What is cryptocurrency mining and how does it work?

The concept of mining immediately refers to the idea of ​​picks and shovels, to the extraction of metals and precious stones. Satoshi Nakamoto, the inventor of Bitcoin, chose this term as an analogy to gold mining to refer to the mechanism of “issuance” of new bitcoins.

The miners they are the ones who run the nodes of a crypto network, and are a fundamental part of the operation and integrity of the network of each cryptocurrency.

Your mission is collect transactions as they occur, order them into blocks, and add them to the chain, the way the blockchain works, where each block must be related to the previous one to be valid.

This feature will continue to exist even after the last asset has been mined, and will always be critical to the network.

Consensus mechanisms in crypto networks

The difference between various cryptocurrencies is given by their consensus algorithms. That is, by how the network reaches that single result that most of its nodes like when it comes to validating transactions.

There are several types of solutions, such as work test (PoW, for its acronym in English), the proof of stake (PoS) and the ability test (PoC), among others. However, some coins use a combination of these and other factors to determine their consensus mechanism.

Work test

Proof of Work is Bitcoin’s consensus mechanism, which uses the SHA 256 algorithm. Also other cryptocurrencies like Litecoin or Monero use Proof of Work.

The network creates hard puzzle to solve (but easy to check) and the first of the participating mining nodes to find the answer wins the right to create the next block.

Thus, miners use their computational resources to find the solution to the problem. That is, to find the correct hash. What is hash? It’s like a «fingerprint» of a file or data set.

The puzzle is mathematically programmed, and there is no way around it. On average, the process of finding the hash it takes about 10 minutes. The miner who wins this race and creates the new block receives value in bitcoins as a reward, in addition to the fees included in the transactions processed.

The proof of work, however, is a mechanism widely criticized, for being an activity that consumes a lot of energy. In countries like Argentina, where the cost of hardware inputs and electricity can be very high, mining ends up being unviable, even despite the rewards.

proof of stake

The form of mining with proof of participation (or Proof of Stake) uses a random draw to decide who creates the next block.

In this model, the potential creator must have assets in the specific currency. In fact, whoever has the most coins is more likely to end up “winning the raffle” and being designated a creator. Therefore, the term here it is not exactly «mining» the currency, but «forging» it.

It is necessary to allocate a number of coins for this process, varying from one network to another. And that participation is what guarantees the integrity of the participants, since if someone tried to compromise or change the block, they would lose their coins in play and the possibility of using them in the process in the future.

The PoS is much more efficient than PoW in terms of power consumption, since it does not require computational force to solve the algorithm. But there are those who consider this type of consensus test to be biased, and demand social intelligence for newcomers to participate.

Another important point is your safety, because the more decentralized the network is, the more secure it becomes. Also, running PoS crypto nodes tends to be more accessible, both financially and technologically, so more people have access.

EOS, Stellar, Waves, Dash and Cardano are some of the crypto projects that use PoS, which is the consensus algorithm most used as an alternative to PoW, and has its rules defined in the contract, where different types of participation checks are also established.

The DPoS or delegated proof of stake is an algorithm used by Tron and EOS, and works with a fixed (choosable) number of validating members. Anyone holding tokens can vote on who will validate network transactions.

The LPoS or leased proof of stake is a form used by Tezos, in which delegation is optional. Whoever has the token can delegate their right of validation to other members of the network, even if they continue to own the cryptocurrencies.

The Proof-of-Stake Masternode is an algorithm used by Dash, where each forged block is rewarded by network nodes that maintain a minimum storage of coins (1000 units, in Dash’s case).

There are several other protocols, such as the test of linked participation (BPoS) and proof of hybrid participation (HPOS). And many more to create, since each network can define its rules as it wishes.

capacity test

This type of consensus algorithm allows mining devices to use the space available on your hard drives for cryptocurrency mining.

It has similarities with the proof of participation, because it is also played through a draw, but in this case the more space in the HD a node has available, the greater the probability of being designated the creator of the next block.

But although it is considered the most sustainable consensus mechanism, due to the lower use of electricity, on the other hand has the disadvantages of a lower adoption rate and a certain fragility to the malware affecting the mining activity.

Some cryptocurrencies that use this consensus mechanism are Storj, Burst and Filecoin.

Different models for different goals

As we have seen, there are several types of consensus, each designed for a different purpose. Consider that there is not one type of mining better than another, but there are different mechanisms that serve to solve different challenges, and each one has its way of allowing the maximum extraction of resources possible.