DEFINITION of Mining
Mining is an integral part of a cryptocurrency network that performs two important functions. First, it is used to generate and release new cryptocurrency tokens for circulation via the cryptocurrency network, and secondly, it is used to verify, authenticate and then add the ongoing network transactions to a public ledger.
BREAKING DOWN Mining
Various types of mining exist, depending on the network configuration and the type of hardware required for mining.
Since cryptocurrency-based ecosystems work in a decentralized and autonomous manner, a mechanism is required to ensure that transactions that occur between network participants are authentic. Secondly, where do new cryptocoins emerge from, and what is the way to ensure that newly found coins are genuine? Mining takes care of both these requirements.
Each time a transaction occurs on a cryptocurrency network, say A pays X cryptocoins to B, the transaction details are broadcast to the network. However, merely broadcasting the details does not ensure that the transaction is genuine. It needs verification.
A cryptocurrency miner performs the necessary verification actions using mining devices to ensure that the transaction details are authentic. Only after suitable verification is the transaction recorded on the blockchain. Akin to mining of metals like gold and silver, cryptocurrency mining also finds newly minted cryptocoins which are added to the network's circulation after verification.
How is Mining Performed?
The mining process involves solving complex mathematical problems using intrinsic hash functions linked to the block containing the transaction data. Depending upon the popularity of the cryptocurrency network, various miners intensely compete with each other to solve the necessary mathematical puzzle. Since it involves lots of complex calculations to be performed in the shortest possible time to win the mining reward, dedicated mining hardware like computers and electronic chips are used by the miners to speed up the process and win the race. The first miner to find the necessary solution to the mathematical puzzle is able to authorize the transaction. For their services, the miners are rewarded by a small transaction fee. In case of a new block is found by the miner on the blockchain, they get rewarded by adding the block to the blockchain and claim the reward.
Depending upon the network configurations, hardware used for mining may involve CPU, Graphics Processing Unit (GPU), FPGA, and Application-Specific Integrated Circuit (ASIC) devices. They are managed by dedicated software that acts as a bridge between the mining device and the blockchain network. Common cryptocurrencies that need mining using different kinds of devices are Bitcoin and Ethereum. They use proof of work mechanism to arrive at a consensus about transaction validation. (See also, GPUs and Cryptocurrency Mining.)
There are some cryptocurrencies for which mining is not required or do not need any mining devices. For example, NXT is an open source cryptocurrency that uses a stake-based consensus mechanism for validating transactions. Proof of stake decides on the network consensus about transaction validation based on how many cryptocoins a miner holds. Similarly, Wave tokens uses a delegated and leased proof-of-stake algorithm. (See also, Consensus Mechanism (Cryptocurrency) Definition.)