If you have been wondering how cryptocurrencies are created, this article is for you.
Cryptocurrencies are created through a process called mining. Mining cryptocurrencies requires computers with special software specifically designed to solve complicated, cryptographic mathematic equations. In the technology’s early days, cryptocurrencies like Bitcoin could be mined with a simple CPU chip on a home computer.
In total, exactly 21 Million Bitcoin will be mined and are expected to be exhausted by 2030. This is a hard limit set on Bitcoin’s supply as imposed by its founder Satoshi Nakamoto. This number cannot be changed and is embedded in the source code for Bitcoin.
How to mine cryptocurrency (Bitcoin)
For this article, our focus will be on the mining of bitcoin since it is the most popular cryptocurrency in the world. This process is similar to the mining of other cryptocurrencies. Written below is a breakdown of what happens during bitcoin mining.
Bitcoin mining requirements
The first thing to do as a bitcoin miner is to select the required tools for the process and set them up. These include:
Hardware GPU (graphics processing unit), SSD for crypto mining, or ASIC (application-specific integrated circuit)
- A wallet
- Preferred mining pool
- Mining software
After gathering these tools, you must set and fire them up, and the mining process will start autonomously. Any other human involvement comes during system or network failure, power outage, or regular system maintenance.
Components of a bitcoin transaction
After initiating a transaction in the bitcoin network: transaction input, transaction output, and transaction amount.
A bitcoin mining software generates a unique cryptographic hash puzzle for every transaction you initiate that is difficult to decode. The software then groups the number of transactions required to form a block into a Merkle tree.
The Merkle Tree and the SHA-256 Algorithm
A Merkle tree is a data structure of the hashes in a block and acts as a summary of all the transactions in the block. In the Merkle tree, hashes of individual transactions known as transaction IDs are paired repeatedly using the SHA-256 algorithm until only one hash identifies the entire tree. This hash is known as the Merkle root or root hash. The Merkle tree enables the efficient verification of transactions in the bitcoin network.
The Block Header
The Merkle root, the identifier of a Merkle tree, is stored in the block header. The block header contains the information about the block, how to solve the puzzle hash, and add a block transaction. It has significant components, namely the version number of the bitcoin software, the hash of the previous block, the root hash, timestamp, cryptographic nonce, and the target
Solve the Hash Puzzle
Miners must solve the hash puzzle by finding the hash below a given target through the difficulty requirement. To solve the hash puzzle, you (the miner) must try to calculate the hash of a block by repeatedly adding a nonce to the block header until the hash value yielded is less than the target.
If your mining computer solves the puzzle, a new block is successfully created that is validated in the Bitcoin network after a consensus between the nodes has been reached. However, if you are the first to solve the hash puzzle, you will get a reward in bitcoin.
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