The core operational logic of Blockchain Mining: From principles to practice

Quick Start

What is mining for PoW-based blockchains? Simply put, it is:

• Miners are responsible for verifying pending transactions and organizing them into new blocks, which is a key mechanism for protecting network security.
• Mining also carries the responsibility of issuing new cryptocurrencies, but is strictly bound by the rules of the protocol.
• Miners invest computing power to solve cryptographic puzzles, and the first miner to find the answer receives the block reward.
• Profit margins are affected by multiple factors: hardware costs, electricity expenses, cryptocurrency price fluctuations, network difficulty adjustments.

How Does Mining Maintain the Operation of Blockchain?

Imagine a globally distributed ledger where every cryptocurrency transaction is recorded. Who is responsible for validating and recording? The answer is miners.

Bitcoin ( BTC ) and other PoW blockchains rely on miners to ensure the validity of transactions. Miners use specialized computing equipment to solve mathematical puzzles to organize transactions awaiting confirmation. When a miner is the first to find a valid solution, they gain the right to add a new block to the blockchain, and they also receive newly minted tokens and transaction fees as a reward.

Why is this mechanism important? It allows cryptocurrencies like Bitcoin to operate in a completely decentralized environment, achieving consensus across the entire network without the need for any central authority. At the same time, the significant computational resources invested by miners act as an economic deterrent against cheating – to alter historical blocks, an attacker would need to invest more in costs than the total network computing power, which is economically unfeasible.

The process of adding new tokens sounds like printing money, but it is actually constrained by strict rules. These rules are written into the blockchain protocol and are enforced collectively by all nodes in the network, and no one can break these limitations.

The Specific Process of Mining: Four Key Steps

Step 1: Hash the transaction

When users conduct cryptocurrency transfers, the transaction enters the mempool and waits to be processed. The first task of miners is to take unconfirmed transactions from the mempool and convert each transaction into a fixed-length combination of numbers and letters through a hash function.

Each transaction hash is like a “fingerprint” of that transaction, representing the unique identifier of all the information within the transaction. In addition, miners will create a special “coinbase transaction” to grant themselves block rewards, which is the way to achieve new token minting. Typically, this transaction is the first record in the new block.

Step 2: Construct the hash tree structure

After hashing all transactions, miners need to organize these hash values into a structure called a “hash tree” (Merkle tree).

The specific method is: pair two hash values and perform a second hash, then continue to pair and hash the new output, progressing layer by layer until only one hash value remains. This final hash is known as the “root hash” or “Merkle root,” which concisely represents the information of all transactions in this block.

Step 3: Find a valid block header

Each block requires a unique identification code, known as the “block header.” Miners need to combine the hash of the previous block, the root hash of the current candidate block, and a random number called “nonce” ( with an arbitrary number, and then process it through a hashing function.

The goal is to find a specific output value (block hash) that is less than the target value set by the protocol. Taking Bitcoin as an example, a valid block hash must start with a specific number of zeros—this standard is called “mining difficulty.”

Since the first two input values are fixed, miners can only make numerous attempts by continuously changing the nonce until they find a hash value that meets the conditions. This is known as “proof of work.”

) Step 4: Broadcast the block to the network

Once a miner finds a valid block hash, he will immediately send the complete block to the entire network. Other verifying nodes will check whether this block complies with the rules, and if validated, each node will add it to their respective copies of the blockchain.

At this time, the candidate block officially becomes a confirmed block, and the mining competition enters the next round. Those miners who did not find a valid hash in time will abandon their current work and start competing for the next block.

What happens when multiple miners find a block at the same time?

Sometimes, there may be a situation where two miners almost simultaneously discover valid blocks and broadcast them to the network. This leads to the emergence of two competing blocks in the network, temporarily splitting the entire network into two versions.

Miners will continue to mine the next block on the chain they believe is correct. This competition continues until someone finds a new block on a certain chain—this new block is considered the “winning” block, while the blocks on the other chain are discarded, referred to as “orphan blocks.” Miners who choose orphan blocks will return to the main chain to start mining again. This mechanism ensures that the entire network ultimately converges to a single chain.

Difficulty Adjustment: Ingenious Design for Maintaining Network Stability

The agreement will regularly and automatically adjust the mining difficulty, with the aim of maintaining a relatively stable generation speed of new blocks regardless of how the overall network hash rate changes. This is the secret behind the predictability and stability of the new token supply.

As more miners join the network and competition intensifies, the system automatically increases the difficulty, raising the number of attempts needed to find a valid hash. Conversely, if a large number of miners go offline or exit, the difficulty will decrease, making mining relatively easier. This dynamic adjustment mechanism ensures that, regardless of the circumstances, the average block generation interval can be maintained at the intended level.

