What is crypto mining and how does it work

What does crypto mining mean?

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In this guide, we’ll go through the basics of cryptocurrency mining. 

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Mining is the process of verifying cryptocurrency transaction data and adding that data to the blockchain. This is done by a group of people called miners, who verify these transactions in exchange for payment in cryptocurrency.

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The mining process creates new coins and builds the blockchain at the same time. It’s a peer-to-peer process that protects cryptocurrency data as the miners validate every transaction detail such as when the cryptocurrency coin is spent, when it is transferred to a wallet, or even when it is exchanged for another cryptocurrency. This helps to prevent a cryptocurrency from being double-spent where one user spends the same coin twice. 

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So, how does crypto mining work?

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“Mining” is solving a complex mathematical puzzle to verify data within each block. The answer to these puzzles is called a hash, which is a string of random characters. The hash is created based on the data within the block and the hash of the previous block. The first miner to find the correct hash can submit their block for approval, add their block to the blockchain, and earn the rewards of new cryptocurrency coins. 

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Hashes contribute to the security of the blockchain as each block has its own unique cache. This means that all blocks within the blockchain can be traced and verified by anyone on the network. Any changes to the data will result in a completely different hash, which means any attempt to hack or change data will be spotted easily and rejected. This peer-to-peer verification process keeps the blockchain secure, decentralised, and reliable. 

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Centralised vs. decentralised cryptocurrencies

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While most cryptocurrencies operate on a decentralised network, some are centralised. Centralised cryptocurrencies are controlled by a single entity, such as a company or government, and often peg their value to fiat currencies. This structure can lead to reduced volatility compared to their decentralised counterparts, making them potentially more stable for investors.

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Why is Crypto Mining Important?

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Crypto mining plays a vital role in maintaining the overall health and security of the blockchain ecosystem. Here are some key reasons why it is essential:

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1. Transaction validation: Mining ensures that all transactions are legitimate and recorded accurately, which is crucial for maintaining trust in the system.
2. Network security: The overarching decentralised nature of mining enhances security, as it makes it difficult for any single entity to manipulate the blockchain. This decentralisation protects against fraud and attacks.
3. Coin generation: Mining is the primary method by which new cryptocurrency coins are created, contributing to the supply and value of digital currencies.
4. Consensus mechanism: Mining employs a consensus mechanism that enables the network to agree on the state of the blockchain, ensuring that all participants have a consistent view of the ledger.
5. Incentivisation: The rewards provided to miners for their efforts encourage participation, ensuring that the network remains active and operational.

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Getting started with crypto trading

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On Deriv, you can trade on crypto price movements with CFDs on Deriv MT5, DerivX, and cTrader, and with multipliers on DTrader and DerivGo.

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Check out our other guides to learn more about cryptocurrency trading or try it out on a practice demo account.