How mining works in cryptocurrencies: from transactions to the blockchain

When you hear the word “mining” in the context of cryptocurrencies, it actually refers to one of the most important mechanisms that keeps the entire blockchain alive. Unlike the traditional banking system, where central banks and government institutions control the issuance of money and maintain records, cryptocurrencies operate differently. Here, the role of these institutions is played by the participants of the network themselves, who take on the responsibility of verifying transactions and ensuring data integrity. This process is called mining.

The Role of Miners in the Network

Participants engaged in mining are referred to as miners or mining nodes. Their work involves not just arithmetic — they perform a critically important function for the security and stability of the entire system. Each miner is assigned a task: to collect a pool of unconfirmed transactions from a special memory pool and organize them into a single package known as a candidate block. In this block, the miner also adds a special coinbase transaction — this is a transaction in which they send the reward for the block to themselves. This reward serves as an incentive that encourages people to expend their computational resources to support the network.

Mathematical Tricks: from Hashing to Root Branch

To ensure that all transactions are indeed linked to one another without the possibility of tampering with the data, a hash function is used. Each transaction in the block is hashed, then the results are combined in pairs and hashed again. This is repeated until the entire block is folded into a single value — the root of the Merkle tree. This root is then combined with the hash of the previous block, a random number (nonce), and other parameters, and this entire set is hashed again.

Here comes the main trick: the miner must find a nonce such that the hashing result is below a certain target value. Since it's impossible to predict which nonce will yield the correct result, miners simply try possible values almost randomly. The first one to find a valid hash verifies their block and receives a reward. The entire process in Bitcoin takes an average of about ten minutes.

Proof of Work: evidence of issuance as the foundation of the system

The very fact that a miner expended computational power to find the correct hash serves as proof of their work. This mechanism is called Proof of Work — a consensus algorithm that ensures that network participants cannot simply manipulate the data. Attacking the network would be economically inefficient: an adversary would have to expend enormous resources to rewrite the blockchain history faster than the rest of the network combined.

How Rewards for Blocks Have Evolved

When Bitcoin first appeared, the first block was mined for 50 BTC. But Bitcoin was designed with a deflationary mechanism: every 210,000 blocks, approximately every four years, the reward for miners is halved. At the time of writing this material, the reward is 6.25 BTC per block. This design means that the total number of Bitcoin will never exceed 21 million coins, creating a natural scarcity and impacting the network's economy.

Instead of a conclusion

Mining is not just a miracle of technology — it is a sophisticated system that combines mathematics, economics, and fairness in distribution. Instead of trusting a single organization, cryptocurrencies rely on thousands of miners around the world, each motivated to earn rewards for adhering to the rules. This fundamentally distinguishes cryptocurrencies from traditional money and makes the existence of money without a central issuer possible.