In its most abstract form, mining a cryptocurrency consists of providing a service to the network of said currency in exchange for a monetary reward. In the least complex case, the help delivered comprises really taking a look at the legitimacy of a bunch of exchanges. A block is formed whenever a set of transactions are committed. If this block meets certain criteria specific to the cryptocurrency blockchain, then it is added to the top of the chain, and the “miner” who made this block is rewarded for their work.
Blockchain network and nodes
All cryptocurrencies rely on a peer-to-peer network. This network is made up of servers that operate using dedicated software. These servers are the network nodes and the software that enables the communication between the nodes is called the “client”. Each server can run its own implementation of the client; but to be able to be part of the network, this client must be interoperable with other implementations operating on the network. In practice, the majority of nodes run on the same client which is a reference implementation developed by the creators of the cryptocurrency. In the case of Bitcoin, this implementation is Bitcoin Core.
A node in the network works selfishly and it can decide if it wants to provide several services:
propagation of information:
when a cryptocurrency user decides to carry out a transaction, he encodes and then sends (using his wallet software) his transaction on the network. To do this, it contacts a list of nodes and sends them the encoding of its transaction. Each node can then, if it wishes, send this encoding to other nodes, thus allowing the information to be propagated to all the players in the network. Similarly, when a node receives a new block to add to the chain, it can send it to other nodes to propagate the information;
decentralization of information:
each node records the entire blockchain. This means that at any given moment the full history of cryptocurrency transactions is recorded in different servers, located in different jurisdictions and operated by different actors;
sharing of information:
if it wishes, a node can make it available to the public by downloading its version of the chain. Thus a newcomer to the network can be updated with the transaction history.
Verification:
When a node receives a transaction, it can verify that the sender of the transaction actually owns the funds it claims to be spending. Similarly, when a node receives a new block it can verify that the latter is valid;
research and addition of blocks:
the most intensive service in terms of power consumption is the creation of new blocks. For this, a node assembles a group of transactions, verifies them, then tries to form a block containing these transactions as well as a hash of the previous block, guaranteeing the unforgeable nature of the chain. If so, the node broadcasts this new block to the entire network for all other nodes to recognize as valid and add it to their version of the chain.
Running a network node 24/7 has several costs:
- electricity: a server consumes energy;
- bandwidth: providing some of the above services requires a stable and fast internet connection;
- investment: a node is above all a server and the purchase of a server has a cost. Additionally, blockchain logging (which continues to grow) requires a dedicated hard drive.
To spark as many nodes as possible, cryptocurrencies are designed in such a way that the above services are financially rewarded. It’s mining. Nodes that operate for the sole purpose of collecting financial rewards are called miners. That said, some nodes are funded by donations or pure dedication to a cryptocurrency, and generally, these nodes do not mine.
What is a miner?
A miner is a cryptocurrency actor who operates one or more nodes for the purpose of receiving financial compensation. Miners focus their servers on creating new blocks.
Reward and “Coinbase”
When a miner adds a new block, they receive a reward that can take different forms depending on the cryptocurrency:
- If the cryptocurrency is “mineable” the miner receives a so-called “Coinbase” transaction. This transaction is a monetary creation for the miner. If the cryptocurrency is not “minable”, there is no monetary creation and the miner does not receive this reward. It is this creation of money that explains the use of the term “mining”, by analogy with the exploitation of gold mines.
- The set of transactions selected by the miner to be part of the new block may possibly contain transaction fees. These costs accrue to the minor.
Some cryptocurrencies split the rewards between the miner who created the new block and other network players. This is the case of Dash.
A transaction that has been added to a block in this way is said to be “mined” or even “confirmed 1 time”. The number of confirmations needed for a transaction to be considered final depends on the characters of the blockchain. In the Bitcoin case, the number of 5 confirmations is commonly accepted.
Difficulty
The difficulty is usually a dimensionless unit. It represents an abstract and arbitrary constraint specific to each blockchain. A mined block is valid only if it satisfies the difficulty constraint.
Each cryptocurrency has a different difficulty adjustment mechanism. This mechanism allows the maintenance of constant production of blocks: if the blocks are produced too quickly compared to a precise value, the difficulty is increased; if the blocks are not produced quickly enough, the difficulty is lowered. In the case of Bitcoin, for example, the difficulty is readjusted every 2016 blocks to take into account the real computing power of the network and allow on average add of a block every 10 minutes, which means that the duration probable calculation of a valid fingerprint is 10 minutes for the most powerful computer or group of computers on the network.