What is Digital Currency Mining?

In Mining

If we had a dollar for every article and news report we've seen about digital currency mining that trumpets, “You. Can. Make. BIG MONEY!!!” and doesn't even bother to describe the process, well—we'd have a lot of dollars. The average person out there understands that mining can be a source of cryptocurrency income, but has no idea how to go about it. To clarify matters once and for all, we're gonna look at digital currency mining in this article—what it is, how it's done, and the different types of mining there are out there.

The information for all cryptocurrency transactions is embedded in what are called data blocks. Each of these blocks is interlinked with several others, creating a block chain. In order for transactions to be verified, these blocks need to be analyzed as quickly as possible, and the issuers of digital currency know they don't have the processing power to do it alone. That's where the miners come in.

Miners are investors who devote computer space and time to sorting through data blocks. When their mining hits upon the right “hash”—a complex mathematical formula puzzle that helps not only verify transactions, but also create new currency—they submit their solution to the currency issuer. When their work and hash are verified, the miners receive a reward of a given number of coins. A portion of the transaction fees linked to the transactions the miners have helped verify also goes to the miners, so there's a dual-layer system of reward there. This type of mining and its resulting rewards is called a “proof of work” system, a term that's self-explanatory: you do the work, you get paid for it. Proof of work is used by Bitcoin, Litecoin and most other digital currencies.

There's another system of mining called “proof of stake.” Unlike proof of work, this system isn't used as a stand-alone, but in tandem with the proof of work method. The proof of stake concept means investors earn through mining—in addition to the proof of work income—an amount that's proportional to the amount the miner already has invested in the currency. Right now, both Peercoin and Novacoin use the proof of work/proof of stake mining combination.

Mining speed can be a big issue. For currencies that use the SHA-256 algorithm in mining—such as Bitcoin and Peercoin—individual mining can be nearly impossible, since the algorithm and process both demand very high CPU and energy usage. Indeed, many miners who use SHA-256 mining have dedicated computers that are assigned to that task alone, and nothing else. Since this isn't feasible for most individual miners, mining pools have been formed where several miners combine their resources to perform the process. When all is said and done, they divide the coin and transaction fee income evenly among their pool members.

As a counter to SHA-256, there's the Scrypt algorithm. Scrypt is much quicker and computer-friendly, and takes less time and energy. Litecoin and Novacoin are among the digital currencies using Scrypt, and they count more individual miners among their investors—and fewer mining pools.

Since most cryptocurrencies have mintage caps—meaning once a certain number of coins are mined or created, that's it—earning coins in the mining process will slowly taper off and become less common. By that point, the sharing of transaction fees will be the main incentive for miners to continue to do so. By the time that happens, it's projected that transaction fee shares alone will be large enough to make mining worth the time and trouble.

There is digital currency income to be made through mining; however, the process can often be time-consuming and comparatively low-return, especially for individual miners. It's definitely not the get-rich-quick scheme some articles might lead you to believe.

All cryptocurrencies use mining; after all, it's how they check the validity of transactions and create new coins. For a plain-English description of the mining process, we recommend this article. It covers Bitcoin mining specifically, but gives a good overview of the terms and steps taken in the mining of most alternative currencies.

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