Quite recently (about two days ago, to be honest), a friend of mine was listening to a podcast about bitcoin, crypto, and the associated economy. She started asking me some questions (which is fine), but many of those questions are things I covered in previous articles. Still, to find that information, a reader would have to dive into the topic and read all about ledgers and all that kind of thing. I decided the best way to approach informing people about crypto is by giving them a fundamental, layman’s terms answer to their questions. So, if you’re a crypto native, this article probably isn’t for you. But if you’re wondering how crypto, bitcoin, or anything like that works, this might be what you’re looking for. Let’s start with one of the most prevalent questions crypto natives get (but still find hard to explain).
What is mining?
When the average person thinks of mining, it’s all shovels, picks, and deep, dark holes. Clearly, there are none of these things in crypto mining. So what exactly is crypto mining? How does it work? Cryptocurrency systems must verify transactions when people buy, sell, or trade crypto. Just like when you swipe your credit card and Visa needs to confirm that you have cash in your account, the system needs to verify that you have crypto in your wallet. However, unlike Visa, there’s no central server. As a result, anyone who wants to contribute processing power (and electricity) to the network can do so to verify transactions.
Naturally, processors and electricity cost money, so the best way to reimburse these people for using their computers for verifying transactions is with some currency. So how does a miner know which blocks contain coins? The distribution of coins changes dynamically with each block solved. Ideally, this is supposed to reduce inflation, but because many currencies like bitcoin are speculatory things, the price of those coins is vastly inflated.
What happens when a block is “mined” is that a handful of miners get together and solve a complicated cryptographic equation. Once they agree on a solution, the…