Nick Kundnani in Economists and Finance, Finance, Finance / Banking Director • Alchemy Capital 7 d ago · 1 min read · +300

What Is Blockchain Mining And How Does It Work?


What Is Blockchain Mining And How Does It Work?

By now, most people are at least familiar with the concept of blockchain but may have little idea how it works. Here is a basic overview of blockchain mining and how it works. 


What is it?


Hard currencies are based on a gold standard, which means the regulatory agency or body needs to keep enough gold bullion on hand to back the amount of currency they place in circulation. The bullion stores allow them to act as a guarantor on every transaction. In theory, the way this works is that if a merchant creates something that they place a value of ten dollars on and you hand them a ten dollar note (which is not in and of itself worth ten dollars) then the merchant would be able to take the note to a bank and receive ten dollars worth of gold. Obviously, you can't purchase gold directly from the government, but governments do keep stores of gold on hand to back their currencies


Cryptocurrencies are digital currencies created by people that invest other types of currency in them. For instance, if I take my digital US dollars and convert them to cryptocurrency, then the US dollars are still, in essence, acting as a guarantor on the cryptocurrency I am buying, but the cryptocurrency itself is regulated by a blockchain, not a government. 


How does it work?


Every time you exchange a dollar, whether digitally or in hard currency, that transaction is recorded somehow. For instance, if you leave a $1 tip at a restaurant, the exchange is not recorded immediately, but it is eventually recorded when they put it in a bank or buy something with it. No one computer has the processing power to record millions of transactions per day, so blockchain harnesses the power of thousands of computers to create a public ledger of all the transactions. 


Blockchain mining is the way in which participants get paid. All of the transactions create a sort of giant puzzle that needs to be solved. Once a certain segment of the puzzle is solved, it unlocks a "block" of currency that is divided among all of the contributors. The more contributors, the faster a puzzle is solved, but the more parties the reward is divided amongst. Blockchain "mining" is simply individuals lending their computing power to keeping the ledger, which they, in turn, are eventually paid a reward for.