Crypto 101: Cryptocurrency Mining

Cryptocurrency mining is the process of providing computing power to secure blockchain consensus. This article will discuss mining, the different methods of performing mining, and how mining happens on the Bitcoin network.

Cryptocurrency mining is the process of using your computer’s computing capabilities to secure consensus on a blockchain.

Mining is used in Proof of Work (PoW) blockchain networks to create and validate new blocks of transactions and secure the network. In a PoW network, miners use vast computational resources to create new cryptocurrency units, boosting the existing circulating supply.

Proof of Stake (PoS) networks don’t have miners. Instead, validators work to create blocks for the blockchain. They differ from the PoW model in that there is no computationally demanding race to solve transaction blocks in the PoS model to create, validate and secure the network.

Miners help a blockchain platform maintain its operations free of hostile takeovers, spam and attempts to concentrate the network control in the hands of a few network actors. Miners also earn cryptocurrency rewards by participating in these activities.

There are two types of blockchains based on the mechanism of transaction verification utilised, either proof of work (PoW) or proof of stake (PoS). Mining is the process of verifying transactions on PoW blockchains.

Bitcoin, Dogecoin (DOGE), Litecoin (LTC), Monero (XMR), and Kadena (KDA) are examples of networks that employ the Proof of Work (PoW) consensus algorithm. PoW refers to the computational ‘work’ which validates and adds blocks of transactions to a blockchain’s permanent ledger of records.

On blockchains which utilise PoW, special nodes called miners package transactions into batches, or ‘blocks’. They then use their computational power (or hashing power) to try to ‘solve’ a computational puzzle that will ‘validate’ the block. The validated block is then added permanently to the blockchain.

PoW mining also contributes to the decentralisation of a blockchain network. A blockchain can only act as a decentralised ledger because it is maintained by a network of distributed nodes spread worldwide. Rather than a single database, these interconnected computers keep a copy of the blockchain data and communicate with one another to continuously ensure the blockchain’s accurate state. The higher the number of participants in this decentralised ledger, the higher the levels of decentralisation will be.

A primary concern in mining cryptocurrencies with PoW consensus mechanisms is the long-term viability and cost. Mining these cryptocurrencies necessitates a significant expenditure, not just in machinery but also in electricity. As a result, many miners, particularly those mining bitcoin (BTC), require enormous quantities of electricity. Especially in the Bitcoin case, if a miner cannot access multiple mining rigs and affordable electricity, the mining will almost certainly never be profitable.

In the current crypto bear market, at least three big bitcoin mining firms have shown how expensive mining can be as they have entered cash flow issues. For these examples, you can check the Crypto Saving Expert articles about Core Scientific, Argo, and Iris Energy.

Mining in a PoW ecosystem is a complex and technical process, but it can be easily understood by looking at its process step by step. This article will explain based on how Bitcoin mining works. The principles applied to bitcoin can also be used to understand the mining basics of other PoW chains.

Step 1 — A New Transaction Occurs

All Bitcoin transactions begin as an unconfirmed transaction. These transactions are generated when a user first sends a transaction to another user on the bitcoin network. The transaction will comprise important information such as the sender’s address, the receiver’s address, and the amount sent. The transaction is then spread throughout the entire network.

Step 2 — The Waiting Transaction Enters the Mempool

Miners are constantly scanning the Bitcoin network for fresh activity. After a new transaction is sent, each miner has a temporary region on their system where all the unconfirmed transactions are stored. This temporary space is known as a mempool, derived from combining the words memory and pool. On the Bitcoin network, there is no single, combined mempool. Each miner has their own mempool. Two miners may have slightly different mempools, as each node is built differently and gets unconfirmed transactions at different times. However, the mempool size cannot exceed 300 MB by default.

