Crypto Mining - The Role Of Crypto Miners In The Blockchain Ecosystem

Crypto Mining - The Role Of Crypto Miners In The Blockchain Ecosystem

Blockchain Knowledge

Crypto APIs Team

Nov 14, 2023 • 8 min

Cryptocurrency mining plays a pivotal role in on-chain operations, serving a dual purpose. Firstly, it facilitates the creation of new digital coins, and secondly, it serves as a mechanism for validating new transactions. The process of cryptocurrency mining involves the collaboration of three essential elements: the efforts of network contributors (referred to as crypto miners), the hardware utilized by these contributors to harness computational power, and the last but not least - use of software.

In essence, crypto mining involves a broad decentralized network of computers and crypto miners - both can be located anywhere in the world, аnd can make their network contribution as long as they have stable access to internet, enough computing power and miners would like to take part in the transaction verification. But why does crypto mining exist?  

The concept is straightforward: in traditional centralized systems, one or more authorities act as intermediaries. To preserve the decentralized nature of blockchain and cryptocurrencies, it is imperative to avoid central authorities that might compromise decentralization. Instead, the responsibility of processing transactions and generating new coins is assigned to crypto miners. These miners are motivated to engage in blockchain operations by transaction fees or the rewards of newly mined coins. In this way, they play a crucial role in maintaining and securing the network's integrity.

Crypto mining on the blockchain - how does that work?

Without blockchain there won't be crypto mining, since all chain activities are related to the network protocols. Blockchains function as a public distributed ledger which keeps track of all transactions in a chronological order. No changes or edits can be made to the log of transactions, which prevents transactions from being hacked. 

As its name suggests, the term blockchain means a chain of different blocks. Therefore we need to examine what a block means and how it is created. A "Block" serves as the fundamental building block of a blockchain, functioning as a container that stores essential information pertaining to individual transactions. 

Within a block, four distinct elements related to transactions can be distinguished. Firstly, there is the "previous hash data," which contains information about the preceding mined block. This data enables the connection of blocks, forming a continuous chain. The second element consists of the mined and validated dataset specific to the transaction associated with the block. The third component is the "nonce," a random 32-bit number employed by miners in their computational calculations. Miners engage in a competitive race to be the first to guess the correct nonce and compute the block hash. And last but not least, the fourth attribute is the digital signature of the block, which relies on the cryptographic SHA-256 algorithm, which always produces hashes that are 256 bit. 

Blockchains are very different from one another, which leads to differences in terms of how crypto miners are mining or validating transactions. For example, the most popular UTXO protocols are proof-of-work (PoW), which means that network participants must create new blocks by employing their hardware equipment and deploy a lot of resources and energy to solve mathematical problems. Other blockchains are working with the proof-of-stake (PoS) mechanism, which is concerned with locking up a certain amount of specific cryptocurrency. By doing so, a new block is created, instead of having to solve mathematical puzzles as it is in PoW. 

It is important to note that in PoS, validators are responsible for confirming transactions and creating new blocks, rather than "mining" as in the case of Proof of Work (PoW) systems. The likelihood of a validator becoming a block creator is influenced by the amount of cryptocurrency they hold and are willing to "stake" within the network. Additionally, some PoS blockchains may employ a voting mechanism to determine the selection of validators who will create new blocks.

What Is Bitcoin Mining?

The Bitcoin network operates on the UTXO-based system and employs the proof-of-work mechanism. This design entails that all transactions occurring on the Bitcoin blockchain are processed by cryptocurrency miners. Mining is the pivotal process through which transaction validation occurs, playing a crucial role against fraudulent activities. Additionally, Bitcoin mining yields a secondary outcome, which involves adding new blocks to the blockchain, consequently adding new BTC coins into circulation. When cryptocurrency miners successfully mined a transaction, they are rewarded with Bitcoin (or more specifically in Satoshis), which are subsequently introduced into circulation.

When discussing the Bitcoin protocol, we need to emphasize that the size of transactions is directly linked to the awards that miners will receive. Higher size means higher fees. By default, the Bitcoin protocol was hard coded so each block can fit no more than 1MB transaction data. Here comes the question - what happens when numerous transaction requests with the same size are awaiting to be processed by miners? Who gets a priority?

