In the crypto ecosystem, mining serves two purposes: it produces new coins and it verifies that information is accurate before it’s permanently recorded onto the blockchain.
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February 23, 2021

In the crypto ecosystem, mining serves two purposes :

  • it produces new coins
  • it verifies that information is accurate before it’s permanently recorded onto the blockchain

Unlike fiat currencies, cryptocurrencies are decentralized, so no single organization is responsible for releasing coins into circulation. Instead, coins are awarded to miners who solve mathematical problems.

These mathematical problems are complex, and the rewards are random — your mining efforts could result in many coins, few coins, or none at all.

This is intentional. The system wants to ensure no single individual or group is in a position where they own the majority of the coins and, so, can influence the network.

Once a problem is solved — this is called proof of work or proof of stake — it has to be verified. Verifying proof of work and proof of stake is an easier process.

Again, this is by design. Easy verification means data can be recorded onto the blockchain relatively quickly. In Bitcoin, it typically takes about 10 minutes for proof of work to be verified and, so, for a transaction to go through.

In certain cryptocurrencies, there’s a cap on how many coins can be mined. This is hardwired into the network’s source code. For example, only 21 million Bitcoins can ever be mined. Once that limit is reached, it won’t be possible for any further Bitcoins to enter circulation.

Ether, which is mined on the Ethereum platform, has a limit of 18 million coins a year, but no upper limit. So, in theory, an infinite number of Ether could be mined, provided miners stay within the yearly limit.


AtoZ-Digital Assets Glossary-Mining-14


Some facts

  • While Ether doesn’t currently have a hard cap, Ethereum’s creator Vitalik Buterin has proposed one.

Buterin made his proposal on 1 April 2019, which led people to believe he was joking. But Buterin subsequently confirmed his proposal and encouraged the community to weigh up the pros and cons

  • On the Bitcoin ecosystem, mining difficulty is adjusted every 2016 blocks — roughly every two weeks — to keep mining rates more or less constant. Difficulty increases when there are more miners on the network, and decreases when there are fewer miners
  • The solution to a mining problem is typically a hexadecimal number, or hash. The Bitcoin network processes 5.5 quintillion hashes per second, which means you’re unlikely to be a successful miner without access to heavy duty equipment


Want to know more?

Of particular interest is the argument about centralization. Mining difficulty and reward randomness should ensure no single individual or group can corner the market. But this is happening anyway because select miners have invested in high grade machinery the average miner couldn’t access.

Buterin thinks switching to a fixed supply would allow the network to calibrate randomness in a way that’ll make it harder for those with powerful equipment to have an edge.


The Metaco view

There have been multiple times in the history of Bitcoin where mining was so centralised that the top two out of three miners were almost able to control the network. What we’ve seen is that, naturally, the network itself got so afraid that it fragmented by itself.

This is as it should be. Excessive centralisation would hurt the trust and the security of the network and, ultimately the value of the coin.” – Adrian Treccani, Founder and CEO

Digital asset glossary

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