Many people are choosing to jump on the cryptocurrency bandwagon, but there is still a need for further understanding with regards to how they actually work in order to ensure that they will consistently make informed choices in a volatile landscape.
A common question regarding this topic is the nature of cryptocurrency mining — specifically, why does mining exist and what purpose does it serve?
The short answer to these questions is that mining supports the decentralized nature of cryptocurrencies. This can be further broken down into two answers:
It Secures & Verifies Transactions
Mining cryptocurrencies performs the same function that all security features in traditional currencies do, which is to prevent people from counterfeiting them.
With traditional money, the use of special fabric, paint, serial numbers, and intricate design patterns are employed to prevent people from making their own copies and thus flooding the market. Since there is no central authority that secures and regulates the creation and transfer of cryptocurrencies, the cryptographic problem that is being solved with each new block is proof that someone went through the effort of mining that particular block. It proves that a transaction occurred, as well as shows the sender, receiver, and value.
It is deliberately difficult to mine cryptocurrencies because it ensures that the network is not flooded with blocks that have to be checked for validity and stored. It has been dynamically adjusted so that on average worldwide, one block is generated every ten minutes.
If mining did not exist, a central authority would be needed to create the money and transfer it, defeating the purpose of a decentralized currency. It could also be rendered worthless because anybody could replicate money for themselves.
It helps keep the network running
When the first cryptocurrency — Bitcoin — was introduced, having others mine for Bitcoins by exchanging their computation power for Bitcoins was what incentivized people to get into the industry in the first place.
The economic benefit derived from this is that value was not created out of thin air. Bitcoin miners trade one valuable resource — which is their time and energy — in exchange for another — which are the Bitcoins. This helps establish a connection between the real world value and the value of a Bitcoin.
Mining also keeps the network running through the release of new currency — that is, when miners are rewarded for successfully solving a block. The possibility of getting rewarded incentivizes people to continue to contribute resources so the network continues operating and increasing the cryptocurrency’s value.
Over time, mining for cryptocurrencies has become exclusive to those with sophisticated software and/or those who are in consolidated mining groups that increase the likelihoods of successfully mining a block.
That is why hard forks — drastic changes in cryptocurrency protocol —in Bitcoin such as Bitcoin Gold, as well as the rise of alternative cryptocurrencies, have occurred. Throughout the development of different cryptocurrencies that people can invest in, mining remains to be the driving force behind what keeps the market alive.