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Digital Currency Mining 101

Updated: Sep 27, 2018

| B + T |

To fully understand how digital currency mining works, you first need to know the basics of blockchain, which is the underlying technology for digital currencies like Bitcoin, Ethereum and Litecoin.

Blockchain is like a digital ledger that records each transaction of a digital currency, copies itself, and sends the copies to every computer or node in its network.

To make sure the ledger’s true state is verified and updated, each node in the network references and communicates with each other to see if all the copies are the same. This decentralizes, secures, and publicizes every single transaction of the digital currency. If one of the copies isn’t the same, due to a manipulation of a transaction’s record after the fact, the network rejects the transaction. This security protocol halts people from altering the ledger to spend the digital currency more than once or send someone else’s digital funds to themselves.

To update a blockchain with new transactions, a new block (a bundle of transactions) needs to be created and added. But in order to create and add the block, its transactions needs to be validated by the answer to an incredibly intricate math problem. So individuals, groups, or businesses use mining rigs, which consists of mining hardware and software to solve it. These validators are called miners, and the first miners to solve the problem will be rewarded with a payout of the digital currency.

Once a miner figures out the correct answer to the math problem, which is verified by each node in the network, the new block is created and added to the blockchain and the winners earn a block reward. For Bitcoin miners, the block reward for validating one megabyte worth of Bitcoin transactions is around 12.5 tokens. And since the value of one token currently hovers at around $6,350, a successful miner could rake in approximately $80,500 today.

Validation methods like digital currency mining are called proof-of-work or PoW, and it's one of the reasons why digital currency and blockchain are considered so innovative. Incentivizing miners with payouts of a certain digital currency to validate its transactions makes the digital currency safe, secure, and trustworthy to use. Mining also mints and releases the digital currency into circulation, which increases the odds that consumers and merchants will be more willing to adopt and accept it, boosting the currency’s value. But even though digital currency mining is economically beneficial to miners, consumers, merchants, and the digital currency itself, digging for 'crypto' can potentially harm the environment.

As more people mine more digital currency, it gets extremely difficult to solve the math problems that validate the digital currency’s transactions. An substantial amount of electricity is needed to power mining rigs and solve these complex problems, especially for digital currencies with a limited supply, like Bitcoin for instance. In fact, by the end of this year, Bitcoin miners are predicted to consume more electricity than all of Argentina.

Whether or not one is willing to contribute to the massive energy use of digital currency mining, one can definitely earn a profit mining, if you live in low-cost power regions.

One can potentially mine digital currency in a more environmentally-friendly way and mine a less known digital currency that requires less energy and effort to dig up. There’s even some digital currency that can be mined using a personal computer.

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