The answer is - there is a second incentivization stream for cryptocurrency miners аnd this is the transaction fees paid by transaction senders. The higher the transaction fee a sender is willing to pay, the higher priority they will get, meaning that more miners will focus their resources to add the sender`s transaction to the next block.  

An important topic in regards to bitcoin mining is mining nodes. It is widely accepted, although a subject to speculation, that miners are nodes, but it is essential to note that not all nodes are miners. What is meant by nodes are devices that are in communication with other devices within the blockchain protocol. Based on this definition, it is explanatory why cryptocurrency miners are considered to function as mining nodes. 

Bitcoin full nodes are operating by running checks on transactions and if found valid, transactions are added to a mempool. Once added to the mempool, crypto miners make a selection which transaction appears most attractive to them and start working on solving the mathematical puzzle to change the status of the transaction from pending to success.  

Upon completion of the mining process, crypto miners are feeding the transactions to the full nodes for verification. The role of nodes is clear - they are responsible for the blocks creation and for adding these blocks to the Bitcoin network.  

When discussing the Bitcoin network, one of the most important aspects that affects crypto miners is Bitcoin halving. The halving event takes place once in every 4 years by slicing in half the cryptocurrency miners` rewards. The next halving is expected to happen in April 2024 - an exact date is not known, as halving comes at intervals of 210,000 blocks rather than a fixed time period. After the 2024 halving, the miners reward per block will become 3.175 BTC which will be half of the current 6.25 BTC reward. The lower mining fee which will be in force after the next halving event does not necessarily mean that transaction fees paid by transaction senders will be affected in any particular way.  

How To Optimize Your Activities In The Crypto Mining Landscape

There are various strategies for enhancing your organizational processes, spanning from optimizing transaction preparation to streamlining the processing by crypto miners and ensuring prompt payment completion. Moreover, you may need to track blockchain historical data that spans a wide timeframe, extending from hours, days, weeks, and months to even years in the past.

Crypto APIs blockchain infrastructure offers unified endpoints which are allowing our clients to prepare in the exact same way their transactions, regardless of the blockchain networks specifics. We also offer non-custodial wallets which organizational users can take advantage of and provide access to these wallets to their clients. This means that if your clients are cryptocurrency miners, they can receive their rewards in our HD wallets, or use them for all kinds of cryptocurrency transactions that they require to create or complete.  

The blockchain infrastructure provided by Crypto APIs offers a cohesive set of endpoints, enabling our clients to easily prepare their transactions, irrespective of the unique features of the different blockchain networks. This is done through the provision of data which is unified. 

Additionally, we provide non-custodial wallets that can be utilized by organizational users, granting them the ability to give access to these wallets to their own clients. These non-custodial wallets (also known as HD wallets) can be beneficial for clients involved in cryptocurrency mining, as it allows them to receive their rewards and use them for a wide range of cryptocurrency transactions according to their preferences.

Our blockchain data services empower you to access comprehensive information on individual transactions or monitor multiple transactions, irrespective of the blockchain network they take place on. We provide unified and user-friendly data that extends broadly and has a broad spectrum of applications, such as bookkeeping, data analysis, and accounting, among others. In the context of cryptocurrency mining, our blockchain data service offers insights into the fees paid to crypto miners, transaction processing times, and other pertinent transaction details logged on the public distributed ledger.

With Crypto API`s blockchain events services, clients can listen to “new reverted block” events. This means that in the event when there are two or more blocks with the exact same height (blocks were mined simultaneously), and miners nodes cannot define which block was first, there will be an occurrence of blocks that will be reverted. This process happens as part of the blockchain re-organization since the height parameter fails to be used as a global identifier and blocks must be arranged.

In addition to the blockchain events services, our clients can subscribe to a variety of other real-time on-chain events and get notified instantly. The delay between an event occurrence and notifying our clients is minimal, with up to just several milliseconds. In the context of cryptocurrency mining, our clients can receive data about the miner, timestamp, and method used to mined a specific block on the blockchain network via webhooks, ensuring they stay well-informed. Our automated system allows for the tracking of a vast number of events, saving you time, effort, and resources, while ensuring remarkably swift response times.

The blockchain infrastructure suite that we offer has a multitude of applications and choosing what suits your needs and what can guarantee optimal results for your business may require the attention of our team. Do not hesitate to get in touch with us at [email protected] or on our live chat platform - your success is our success and we take very seriously even the tiniest goals you have set for your organization. 

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