What does it mean to "mine cryptocurrency"?
Mining is just like any job. Perform a task, get paid. In mining cryptocurrency, the task is verifying transactions that occur between users of a currency and the payment is the creation of a new coin of that currency. To give this operation context, let’s compare how this operation works with traditional payment networks, like Visa.
For Visa, all transactions are verified by a network of computers across the world that are owned, secured, and controlled by Visa. They perform all of the work to verify that transactions using Visa cards are valid; the person paying has the money needed for the transaction and then the money is transferred to the recipient. Otherwise, transaction declined and no money transferred.
Visa is a central authority on the transactions that occur on the Visa network and they must control and secure all of the data associated with these transactions. For all the work they do for these transactions, they charge a transaction fee. This is the Visa business model, secure and verify transactions, get paid.
For cryptocurrency, transactions are verified by a network of computers across the world that are owned by a decentralized group of people. There isn’t one owner of all of the computers, but what connects these computers into one cohesive system is the software.
This software encourages competition between the computers by awarding new coins to the computers that complete a complex math problem in the fastest time. This is called Proof of Work and it ensures that no one machine can take over the network. Only raw computing power can solve these problems so there is no shortcut or hack. This is the business model for any enterprising cryptocurrency miner, build a powerful computer and dedicate it to solving these math problems and verifying transactions, get paid. The more computers that join the network, the stronger and more reliable it becomes (in theory).
If this sounds insanely complicated and out of a movie, I agree. Proof of Work (PoW) is just the first way that was implemented to secure and verify transactions, and the idea was actually born out of science fiction. No kidding, inspiration for working examples of PoW prior to Bitcoin’s implementation were credited to a sci-fi book from the 90s called Cryptonomicon.
That said, Bitcoin mining alone is credited with consuming the power suited for “medium-size countries — which country depends on whose estimates you believe.” There are ways being investigated to do away with PoW entirely and this would be a promising development for the future sustainability and adoption of cryptocurrency.
For now, PoW is what we have to verify transactions for Bitcoin and Ethereum and there is still money to be made the old fashioned way; Mining.
Cryptocurrency is a working project and requires skeptics, optimists, revolutionaries, academics, convenience seekers, early adopters, and technophobes alike to participate. Ask questions in the comments and that can help me write more about this in the future!