In this context the term refers to cryptocurrency mining, which is named after but is distinct from physical mining.

Cryptocurrency mining refers to the act of participation in consensus formation within a peer to peer distributed cryptocurrency network, usually including the performance of ‘Proof of Work’ (PoW) calculations which are used to secure the network. Participants in this process are usually rewarded with newly generated coins, transaction fees paid by the other members of the network, or both.

Mining, as a method of generating new currency units and securing the network by introducing a cost to participate in consensus building, was first introduced by Bitcoin in 2009. Since then it has been adopted by a wide range of other cryptocurrencies following in Bitcoin’s footsteps.

The term mining may also be used when alternative’s to proof of work are used, such as proof of stake or proof of resources, however alternative terms are often preferred for these. Proof of stake ‘mining’ is usually called ‘minting’, while proof of resource participation is sometimes called ‘farming’.

Double Spending and Network Security

The purpose of mining is to process transactions and form a consensus about how many coins each member of the network has and which member has sent coins to which other member. Prior to the development of Bitcoin ‘double spending’ prevented the development of truly peer to peer and decentralized currencies. This is because, unlike physical products, data is inherently easy to copy. So without a central issuer to keep track of who has what, members of the network could copy their coins and send the same money to many different people – making them effectively worthless.

Proof of Work

Bitcoin’s solved the double spending problem using a network of mining nodes which perform ‘Proof of Work’ calculations. Each miner, in order to submit their opinion on what transactions have taken place, must perform proof of work calculations. Each time one of these calculations is perform it gives the ‘miner’ a chance to ‘mine a block’, which includes earning newly generated coins and the fees included in any transaction since the last block was generated. It also effectively gives that miner a vote in the democratic process of decided what the current state of the network is (how many coins each person has). The more calculations that a miner performs the greater their vote, and the greater the chances they have of mining a block.

When there are a lot of different miners performing these calculations it becomes very hard or a malicious actor to submit false information and have it accepted as the consensus, because they must have more computing power on their side than every other member of the network combined.

Alternatives to Proof of Work

Alternatives methods of securely forming a true consensus within a peer to peer network include:

  • Proof of Stake
  • Proof of Resources
  • Distributed Ledger

Recommended Read: Comparison of the best Bitcoin Cloud Mining Sites

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