There is no doubt that cryptocurrencies, along with their underlying technology, the blockchain, are slowly but surely revolutionizing the world we live in.
There’s a lot to learn about cryptocurrencies such as their history, the way they work, and their potential impact on the future of our society.
Today, we’re gonna talk about one of the most important aspects regarding their creation – mining.
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What is cryptocurrency mining (and how does it work)?
The easiest way to explain cryptocurrency mining (or crypto mining) would be to associate it with “gold mining”. Even though this association is not entirely perfect, it makes sense since crypto mining is a fairly similar process.
Mineable crypto coins exist inside a protocol, in a similar way that gold exists in the ground. The “miners” are the ones responsible for bringing it into the light.
This process has two main functions – to add transactions to the blockchain network, and to release new crypto coins (units) into the market.
In this process, any involved party, be it an individual, a group of people, or a business, uses powerful computers or computational devices to solve complex mathematical equations. The end goal is to validate blocks of transactions. The first one who manages to solve these equations and validate the block receives what is called a “block reward”.
In the aforementioned Proof-of-Work model, these rewards are paid out in the cryptocurrency that is being validated. In the end, each transaction processed over any blockchain network needs to be verified by miners to ensure that the same virtual token was not spent twice.
But not every cryptocurrency requires transaction validation through mining.
Coins such as Ripple, Stellar, Cardano, EOS, and NEO are non-mineable cryptocurrencies. These cryptocurrencies use a “Proof-of-Stake” protocol, as opposed to the “Proof-of-Work” which is used by most mineable cryptocurrencies.
Proof-of-Work vs. Proof-of-Stake
The Proof of Work (PoW) system is one of the most important algorithms in blockchain technology. It is used by most of the cryptocurrencies, including Bitcoin and Ethereum.
However, Ethereum is slowly but surely approaching a hard fork, with its developers having announced a change from PoW to PoS several months ago. Earlier in May, Ethereum released its much-anticipated Casper update, a hybrid PoW/PoS mechanism that will help make the transition to PoS smoother.
How does PoW work?
Since Bitcoin is the most prominent cryptocurrency using PoW, we will use it in order to better explain the algorithm.
All the transaction in the bitcoin blockchain are grouped together in a memory pool (commonly referred to as mempool), with all of them requiring validation. And that’s where mining comes in.
Every block in the blockchain has a cryptographically encrypted hash value, which the miner needs to discover so he can verify the transaction and include it in the next available block.
SIDENOTE. A hash value is a numeric value of a fixed length that uniquely identifies data. Hash values represent large amounts of data as much smaller numeric values.
In order to find the hash value of the last block, miners use pure computational power in order to try one number after another until they find the complete hash value. Once found, the miner announces his discovery on to the network so that the other nodes can verify it and create a new block. He is then rewarded with a fraction of the Bitcoin he mined, and the whole process starts from scratch.
One of the main strength of the PoW algorithm is its resistance to attacks. In order to effectively attack a major PoW system, you would have to acquire 51% of the computational power of the network, and the costs of doing that would be higher than the actual reward you could get off of the whole attack.
However, the security provided by the PoW algorithm comes at a great cost. Literally. Research shows that in 2017, bitcoin mining around the world required more electricity than the world’s smallest 159 countries.
The ever-increase requirement for computational power makes it difficult for individual miners to continuously upgrade their cryptocurrency mining rigs. Thus, there is an increase in the centralization of mining rigs, which goes against the blockchains fundamental principle – decentralization.
How is PoS different?
Whereas in a PoW system mining is directly impacted by the mining rig of a person, in a PoS system a person can validate block transactions depending on how many coins he or she holds.
In PoS systems there is no need to create new crypto coins, as they are all already created. This takes care of the issue of having to solve complex puzzles, thus eliminating the massive energy costs.
Another difference between the two algorithms is that while in a PoW miners are rewarded with fragments of their mined block, in a PoS system the users are rewarded solely through transaction fees.
Which one is better?
