Since blockchains' advent in 2009, people have hailed this technology as revolutionary. It offers decentralised, secure, and transparent record-keeping. But one might wonder, how does a blockchain add a new block? The answer to this question lies in a process known as ‘mining’.
It powers blockchains using Proof of Work (PoW) consensus mechanisms such as Bitcoin. Mining in blockchain holds significant value and is one of the cornerstones of this technology.
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In this blog, we will break down blockchain mining and its importance.
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Why Mine Blockchain?
Before getting into what mining is, let us understand why it is even necessary. Blockchain mining serves three purposes:
Transaction validation
Hundreds of transactions take place in a blockchain on a daily basis. But how does one authenticate the transactions digitally? Just as physical notes verify themselves with serial numbers, mining verifies cryptocurrency transactions.
Network safety
As blockchain is a decentralised and peer-to-peer network, maintaining security is absolutely pivotal. Mining in blockchain authenticates whether or not a transaction is valid. A block gets added only then. This makes the network secure and impossible to hack.
Circulating a new cryptocurrency
Ever wondered how new cryptocurrencies are generated if there is no central authority governing these regulations? Mining generates new cryptocurrency. This further enforces decentralisation in the blockchain, as anyone can mine the blockchain and generate new cryptocurrencies.
Blockchain Mining: An Overview
To put it simply, mining in blockchain refers to auditing transactions. The mining process requires huge amounts of computational power and electricity. Blockchain mining is especially important in Proof of Work blockchains. In this, miners are rewarded with cryptocurrency and transactional fees for their efforts as proof.
Types of Mining in Blockchain
Miners can participate in mining in several ways.
- Mining Pool: Blockchain has been around for over a decade. Therefore, the mathematical puzzles miners solve are much more complicated. A single miner is unable to do the whole process alone. That is where a mining pool comes in. A group of miners collectively engage in mining to increase the chance of success.
- Solo Mining: When a miner decodes and audits transactions on their own, it is called solo mining. Individual miners compete with one another to find out the hash value. Whoever comes close to the target gets to add a block to the blockchain. However, the chance of success is significantly lower due to greater competition and complex mathematical problems.
- Cloud Mining: In cloud mining, users do not have to buy expensive hardware and software to participate in the process. They can rent the mining power from data centres. However, there is significantly less profit and a high chance of scams.
Mining Process
Let us understand how mining in blockchain works clearly.
Step 1: User Initiates a Transaction
An individual must initiate a transaction from their digital wallet to start the process. For example, you want to send three bitcoins to someone. You open your digital wallet and send three bitcoins to your desired destination.
Step 2: Transaction is Public
The transactional information is broadcast to all the nodes in the blockchain. The nodes ensure that the sender has enough balance, the transactional details are correct, and there is no double-spending attempt.
Step 3: Bundling
Miners group transactions in a block. They select which transactions to include in a block based on transactional fees. The more the fees, the higher the priority it gets. In this step, miners list all pending transactions, the previous block's hash and nonce in the block header.
Step 4: Proof of Work
Miners compete with one another to match the nonce to the hash value. The first miner to match it to the target difficulty gets to add the block. It requires high computational power to solve mathematical puzzles to generate a hash value.
If the hash doesn’t meet the network’s difficulty target, a miner tries again. This process can repeat up to a million times before a valid hash is generated. Miners get rewarded with cryptocurrency and a transactional fee for their efforts. This acts as a digital signature or Proof of Work, validating not only the miner's identity but also the block's validity.
Step 5: Block Addition
Once the miner decodes the hash, they broadcast the block to other nodes for verification. The other nodes check the hash value. If it matches, nodes agree to add the block to the blockchai,n and this process repeats. Miners get cryptocurrency (for example, 6.25 BTC per Bitcoin block in 2024) and a transactional fee as a reward.
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Conclusion
Blockchain and mining go hand in hand to ensure the security and decentralisation of the whole process. Blockchain mining is, therefore, crucial. While the process remains extensively competitive and resource-heavy, alternative consensus mechanisms are emerging.
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