Cryptocurrency tokens are virtual currency tokens that represent a tradeable asset on a cryptocurrency blockchain. These tokens are necessary for various purposes, including transferring funds from one party to another or storing value. Tokens are created through a process known as “mining.”
Mining, also known as crypto mining, is a practice where people verify and add transactions to the blockchain that supports the cryptocurrency. Miners will review how transactions that use crypto tokens work and verify their authenticity. A new block of data will appear on the blockchain ledger at the end, allowing easy tracing of transactions.
Miners who assist in the process receive rewards for the work. Those rewards come as an amount of some of the cryptocurrency; specifically, they get a few tokens.
The effort can be valuable, but miners must follow the proper measures and have the right equipment to begin.
How Does Crypto Mining Work?
What Is the Goal of Crypto Mining?
Crypto mining is the practice of collecting and verifying blockchain transaction data. Blockchain data are broken down into “blocks,” which are individual structures that record and store transactions on a digital ledger. This feature allows any blockchain to permanently record transactions for the community (or world) to verify.
Miners send block data to network nodes responsible for validating data. Full nodes will hold copies of the data miners send, helping confirm transactions.
What Equipment Does a Crypto Miner Need?
The equipment a crypto miner will require can be expensive, with a typical mining rig costing close to $1,800 on average. The energy cost to keep the mining process working can also be high, but the expense is necessary for producing tokens.
A currency miner will require the following assets to start mining cryptocurrencies:
- A graphics processing unit (GPU) or an application-specific integrated circuit (ASIC)
- A currency mining software program like Pionex, Kryptex Miner, or BeMine
- A solid-state drive (SSD), preferably with at least 100 GB of available space
- A crypto wallet
- Access to a mining pool like AntPool, Poolin, or KanoPool
A GPU or ASIC will offer a faster processing speed than a traditional CPU, making it a necessity for crypto transactions. An SSD is also necessary for handling the vast amount of equation data for mining. A faster computer is likewise necessary for crypto mining, as a faster unit can validate more transactions in less time on average.
You also need access to a mining pool, as it entails multiple miners working together by combining their computational resources to enhance the mining process.
How Does Crypto Mining Work?
Crypto mining requires a unique process that ensures blockchain transactions are verified using complex mathematics. Here’s what’s behind it all:
- Mining software to produce a cryptographic hash puzzle. This puzzle will gather the transaction inputs from multiple trades on the currency network and produce a Merkle tree. The mining software must connect to a mining pool, as the pool has access to the blockchain ledger.
- A Merkle tree to help check transactions. A Merkle tree includes a listing of hashes in one block. It summarizes the movements in that block that will enter the blockchain. The transactions in the tree are consistently paired with each other until one single hash can identify everything within the same tree.
- Powerful hardware to calculate complex mathematic equations. Calculating and confirming the timing of each transaction on a blockchain is necessary to ensure that the data in the Merkle tree is 100 percent correct. The challenge? Confirming blockchain transaction computations requires powerful computers. That means using expensive GPUs and ASICs so that transactions can be computed and confirmed as quickly as possible.
- Confirmation from other nodes on the blockchain. It’s not enough for one miner to confirm or validate that the challenging math equation has been solved. Instead, the solution is sent out so it can be confirmed with all other nodes (or computers) on the blockchain network.
When these four steps have been successfully completed, all transactions in the initial Merkle tree will be bundled together, and a new block enters the blockchain. When that happens, the first miner whose hardware has successfully computed the hash puzzle receives their reward: some amount of cryptocurrency.
The reward value varies but typically entails a specific number (even fractions) of cryptocurrency coins or tokens. It becomes harder to mine new coins over time because there won’t be as many available. Miners receive smaller rewards, with the rules varying over what the blockchain ledger states.
The mining process is necessary as the blockchain ledger is decentralized. With no central authorities to confirm transactions, multiple miners must access the blockchain to participate in the confirmation process.
Proof of Work Versus Proof of Stake
There are two approaches to the mining process:
Proof of Work
Proof of work permits miners to receive cryptocurrency rewards if they are responsible for supporting the mining effort. Although many people attempt to mine currencies, only one miner will receive the applicable reward for producing a new block on the chain.
This system requires fast computers that operate at their top capacity 24 hours a day, 7 days a week. Anyone working on the mining process could get the reward, but those who put in more work tend to be more likely to get the coins.
Proof of Stake
As of this publication, the popular blockchain Ethereum has just moved to a proof of stake system. Proof of stake requires all miners to purchase their own coins as a stake in the cryptocurrency that they seek to mine. Miners who invest, or stake, more cryptocurrency and perform more blockchain validation work receive higher rewards.
Proof of stake is easier for people to manage in most situations because it doesn’t require a massively powerful computer. That saves energy costs. Proof of stake requires miners to invest substantially in cryptocurrency, however. For example, the Ethereum blockchain requires a person to have a stake of 32 ETH, currently equal to about $50,000.
How to Mine Multiple Tokens
Crypto miners are free to mine as many coins or tokens as they like. Much depends on whether a miner is working in a proof of stake or proof of work system: that determines a miner's upfront and ongoing costs. The possible rewards are set at specific values based on what the blockchain ledger says and, in the case of the Ethereum blockchain, what the founder has set as a maximum percentage.
Start Crypto Mining Today
The crypto mining process involves many steps and requires a sizeable investment: either by purchasing a fast mining rig for proof of work computations or by purchasing a sizeable investment of the cryptocurrency for proof of stake work. All miners will compete to determine who receives the valuable reward tokens. The work takes a while and can be expensive, but it can also be profitable if managed well.