Cryptocurrency is fastest growing industry in the world at the moment, It all started back in 2009 when world’s first decentralized minable cryptocurrency was launched known as Bitcoin. It’s now bing traded worldwide and many governments have also started accepting it as world currency.

Cryptocurrency need checks and balances, validation and verification. Which normally central governments and banks are the ones who perform these tasks, making their currencies difficult to forge while also keeping track of them.

The big difference with cryptocurrency is that it is decentralized. If there is no central government regulating it, then how do we know that the transactions are accurate?

The answer is Mining.

One of the most common analogies that people use for Cryptocurrency is that it’s like mining gold. Just like the precious metal, there is only a limited amount and the more that you take out, the more difficult and resource intensive it is to find. Apart from that, cryptocurrency actually works quite differently and it’s actually quite genius once you can get your head around it. One of the major differences is that mining doesn’t necessarily create the cryptocurrency. Cryptocurrency is given to miners as a reward for validating the previous transactions. So how do they do it?

Mining requires a computer and a special program. Miners will use this program and a lot of computer resources to compete with other miners in solving complicated mathematical problems. About every second, they will try to solve a block that has the latest transaction data in it, using cryptographic hash functions.

What are Hash Functions?

A cryptographic hash function is an essentially one-way encryption without a key. It takes an input and returns a seemingly random, but fixed length hash value.

For example, if you use Movable Type’s SHA-256 Cryptographic Hash Algorithm:

Message: I Do CryptoCurrency Mining.

Hash Value: 6212379b 8ecd9c33 a2ab8985 38119814 68f3de74 661b3deb 22615c38 2f125a2d

If you change even one letter of the original input, a completely different hash value will be returned. This randomness makes it impossible to predict what the output will be.

How Are Hash Functions Useful For cryptocurrency?

Because it is practically impossible to predict the outcome of input, hash functions can be used for proof of work and validation. Bitcoin miners will compete to find an input that gives a specific hash value. The difficulty of these puzzles is measurable. However, they cannot be cheated on. This is because there is no way to perform better than by guessing blindly.

The aim of mining is to use your computer to guess until it comes up with a hash value that is less than whatever the target may be. If you are the first to do this, then you have mined the block (normally this takes millions and billions of computer generated guesses from around the world). Whoever wins the block will get a reward in cryptocurrency. The winner doesn’t technically make the cryptocurrency, but the coding of the blockchain algorithm is set up to reward the person for doing the mining and thus helping to verify the blockchain.

Each block is created in sequence, including the hash of the previous block. Because each block contains the hash of a prior block, it proves that it came afterward. Sometimes, two competing blocks are formed by different miners. They may contain different transactions of cryptocurrency spent in different places. The block with the largest total proof of work embedded within it is chosen for the blockchain.

This works to validate transactions because it makes it incredibly difficult for someone to create an alternative block or chain of blocks. They would have to convince everyone on the network that theirs is the correct one, the one that contains sufficient proof of work. Because everyone else is also working on the ‘true’ chain, it would take a tremendous amount of CPU power to beat them. One of the biggest fears of cryptocurrency is that one group may gain 51% control of the blockchain and then be able to influence it to their advantage, although thankfully this has been prevented so far.

Who Are cryptocurrency Miners?

Initially, cryptocurrency miners were just cryptography enthusiasts. People who were interested in the project and used their spare computer power to validate the blockchain so that they could be rewarded with cryptocurrency. As the value of cryptocurrency has gone up, more people have seen mining as a potential business, investing in warehouses and hardware to mine as many cryptocurrency as possible.

These warehouses are generally set up in areas with low electricity prices, to further reduce their costs. With these economies of scale, it has made it more difficult for hobbyists to profit from Bitcoin mining, although there are still many who do it for fun.