Crypto Mining
In crypto, mining or other consensus protocols are how a distributed blockchain synchronously updates the account of who owns what. It is also the way that crypto networks eliminate the risk of double-spending. Like people who, say, try to send the same $1 million to two different people.
This double-spending problem is important; a lot of what banks do is make sure that if you send someone $1 million you actually have it, and you haven’t sent it to multiple people.
To show how it works, let’s go back to our original example of me sending you money. To initiate that transaction, I would send a message into the network saying I want to send you that $1 million in bitcoin.
All the computers that are keeping track of the bitcoin ledger —effectively, the spreadsheet of who owns what in the bitcoin network—take my proposed transaction and a bunch of others and combine them with other proposed transactions into what’s called a block.
Importantly, these computers—colloquially known as “mining rigs” and operated by “miners”—can only combine valid transactions. So if I tried to send that same $1 million to two different people, a miner would have to choose which of my transactions to take.
Once a group of valid transactions is combined into a block, a miner will race other miners to solve a really hard math problem. The problem is so hard that it doesn’t actually matter how smart you are, only how much computing power you can throw at it, effectively randomizing who solves it first.
First Miner
The first miner to solve the problem broadcasts the solution to the network, along with the block of validated transactions. Other miners then check to see if the proposed solution to the problem is correct and the transactions are valid. If they are, that block is added to the chain of previous blocks, the transactions are “settled,” and everyone updates their copy of the blockchain to the new official state.
The miner that solved the puzzle first is rewarded with some amount of the cryptoasset as compensation for keeping the network up to date. Then, the process starts all over again, with a new block, more transactions, and a new puzzle.
Importantly, the next math problem is built on the information in the past block. Therefore, you can’t solve the next puzzle if you change any of the past data.
This process has multiple positive effects.
-First, it solves the double spend problem, because miners can’t make a block with invalid transactions, creating digital scarcity for the first time ever.
-Second, it makes the database incredibly secure. Because each subsequent block contains all of the information of previous blocks, you can’t go back and falsify records without invalidating everything that follows. It breaks the chain. That’s why, despite holding $120 billion in bearer wealth, the bitcoin blockchain has never been hacked.
-Third, but most importantly—and the reason it has implications outside of just sending money— it negates the need for rent-seeking middlemen we previously had to rely on in order to process our transactions.
The ability to replace trusted intermediaries with something better, faster, and cheaper means we can rethink major systems, where the reliance on a third party to process transactions was once a foregone conclusion.
