How Does Blockchain Mining Work and How to Set it Up

When people hear “mining,” their minds conjure an image of people with hardhats digging the ground for precious metals.

But the blockchain is a digital concept, so what is blockchain mining?

Blockchain mining is a process that involves computers verifying and adding transactions to the blockchain. Mining is also responsible for introducing new cryptocurrencies into the existing supply.

Mining helps secure the validity and reliability of blockchain-based transactions. Since the blockchain is absent of centralized control, miners are crucial to maintaining the ledger and securing it against malicious activity.

This article explains what blockchain mining is and why it matters for cryptocurrency. We’ll also answer the “how does blockchain mining work?” question and detail how to start blockchain mining.

Let’s dig in.

What Is the Blockchain?

Understanding blockchain mining requires a good grasp of how blockchain works. If you’re new to the technology, here’s a crash course on blockchains:

Blockchain technology is a distributed ledger that records transactions performed on the network. This “network” is an interconnected group of computers (called nodes) that contribute to the system by checking the validity of transactions.

New transactions on the blockchain are packaged in “blocks”, which are essentially files containing data. Nodes confirm these blocks and add them to the ledger.

Each block is linked to the preceding block through cryptographic protocols. This creates the semblance of a chain—hence, the term “blockchain.”

The anatomy of a blockchain transaction. Source: Euromoney.com

Why is Blockchain Mining Important?

As explained earlier, mining is the process of confirming and verifying transactions before they are added to the blockchain. But you may wonder—why do transactions need verification in the first place?

When someone initiates a transaction, nodes confirm if the person has enough in their wallet balance to fund the transaction. Say the transfer involves a non-monetary asset, like digital data, the sender must prove ownership of the asset.

Remember that cryptocurrencies transferred on the blockchain are not backed by a central authority. As such, a system is necessary to ensure that no one tries to spend the same funds twice or transfers assets they don’t own.

This problem doesn’t come up with physical currencies. If you spent $5 on a cookie, it’s impossible to spend that same $5 on a Snickers bar.

Can you spend a counterfeit version of the five-dollar bill on another purchase? Maybe. But a simple check of the details on each bill (including the serial number and watermark) will expose the fake currency.

Cryptocurrencies are digital records existing on the blockchain. And that means any Tom, Dick, and Harry will try to copy and counterfeit them to spend them in illicit transactions.

Fortunately, Satoshi Nakamoto, creator of the first cryptocurrency (Bitcoin) had a solution to the problem of double-spending.

Called proof-of-work, this system brought a way for participants to agree on a shared history of the blockchain. This meant that no one could double-spend a bitcoin twice since nodes would cross-check the records before accepting the transaction.

Proof-of-work incentivizes nodes to verify transactions by rewarding them in cryptocurrency for each block successfully added to the chain. However, nodes (called miners) must compete to validate new transaction blocks.

Proof-of-work requires miners to dedicate intensive computing power before adding new blocks. But this is a feature, not a bug. The higher barrier to entry prevents malicious behavior since dishonest miners lose both block rewards and their initial investment (electricity).

Bitcoin isn’t the only cryptocurrency to use mining. Popular PoW cryptos include Litecoin, Ethereum (before the Eth2 upgrade), ZCash, and Elon Musk’s favorite, Dogecoin.