Ulas Crypto

Cryptocurrency Mining

The following is a very simple explanation of mining:

Suppose you live in a country located on the continent of Europe and your friend lives in a country located in Asia and has the same bank account, say Bank "A". Therefore, the bank "A" is "party third "that holds your account together, the balance in your ledger.

Now, your friends in Asia send 1000 USD. Bank "A" charges 2% for this transaction.

Bank "A" charges this amount for the following services:

• Maintain both of your ledgers, the database.
• Providing services to both of you to transfer money from one account to another.

Now, let's move on to cryptocurrency. Crypto's (like Bitcoin) are based on open-source blockchain technology with distributed databases which means, they are not third parties (like the "A" bank) that manage your ledger.

Meanwhile, miners are people who maintain a database of all transactions that occur on the bitcoin network. Anyone who has downloaded copies of all transactions can become miners.

What did this miner do? 

• Miners share the power of their hashes or you can say run an algorithm to confirm/verify transactions that occur on the cryptocurrency network. 
• To verify each transaction, they get a fixed reward, a cryptocurrency. 
• This is how new cryptocurrency is generated.

A cryptocurrency like Bitcoin offers good security for transactions that occur on its network. This security is provided by validating transactions. An algorithm known as Proof of work is used to validate transactions

But, why does someone validate the transaction?

• When transactions are validated, contributors to computing power that help in validating transactions are valued, this process is called mining.
• If you contribute computing power to the network, you will be known as a miner.
• For each validated block, the prize is 12.5 Bitcoin, this prize is divided into two every 4 years

Simply put, try and understand in a very practical way without technical words. The word mining is exactly the same as any precious metal mining. Here said mining is connected with mining using cryptocurrencies.

The following picture has one example of how the "Bitcoin" cryptocurrency is mined and what the purpose of mining is.