Articles on Stock markets

News, Research and Analysis

Help Center
Investment Portfolios
Investment Terminology and Instruments
Technical Analysis and Trading
Cryptocurrencies and BlockchainBlockchainBitcoinEthereumLitecoinRippleTaxes and Regulation
Retirement Accounts
Personal Finance
Corporate Basics
How Does Ethereum Mining Work?

How Does Ethereum Mining Work?

Ethereum mining is the process of solving blocks of encrypted blockchain data using a proof-of-work algorithm and occasionally being rewarded with Ether.

Blockchain data is validated and added to the distributed ledger by computers on the network performing the task of “mining,” which is continually attempting to solve puzzles, basically, which each unlock a block of encrypted data containing information about transactions, and, on the Ethereum platform, information about distributed application functions and smart contracts. Once a block is unlocked, the data within is shared with the network and added to the distributed ledger.

The puzzles that unlock the data are meant to take a certain amount of time, on average, to be solved, and the difficulty of the puzzles will adjust to maintain the intended average amount of time to solve. Currently, this is about 15 seconds for Ethereum. While this process may seem pointless, especially since the puzzles themselves do not serve any purpose except to take time to solve, it is one of the most essential parts of blockchains which use proof-of-work. When it takes time and resources like electricity to make changes to the blockchain, not to mention consensus among many computers mining the same blocks, it becomes prohibitively expensive for bad actors to make fraudulent changes to the ledger, and changing the ledger is the only way on a blockchain to transfer currency or to realize other actions, such as executing smart contracts or lines of code for a decentralized application. This is what makes blockchains extremely secure and difficult to manipulate.

Mining computers are rewarded with Ether, the “fuel” (i.e., currency) of the Ethereum platform, at a rate which decreases over time, just as the Bitcoin mining reward system does. As of the time of this writing, a successful mining attempt yields 3 Ether, down from 5 not too long ago. Miners also receive a cut of the transaction fees associated with the information being processed. These transaction fees are typically less than traditional transaction processing system fees (e.g., credit cards) and are ideally proportional to the amount of work that it will take the blockchain to execute the order.

The reason that the mining rewards are decreasing is because, as with Bitcoin, the mining rewards are the means by which “newly minted” currency enters the system (instead of being printed by central banks), and both Ethereum and Bitcoin are scheduled to stop producing new currency eventually, at which point miners will make their money solely on transaction fees. Currently, anyone can join the network and mine for Ethereum without paying for any software or licensing fees. (See “How Do You Mine Ethereum?”) An update called Serenity is on the horizon for Ethereum, which would change Ethereum’s mining process from proof-of-work to proof-of-stake, which would require a separate explanation.

Keywords: proof-of-work, mining rewards, blockchain transaction fees, Ethereum Serenity,