In order to fully understand how mining cryptocurrency works, you need to understand the process of the Blockchain. The Blockchain, also known as a digital ledger, holds a similar objective to accounting processes, however the mining process in the cryptocurrency market relies on further functions to be effective. Similar to the standard accounting process, the functionality is supposed to accurately track how much is in an account, what transactions have occurred, the order in which the transactions have been processed, and lastly place that information in a permanent ledger; the Blockchain.
In addition to these classic accounting functions, the mining process must also take the most recent and varied transactions, include them in the latest block, and apply a specified mathematical problem to that current data. To ensure each result is completely unique, this particular math equation requires additional parameters for certain digits within the answer. Although, the equation does not provide an exact answer, it displays a set length for use in the digital ledger. In order to successfully create a block, it must be accompanied by a cryptographic hash that fulfills these certain requirements, at which point when the correct hash is found, a new block is formed and the miner that found it is awarded with the units of cryptocurrency.
Cryptocurrency is a form of digital money that uses cryptography; a technique that uses mathematical theory, along with computer science to securely transfer data and information. It is used to convert certain information into an almost unbreakable code to assist in tracking purchases and transfers. The cryptocurrency is recorded through the blockchain and when the right hash [a numeric value of fixed length that uniquely identifies data] is found, a new block is created and the miner that found this particular block is awarded the units of cryptocurrency.
A similar analogy would be a lock and key, with the lock being the existing blockchain and the basic key outline being the latest transactional data that is soon to become the newest block. The miners will then compete by randomly carving grooves, until someone is able to identify a pattern that allows the miner to permanently secure the key into the lock; or in this case, a new block to the blockchain. This miner is the “winning” miner. In essence, whoever can make guesses at the faster rate, will have the higher chance of winning.
This accounting and mathematical analysis process is referred to as hashing and the speed at which calculations can be made are called the hash rate. As the analogy implies the hashing process is not a proper mathematical analysis but instead a competition that requires technology, energy, and time.
How did Satoshi Nakamoto, the inventor of Bitcoin, encourage people to take up this increasingly difficult, time consuming and power intensive process? He created two reward systems. The first was to establish a new digital reward system, called Bitcoin, to be given to miners who completed a new block; the second basic transactional fees.
And as the reward for these brute force technical efforts is a new asset, it becomes apparent why sometimes it is referred to as “digital gold”, and the process of generating this “digital gold” has come to be called mining. This entire process is referred to as proof-of-work (PoW) and is the cornerstone of the decentralized ledger that is currently the foundation of most cryptocurrency blockchains.