Mining crypto currency is a term we always hear in all crypto forums. The faucet sites are also full of advertisements promising very good returns in it. For those who are relatively new in this field like me, understanding it becomes a bit difficult. For this reason we fall prey to crypto mining scams and lose our hard earned money. This type of mining is unlike mining as we know that is going down the earth to get some precious metal. Here we get precious crypto currency by using the computational power of powerful computers. It’s all happening in the digital virtual world.
A simple example
Suppose you are a student and your math teacher asks a question. For a correct answer he will give you 3 candies. You answer it correctly and get the 3 candies. This is like you have mined the 3 candies yourself.
If you take the help of a group of your friend to answer it correctly, then all of you will get 3 candies. This is like a mining pool where everyone is contributing.
Mining crypto currency.
In mining, a transaction is recorded and stored in a block chain. When you make a transaction the miner verifies it and stores it in a digital ledger. Once the transaction is confirmed by the miner then it can be used by the new owner.
A new block is mined in a time which is different for different crypto currency. These new blocks are added to the black chain. Each block has a certain number of crypto currencies.
There are two types of rewards for a miner doing the mining process.
1. Reward in the form of new currency for creating new blocks.
2. Taking a transaction fee
Miners have to complete a mathematical puzzle which is a crypto hash algorithm. Then the proof of his work is included in the new block as proof of work (POW). Each block is added to the older blocks to form a block chain and all transaction records are kept in the block chain.
The mining code is like a treasure hunt, after a certain period a new code is generated and all the miners are in a race to solve it. The one who solves it first gets the block and the currency attached to it. A lot of computational power is required for this.
Mining mechanism
The one who completes the calculations first is rewarded. Let us take the example of Bitcoin. It is basically a long combination of password hidden in an encrypted algorithm. The miner who can find the matching password first gets the reward. There are 21 million Bitcoins and 210.000 blocks will be generated. Also every 4 year the block size is halved until it cannot be halved anymore. So its mining gets difficult with time.
As its quantity is limited so it is compared to gold and also called digital gold. With block size reducing and more and more miners coming in to mine it, so these miners are using more computational power to solve the algorithm first. The competition is fierce and the rewards less.
Even 4-5 years ago it could be mined on a computer but now it is not possible as the computational power is not there in a computer. Now specialised equipments are required to mine Bitcoin.
Formula for reward
Crypto currency generated from a new block minus the cost of equipment, electricity, maintenance etc = your reward.
The miners can then sell the newly generated crypto currency in the exchange or market if it is a bull market. Or hold it in a bear market and sell when the bull market returns.
Everything is controlled by the miners. If the reward is more then more miners will join to mine new blocks. If the reward is more for confirming each transaction then more miners will participate in it. Now it is in the hand of big corporations with big money. A person can also participate in it by making an investment and getting a part of the miners reward as return. This investment of yours helps the miner to meet his expenses.
Risk as an individual investor
As it is beyond the reach of an individual so now you will find fraud companies coming up which will ask for a token investment in return for reward. Most of these are not mining but actually running ponzi schemes, so please use due diligence before investing anything.
I tried mining too before but its draining battery life and consumes a lot of electricity I guess.. I think this is the risk that we have to check too.