Comparison of Mainstream Mining Methods

CPU mining: has become a thing of the past

In the early days of Bitcoin, the CPU of a regular computer was sufficient for mining. At that time, the difficulty was low and the rewards were considerable, allowing anyone to participate. However, as more and more people joined, the total network hash rate surged, and the processing power of CPUs became uncompetitive. Today, CPU mining is basically unfeasible and has been phased out.

GPU Mining: Flexible but Limited Efficiency

Graphics processors ### GPU ( were originally used for video games and image processing, but their parallel computing capabilities also make them suitable for mining. Compared to specialized hardware, GPUs are relatively inexpensive and flexible in application, capable of mining various PoW coins. However, efficiency is affected by mining difficulty and algorithms, and is usually not as good as ASICs.

) ASIC: The King of Efficiency but High Costs

Special Application Integrated Circuit ### ASIC ( is custom hardware specifically designed for mining. They are known for their extremely high energy efficiency, but are expensive, and older models of ASICs quickly become outdated with technological advancements. While ASICs are the most economical choice for large-scale operations, the investment threshold is steep for small individual investors.

) Mining Pool: A Way to Reduce Personal Risk

The probability of a single miner finding a block is extremely low, especially for those with limited computing power. Mining pools have emerged to aggregate the computing power of numerous miners, significantly increasing the chances of earning rewards. When a mining pool discovers a new block, the rewards are distributed according to the amount of work contributed by each member.

Mining pools can help small retail investors share the pressure of hardware and electricity costs, but centralized mining pools may bring concerns such as the risk of a 51% attack.

Cloud Mining: The Price of Convenience

A method of renting computing resources from suppliers instead of purchasing hardware. This lowers the entry barrier, but also comes with risks of fraud and unstable profitability. It is essential to carefully assess the reputation when choosing a cloud mining service provider.

Bitcoin Mining: The Most Mature Practice Case

Bitcoin is the most famous mineable cryptocurrency, and its mining mechanism is based on the Proof of Work ### PoW ( algorithm. PoW was proposed by Satoshi Nakamoto in 2008 and is the original blockchain consensus mechanism.

The core advantage of PoW is that it enables participants scattered around the world to reach consensus without the need for a central authority. This mechanism constrains malicious behavior through economic incentives and computational costs—attempting to alter history or launch an attack is extremely expensive.

In a PoW network, miners compete to solve cryptographic puzzles and bundle transactions into blocks. The first miner to find a valid solution can push the block to the blockchain, and if the validating nodes approve, that miner receives the block reward.

The block reward for Bitcoin is halved periodically. As of December 2024, miners will receive 3.125 BTC) plus transaction fees( for each new block they mine. Every 210,000 blocks), approximately once every 4 years(, the reward is halved. This halving mechanism ensures the scarcity of Bitcoin's total supply, and each halving is a significant event in the market.

Mining Profitability: Balancing Returns and Risks

Cryptocurrency mining can indeed be profitable, but investors need to thoroughly assess the costs, risks, and sustainability.

Core factors affecting profitability include:

Price volatility: This is the most direct influencing factor. When cryptocurrency prices rise, the rewards obtained are higher when valued in fiat currency; conversely, a price drop significantly reduces earnings.

Hardware Efficiency and Cost: Efficient mining equipment is expensive. Miners must find a balance between hardware investment and expected profits, calculating the return on investment period.

Electricity Expenses: Electricity costs are the main ongoing expense of mining. If the electricity prices are too high, the costs may exceed the income, resulting in project losses. Miners typically choose to deploy in areas where electricity is cheap.

Hardware update pressure: Mining equipment can quickly become outdated. New models outperform older ones by far, and without a budget for upgrades, old hardware soon loses its competitiveness, and profit margins are compressed.

Changes at the protocol level: Protocol updates can significantly alter mining economics. For instance, Bitcoin halving directly reduces block rewards; some blockchains may shift from PoW to other consensus mechanisms. In September 2022, Ethereum completely transitioned from PoW to Proof of Stake ) PoS (, resulting in the chain no longer requiring mining—leading to a sudden unemployment of a large number of Ethereum miners, which is a significant case of the impact of protocol evolution on the mining industry.

Anyone considering entering the mining industry should conduct thorough self-research ) DYOR ( and systematically assess all potential risks and rewards.

Summary: Why Mining is Important

Cryptocurrency mining is an essential component of Bitcoin and other PoW blockchains, serving three core functions: maintaining network security, ensuring transaction validity, and stabilizing the supply of new tokens.

Mining has obvious advantages - direct income from block rewards. But its disadvantages are also prominent - profitability depends on many uncontrollable factors, especially electricity costs and market conditions.

Before deciding to invest in mining, it is essential to conduct comprehensive research, understand the technical principles, assess economic feasibility, and be aware of market risks. This is not an easy investment to quickly recoup, but requires long-term planning and risk awareness.