How does mining work? A step-by-step breakdown

At Nomium, we work with blockchain technologies every day and see how important it is to explain complex concepts in clear, accessible language. That’s why we decided to start with the very basics — the process without which neither Bitcoin nor the entire crypto industry would exist.

The Bitcoin network consumes as much electricity as a small European country. Tens of thousands of computers run trillions of calculations around the clock. Why is so much energy required, and what exactly happens during the mining process?

Why mining is necessary

In a traditional bank, all transactions pass through a central server. The bank checks whether there are sufficient funds in an account, debits the required amount, and credits the recipient. The bank controls the database and can modify records.

Blockchain works differently. There is no central server that everyone trusts. Instead, the transaction database is stored simultaneously on thousands of computers. When a new transaction appears, all these computers must agree to add it to the shared ledger.

This raises key questions: who decides which transactions are added and in what order? Who verifies that a person actually has the right to spend the funds? How is a situation prevented where someone tries to spend the same money twice by sending it to different recipients?

Mining solves these problems. Miners collect transactions into blocks and add them to the shared chain. For this work, they receive a reward in cryptocurrency. However, a block cannot be added arbitrarily — miners must perform computational work that requires time and electricity.

What problem do miners solve

Imagine a lock that opens only with a specific key. You have a blank key, but you don’t know the correct shape of the grooves. The only way to open the lock is to try different combinations until one fits.

Mining works in a very similar way. A miner takes a block of transactions and tries to find a special number called a nonce. Once the correct nonce is found, the block can be added to the chain.

Verifying that the nonce is correct takes a fraction of a second. Finding it, however, requires brute-forcing billions of possibilities. Modern hardware checks trillions of variants per second, yet across the entire Bitcoin network the search still takes about 10 minutes on average.

This consensus mechanism is called Proof of Work. To add a new block, a miner must prove that real computational resources and electricity were spent. This acts as verifiable proof of honest participation in the network and cannot be faked.

How the mining process works

Why mining difficulty constantly changes

New miners are constantly joining the network, while others drop off. When more miners participate, blocks are found faster. When fewer miners remain, the process slows down.

To keep a stable pace, the system automatically adjusts mining difficulty. In Bitcoin, this happens every 2,016 blocks — roughly once every two weeks.

The network measures how long it took to mine the previous 2,016 blocks. If blocks were found faster than the 10-minute target, difficulty increases. If they were slower, difficulty decreases.

Higher difficulty means the hash must start with more leading zeros. This exponentially increases the number of attempts required to find a valid solution. The mechanism works automatically, without any manual intervention.

Thanks to this, new bitcoins are issued at a predictable rate, regardless of how much computing power is active on the network. It also makes the network extremely expensive to attack — an attacker would need more computing power than all other miners combined.

Why miners join pools

At today’s Bitcoin difficulty, a single miner with just a few devices may go years without finding a single block. The probability of success approaches zero — it becomes a lottery with extremely low odds.

Mining pools solve this problem. Thousands of miners combine their computing power. When a pool finds a block, the reward is distributed among all participants proportionally to their contribution.

Technically, a pool acts as a coordinator. It assigns simplified tasks to miners. Instead of searching for a hash with 19 leading zeros, a miner may search for a hash with only 10 zeros. This is much easier, and valid results are found far more frequently.

Each such result is called a share. Miners submit all their shares to the pool. The pool uses them to measure how much work each participant has contributed. Most shares are not valid for the main network, but occasionally a miner finds a solution that meets the full difficulty requirement. When that happens, the pool submits the block to the network and distributes the reward.

Pool payout schemes

There are different ways to distribute rewards. The PPS scheme pays a fixed amount for every submitted share. You know exactly how much you earn per day — income is stable and predictable. However, the pool charges a higher fee (typically 2–4%) because it takes on the risk: even if blocks aren’t found for a long time, the pool still pays miners out of its own pocket.

