WHAT IS CRYPTOCURRENCY MINING?

THE SIMPLE ANSWER

Bitcoin is as a decentralized network of computers (that’s you & me) that keep a ledger of accounts and balances individually, mining is literally the process of updating this ledger.  The process of updating this ledger requires some complex arithmetic on huge numbers so substantial computing power is required and in exchange for this computation a small fee is paid, this is the mining reward.

 

THE NOT SO SIMPLE ANSWER

Bitcoins can only be created if miners solve a cryptographic puzzle. Since the difficulty of this puzzle increases the amount of computer power the whole miner invests, there is only a specific amount of cryptocurrency token that can be created in a given amount of time.

Principally everybody can be a miner. Since a decentralized network has no authority to delegate this task, a cryptocurrency needs some kind of mechanism to prevent one ruling party from abusing it. Imagine someone creates thousands of peers and spreads forged transactions. The system would break immediately.

So, Satoshi set the rule that the miners need to invest some work of their computers to qualify for this task. In fact, they have to find a hash – a product of a cryptographic function – that connects the new block with its predecessor. This is called the Proof-of-Work. In Bitcoin, it is based on the SHA 256 Hash algorithm.

Bitcoin Mining

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You don‘t need to understand the details about SHA 256. It‘s only important you know that it can be the basis of a cryptologic puzzle the miners compete to solve. After finding a solution, a miner can build a block and add it to the blockchain. As an incentive, he has the right to add a so-called coinbase transaction that gives him a specific number of Bitcoins. This is the only way to create valid Bitcoins.