While the POW algorithm proves to be a more secure system. PoS is proving to be a more scalable alternative, with a better long-term plan than its counterpart. And while a PoS system is more susceptible to a 51% attack, such a move will cause major fluctuations in the price of the cryptocurrency, thus making it very expensive (and thus hard to buy in large quantities) or lose its value.
Even so, for now, it’s hard to pick a winner.
But if Ethereum will manage to successfully transition from PoW to PoS, there is no doubt that others will follow, and this might make a PoS system more popular in the industry.
Is cryptocurrency mining profitable?
In order to successfully mine cryptocurrencies, you first need substantial computational resources.
In the early days, Bitcoin was mined using simple laptops and computers, making the process accessible to anybody wanting a piece of the action. But as block difficulty increased, the mining process became so resource-dependent that it soon required miners to have high-performance GPUs (like the ones used in top-notch gaming rigs). Not long after, as the block difficulty kept increasing, the only way to profitably mine Bitcoin was with the help of ASICs miners, which are expensive and require immense amounts of energy.
SIDENOTE. An Application-Specific Integrated Circuit (ASIC) Miner is an integrated circuit created for a specific use, thus helping them outperform CPUs and GPUs in terms of mining power.
Of course, there are various cryptocurrencies that can still be mined using simple computers (CPU mining-compatible), and some that have even made it their mission to ban mining with ASICs equipment altogether.
Therefore, before deciding if mining cryptocurrency is worthy of your time and if it is a profitable venture, there are many more aspects to take into consideration.
If you were to ask most crypto aficionados that are into mining if bitcoin mining is worth it, they would probably say that it is not. However, mining other, newly launched cryptocurrencies might bring you some extra income. Mining difficulty is the name of the game. It determines the complexity of the algorithm you need to solve as a miner when creating a new block of transactions.
Once you’ve picked a cryptocurrency, you will want to look towards buying the right rig. And there are plenty of options on the ASICs market. Another good idea would be to use various online multicurrency calculators to determine precisely the parameters involved, such as the hash rate.
SIDENOTE. The hash rate is the speed at which a cryptocurrency mining rig can solve the algorithm required to mine a new block of cryptocurrency.
If you conclude that the operational costs are way too high, but you still want to try your luck in the game, not all hope is lost. One thing you can do is join a mining pool, pay the required pool fees, and work together with other miners to mine blocks (and share profits, of course).
As a general rule, the profitability of the mining process is determined by four main components:
- Hash Rate
- Operational Costs.
Last but not least, don’t forget to set reasonable expectations.
Nowadays, crypto mining is considered somewhat of a business, as more and more people and companies are investing resources in order to mine. As time passes, crypto mining should become even more popular and potentially even more profitable (especially if specialized cryptocurrency mining rigs will get cheaper).
What cryptocurrencies can be mined?
As mentioned before, most cryptocurrencies that use the “Proof-of-Work” algorithm can be mined. This means that there are plenty of cryptocurrencies that can be mined. However, some of the best cryptocurrencies to mine with low to medium equipment (CPU and GPUs mostly) are Dash, Steem, Litecoin, Bytecoin, Monero, Ethereum, Zencash, Electroneum, Webchain, Vertcoin, and Dogecoin, to name a few. If you are willing to invest in some severe ASICs equipment, you can very well try to mine Bitcoin.
What do I need in order to start crypto mining?
Before starting to mine, there are a few things that you need to check off your list.
First off, you’ll need a wallet compatible with the cryptocurrency you plan on mining, in order to securely store your earnings. There are numerous types of wallets out there, such as hardware, desktop, mobile, and online wallets.
Depending on the cryptocurrency you are opting for, you will also need either an official or a third-party cryptocurrency mining software. If you’re opting to join a mining pool, then you’ll also require an online membership for the said pool. Membership at an online cryptocurrency exchange is also very important in order to exchange your virtual coins for conventional cash or other cryptocurrencies.
Finally, and maybe the most important of all is to ensure that you have a reliable, full-time internet connection. It’s recommended that your hardware mining rig (be it comprised out of ASICs equipment or simple CPU/GPU-based) is stored in a well-vented, cool location, so investing in a series of specialized cooling devices might also be an excellent idea.