The PPLNS scheme works differently. Rewards are distributed only when a block is found, based on the last N submitted shares. If you’ve just joined, the first blocks may bring lower income. Over the long term, however, average profitability is usually higher than PPS because pool fees are lower. Income is more volatile — sometimes blocks are found frequently, sometimes there are long dry periods.

The choice depends on priorities. If stability matters, PPS is the better option. If fluctuations are acceptable in exchange for higher long-term returns, PPLNS is the better fit.

Home mining: expectations vs. reality

Many people start with the idea of setting up a couple of mining devices at home. Reality quickly cools that enthusiasm. An ASIC miner consumes 3,000–3,500 watts — comparable to a powerful space heater. It’s as loud as a vacuum cleaner running 24/7. A single ASIC produces 3,000–3,500 watts of heat, which in a 15–20 m² room can push temperatures above 35–40°C in summer without additional cooling.

Residential electricity tariffs make mining barely profitable. Most of the revenue goes toward electricity costs. Net profit is minimal or nonexistent.

Many home miners operate in the hope of price appreciation. They mine at a small loss, expecting that the accumulated cryptocurrency will increase in value over time and offset the costs. In effect, they are buying crypto above the market price, but doing so gradually.

Maintenance is another burden that falls on the owner. Equipment needs constant tuning, temperature monitoring, restarting frozen devices, and troubleshooting performance drops.

Industrial mining: a different scale

Industrial operators run tens of thousands of ASICs in dedicated facilities. These are often located near hydroelectric power plants in Siberia, in cold regions of Canada, or in countries where electricity for industry is subsidized.

The key difference is electricity cost. Large operators negotiate directly with power providers and secure tariffs several times lower than residential rates. At this cost level, mining remains profitable even during significant market downturns.

Infrastructure is built for scale: industrial cooling systems, redundant power supply, monitoring, and security. In cold climates, natural ventilation is used — cold air is drawn in from outside, passes through rows of ASICs, and is expelled already heated.

Reliability is critical. Downtime at a farm with 1,000 ASICs can cost thousands of dollars per hour. As a result, operators invest heavily in automated restart systems, 24/7 monitoring of all parameters, and backup power sources.

Hardware is purchased in large batches directly from manufacturers. ASIC efficiency declines every 1–2 years as difficulty increases, so equipment must be regularly upgraded. Older units are sold on secondary markets, often to regions with even cheaper electricity, where they can remain viable for a few more years.

Industrial miners make money through scale and optimization. Every percentage point saved on electricity and every additional hour of uptime directly impacts profitability. Margins are thin, but large volumes turn mining into a sustainable business.

Practical case: building Red Rock Pool

A deep understanding of real-world constraints is critical when delivering blockchain projects. Theory remains theory until it meets the demands of a production-grade system.

Our experience with Red Rock Pool highlights the complexity of building a mining pool from scratch — competing with solutions that have been refined over many years.

The challenge: design an infrastructure capable of processing up to 2 exahashes per second, supporting 10,000+ ASIC devices, with latency under 120 ms and 99.999% uptime (no more than ~26 seconds of downtime per month).

We implemented a microservices architecture with automated reward distribution across four payout models (PPS+, PPLNS, SOLO, FPPS), real-time analytics for miners and operators, and continuous monitoring of speed, latency, and network health.

Results after the first month: the pool reached 2 EH/s, attracted 10,000+ connected miners, and maintained network latency within 80–120 ms. Today, the platform operates with both industrial data centers and individual miners.

Have a blockchain idea?

Building Red Rock Pool from the ground up gave us deep expertise in blockchain development. We went from protocol research to launching a system that processes millions of operations and handles real funds around the clock.

We know how to design reliable architectures, optimize performance under high load, and set up monitoring for mission-critical systems. We understand both the technical side of blockchain protocols and the business logic behind blockchain products.

If there’s a blockchain concept that needs a delivery team, it’s worth discussing. We’ll walk through our development approach, assess architecture and risks, and outline a clear path to launch.