurrency to participate actively, to gain delegation power.

What about stack coins?

Stablecoins are a special case in the world of cryptocurrencies, and this statement also applies to their creation. The value of stablecoins is linked to a fiat currency, such as the dollar or euro, or a metal, such as gold or platinum – unlike other cryptocurrencies, whose value is determined solely by their popularity or usefulness. They work on blockchains, but they do not always have their own chain: they are largely based on Ethereum or Binance.

What is cryptocurrency mining, exactly?
We do not extract bitcoin, ethereum and tezos in the same way. // Source: Shubham Dhage / Unsplash

And the fact that they are not directly backed by their own blockchain changes everything for these cryptocurrencies because their creation does not go through the same steps. Since they do not have their own blockchain, they cannot be obtained by miners as a reward for their work. Their program is therefore controlled by smart contracts, established on existing blockchains, and it is these contracts that should govern their creation. So there is no mining that is really specific to stack coins “, Informs Claire Balva.

Do all cryptocurrencies have miners?

The major cryptocurrencies have their own blockchain, but others, generally the smallest or most obscure projects, are found on chains developed by other organizations: this is called tokens. To use the very clear definition of 20 minutes, ” -one ‘corner‘is a unit of value specific to a blockchain. ONE ‘polet‘is a unit of value of a digital asset that does not have its own blockchain “.

Tokens have become extremely popular in recent years because there is no need to create your own blockchain – and they require less technical means to set up. But for tokens, ” there is no mining informs Claire Balva. As with stack coins (which are also tokens, though their name can be confusing), their issuance is controlled by smart contracts. For these cryptocurrencies, therefore, there is no need for miners.

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