Blockchains are so-called because of their ‘blocks’ and ‘chain’ structure. The blocks are composed of numerous bitcoins/cryptocurrencies which are individual units that store all the data code individually. The chain refers to the links from one neighborhood block to another. Each blockchain represents a specific code authentication explicitly encrypted on the network software.
-> Blockchain Technology has prioritized fraud prevention. Any transaction will be added to the Blockchain only after it is validated, and the validation happens through Mining.
What do we mean by Blockchain mining?
Blockchain Mining is a process used to validate new transactions. Different Blockchain implementations use different methods for validation. It involves vast, decentralized networks of computers around the world that verify and secure blockchains. In return for contributing their processing power, computers on the network are rewarded with new coins.
The participants involved here are known as blockchain miners and these miners function in a labyrinth of computational hardware and software — their primary aim is to authenticate the transfer of currency from one computer in the network to another.
When using bitcoins or other cryptocurrencies blockchain mining is a process that verifies each stage of the transaction. The process is rewarding, as mentioned. A single user does not handle the mining process, but a number of them compete on a unified authentication to get the reward. Each mining success comes with a bonus of several bitcoins(or cryptocurrency).
How is Blockchain Mining Done?
The miners need to solve the complex problem to find the perfect solution hash that matches and fits. The solution to the hidden code encryption is known as the ‘Proof-of-work.’ As the name suggests, it is proof of the abundance of resources, time, and energy that is spent by the miner. This proof-of-work is challenging to produce and may sometimes prove to be of lower profitability.
Two prominent algorithms used for Blockchain mining are:-
Proof of Work (PoW):
Proof of work is a consensus mechanism to choose which of these network participants—called miners—are allowed to handle the lucrative task of verifying new data. In PoW, miners must demonstrate computational work by solving a difficult mathematical problem. The problem is designed to be challenging to solve but easy to verify once a solution is found. This mechanism ensures that miners invest computational resources, making it expensive and time-consuming to attack or manipulate the blockchain.
Proof of Stake (PoS):
A more environmentally friendly algorithm than the Proof-of-work (PoW) protocol. Its working principle states that people possessing the most coins in the network have an entrusted interest in network maintenance and retaining coins’ high value. Here, instead of miners competing based on computational power, block validators are selected in a deterministic way, considering the amount of cryptocurrency they hold or "stake." Validators are chosen to create new blocks and validate transactions based on their stake. It requires participants to show ownership of a certain number of coins, which are "locked" as collateral. PoS is considered more energy-efficient and allows for faster block validation compared to PoW.
Blockchain mining requires a lot of resources. And for spending the time and resources for this, the miner receives a reward called a Mining reward.
The Process:
The following steps are typically included in the mining process:
Validation of the transaction: Miners collect pending transactions from the network and verify their validity, ensuring that they adhere to the network's rules
Establishing a Block: Confirmed transactions are gathered to shape a block.
Hashing: The block hash, also known as the block header, is created when miners apply a cryptographic hash function to the data in the block.
Finding a Nonce: To produce a block hash that satisfies particular requirements, miners alter a small portion of the data in the block known as the nonce. Until a suitable hash is found, the block data must be repeatedly hashed using various nonce values.
Target Difficulty: Having a certain number of leading zeros or meeting other predetermined conditions are two of the requirements for a valid block hash. The level of computational effort required to locate a valid hash is determined by the difficulty target.
Broadcast and Validation of Blocks: A miner announces to the network when they find a valid block hash, demonstrating that they have completed the necessary computational work.
Agreement and Block Expansion: The validity of the block is checked by other network members to make sure the miner followed the rules. The miner is rewarded if the block is deemed valid and added to the blockchain.
Advantages of Blockchain Mining:
Security: Mining ensures the blockchain's security and immutability, making it difficult for malicious actors to tamper with the transaction history.
Decentralization: Mining involves a network of participants, preventing any single entity from controlling the entire network and reducing the risk of manipulation or censorship.
Incentivization: Miners are rewarded with cryptocurrency tokens and fees, encouraging their participation and maintaining network robustness.
Transaction Validation: Miners verify the legitimacy of transactions and prevent double-spending, eliminating the need for intermediaries.
Transparency: The public and transparent nature of the blockchain allows anyone to verify transactions, promoting accountability and trust.
Innovation and Development: Mining drives advancements in hardware and software technologies as miners compete to solve problems more efficiently.
Distributed Consensus: Mining enables decentralized consensus, ensuring all participants have a shared view of the blockchain's history and maintaining network integrity.
Conclusion:
Blockchain mining is a fundamental process that ensures the security, decentralization, and immutability of blockchain networks. While it has its challenges and environmental considerations, mining continues to be a crucial element of many cryptocurrencies and blockchain-based systems. The consensus algorithms (mentioned above and beyond this blog) play a vital role in securing blockchain networks, maintaining consensus, and incentivizing participants through block rewards and transaction fees.