How does cryptocurrency mining work?

What is cryptocurrency mining?

• Cryptocurrency mining is a process that uses a Proof of Work system. This system is based on a simple principle that allows new blocks of transactions to be created to keep the cryptocurrency network secure.

What is PoW (Proof of Work)?

• Proof of Work is a system by which a network determines who has the right to create a new transaction block. Miners try to guess a specific number, called a "nonce", which is 64 digits long. This task is like a riddle, and miners compete to see who can guess this riddle correctly first.
• When a miner guesses the correct nonce, he is entitled to create a new transaction block and is rewarded with transaction fees and a reward for the block mined. For example, for Bitcoin, this reward is currently 6.25 BTC. While there is sometimes talk of "complex mathematical equations", it is really just a matter of estimating this number.
• A simple tool like pencil and paper can be used to mine cryptocurrencies, but a modern ASIC miner like the Antminer S19 XP is capable of "guessing" up to 141,000,000,000 nonces per second.

How long does it take to create a block?

• The process of mining a block takes approximately 10 minutes. Each block contains several thousand transactions.

Why is Proof of Work used?

• Proof of Work ensures network security by requiring a computationally intensive task. Miners must invest time and energy in finding nonces. This prevents someone from creating fake transactions or modifying already approved blocks, as this would require a huge amount of computing power.

Proof of Stake as an alternative?

• A competing system to Proof of Work is the recently popular Proof of Stake. In this system, the miners do not matter. Instead, you lock up a certain amount of your cryptocurrency, which qualifies you for random selection as a validator to confirm a block of transactions.
• This system has lower energy consumption, which is an advantage over Proof of Work.
• It is trusted that locking your coins in the network motivates you not to cheat, as damaging the blockchain would affect your own funds.
• The wallet with the most of a given cryptocurrency has the most power.
• It is precisely because of the need to rely on the validator not to cheat for its own sake that PoS is criticized for having less security and decentralization compared to PoW.