Cryptocurrency mining is how transactions are verified and added to the blockchain by a network of computers. The blockchain is a type of public ledger that records transaction information. Mining is also responsible for releasing new coins to those already in circulation and is an essential component that allows cryptocurrencies to operate as decentralised networks. 

The process involves a worldwide network of computers that act as virtual ledgers. As a reward for their computing power, the miners on the network receive new coins. 

Every miner on the network is part of a race to be the first to guess the “hash” (a 64-digit number). The winner updates the blockchain with the newly verified transactions and is given their reward in coins. 

Bitcoin is the most well-known example of a mineable coin. However, it is necessary to note here that not every cryptocurrency is mineable. 

Let's take a more detailed look at how cryptocurrency mining works.

How does crypto mining work?

A cryptocurrency network consists of nodes or miners that collect transaction information and store them as blocks in the chain. Every node has to verify every new transaction. Specialised computers perform complex mathematical problems to verify and record every new transaction and maintain the security of the blockchain. 

The memory pool contains all unconfirmed transactions on the network. First, the miner must hash each individual transaction taken from the pool. Once the miner has hashed all transactions, they are organised into a hash tree (also known as a Merkle Tree). The hash tree is formed by arranging the transaction hashes into pairs and then hashing them again. The results are organised into pairs and hashed again. The miner repeats this process until “the top of the tree” (or root hash) is reached. The top of the tree is simply a single hash that denotes all previous hashes. 

The root hash, the hash of the previous block, and a random number (known as nonce) are added to the new block’s header. The miner then hashes the header to produce an output representing these three elements (root hash, hash of the previous block, and random number) and some other data. The result is the new block’s hash.

For the new hash to be regarded as valid, the hash must be lower than a specific target value set by the protocol. This is also known as the hashing difficulty. The protocol often alters the hashing difficulty to ensure the speed at which new blocks are created remains consistent. 

So, as the competition among miners increases, the hashing difficulty will also increase. This ensures that the average time it takes to create a block does not decrease. Conversely, if miners leave the network, the hashing difficulty will decrease. 

Miners continue to hash the block header until one of them produces a valid hash. When this is found, the successful miner broadcasts the block to the network. Every other node on the network will confirm that the hash is valid and, if so, include the block in their copy of the blockchain. 

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What is the purpose of mining?

Mining introduces new coins into circulation, but it is also central to many cryptocurrencies’ security. Mining verifies transactions and secures the blockchain to allow these cryptocurrencies to operate as decentralised networks without a central authority. It also offers an incentive for miners to contribute their computational power. 

What is a mining pool?

The miner who identifies the valid hash first receives the reward. The probability of discovering the hash corresponds to the amount of the total mining power on the network a miner holds. So, miners with low mining power are much less likely to find the hash alone. 

Therefore, many miners choose to pool their resources together in mining pools. In these pools, the miners share their processing power and split the reward equally according to the amount of processing power they contribute. 

Popular mining pool platforms include Poolin and F2Pool.

Disclaimer: THIS IS NOT FINANCIAL OR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make, and only you are accountable for the results.