Over the past several years, crypto currencies like Bitcoin have been quietly growing in popularity, with an ever-larger number of people buying and selling them. Now that Bitcoin has hit the mainstream and become a worldwide phenomenon, more people than ever are looking to get into the crypto currency game.
However, the production of crypto currencies isn't anything like that of regular money. There's no central authority that issues new notes; instead, bitcoins (or litecoins, or any of the other so-called 'alt-coins') are generated through a process known as 'mining'. So what is crypto currency mining, and how does it work?
Principally everybody can be a miner. Since a decentralized network has no authority to delegate this task, a crypto currency needs some kind of mechanism to prevent one ruling party from abusing it. Imagine someone creates thousands of peers and spreads forged transactions. The system would break immediately.
As there is no central authority or central bank, there has to be a way of gathering every transaction carried out with a crypto currency in order to create a new block. Network nodes that carry out this task called dubbed 'miners'. Every time a slew of transactions is amassed into a block, this is appended to the blockchain. Whoever appends the block gets rewarded with some of that crypto currency.
To prevent the devaluation of the currency by miners building lots of blocks, the task is made harder to conduct. This is achieved by making miners solve complicated mathematical problems called proof of work'.
In practice, this means that miners are competing against each other to calculate as many hashes as possible, in the hopes of getting to be the first one to hit the correct one, form a block and get their crypto currency payout.
However, the difficulty of calculating the hashes also scales - every new block of bitcoins becomes harder to mine. In theory, this ensures that the rate at which new blocks are created remains steady. Many crypto currencies also have a finite limit on the amount of units that can ever be generated. For example, there will only ever be 21 million Bitcoins in the world. After that, mining a new block will not generate any bitcoins at all.