Step 3 — The Miners Propose a New Block

Miners will select transactions from their mempool and bundle them together to propose a new block. Typically miners choose to select transactions which pay higher fees. Due to the differences between individual mempools, the transactions proposed by miners in a new block will vary from miner to miner. The average candidate block on the Bitcoin network is around 2MB in size, which accommodates approximately 2,000 transactions.

Step 4 — Miners Must Solve a Puzzle to Add Their Block to the Blockchain

Step 4 is when the PoW mechanism starts. Following the packaging of their candidate blocks, miners deploy their mining equipment to repeatedly add a small number, known as a nonce, to a different number generated by the network’s software. The generated number is then hashed in the Bitcoin network using the SHA-256 hashing technique.

The hashing algorithm is intended to modify the input and provide a modified output value cryptographically. This output value must be equal to or less than a system-generated target value, which is updated regularly by the blockchain’s code. If this occurs, the proposed block is considered ‘solved’, meaning its status changes from candidate to fully verified block.

The validated block is subsequently uploaded to the blockchain as the next record in the ledger. The miner who has solved the block receives their reward, which is now 6.25 BTC in the Bitcoin network. In the next halving, expected to occur in 2024, the reward per block will reduce to half of the current value, to 3.125 BTC, and so goes on after each new halving.

The miner who first identifies the target value will add their candidate block to the blockchain. The process of determining the target value is done by the computing equipment, which will repeat the process of adding the nonce value as many times as possible as fast as possible.

A miner will increase their chance of ‘winning the race’ to the target by increasing their hashrate, or ‘guesses per second’ rate. High-performance, specialist bitcoin mining equipment, known as ASIC processors, can produce trillions of hashes per second.

This race to solve the next block takes approximately ten minutes on the Bitcoin network. This metric is determined by the difficulty of the puzzle, which is adjusted every 2016 blocks. When a winning block emerges, miners abandon their efforts to solve their current candidate block. They will update their mempools to remove the now-confirmed transactions, package another candidate block from the available unconfirmed transactions, and resume their race to be the first miner to add the following block to the chain.

PoS is the primary alternative to PoW for validating blockchain transactions. There is no computationally demanding race to solve transaction blocks in the PoS model. Each new unprocessed block added to the network is assigned to a validator node, which verifies and adds it to the chain.

This allocation to a validator node is random in the most basic PoS model. The validator’s probability of receiving the following block to process is directly based on the share of the chain’s native coin held or staked by that node. For example, if a validator owns 1% of all the base cryptocurrency on the network, they will be able to validate around 1% of all blocks.

Unlike PoW, PoS does not necessitate considerable energy expenditure or significantly delay network operations. Ethereum (ETH), Cardano (ADA), Solana (SOL), Polkadot (DOT), COSMOS (ATOM), and Avalanche (AVAX) are some of the popular blockchains that use PoS.

Due to the high energy consumption and computing requirements of PoW blockchains, most blockchains already use a PoS validation mechanism.

The following are the primary ways for mining cryptocurrency to validate transactions and receive crypto rewards:

• ASIC Mining (Solo): Application-specific integrated circuits (ASIC) are single-purpose computers. Some ASIC mining rigs are solely dedicated to cryptocurrency mining. New ASIC devices can quickly make older designs unprofitable. Furthermore, ASIC-resistant cryptocurrencies cannot be mined with ASIC miners.
• GPU Mining (Solo): Their traditional role in a computer is to process visuals and display them on a screen. GPU mining allows users to mine cryptocurrencies with more widely available hardware, such as regular laptop computers. Even though some cryptocurrencies can still be mined using GPUs, their efficiency is determined by the mining difficulty and algorithm.
• CPU Mining (Solo): The central processing unit (CPU) is the fundamental component that powers computers. CPU mining allows you to mine cryptocurrency using your computer’s idle power. Bitcoin was initially mined using a CPU, but due to power limits, CPUs are no longer the most effective for cryptocurrency mining.
• Mining Pools: A mining pool is a group of miners that band together to pool their computational power (hashing power or hash rate). As their chances of discovering additional blocks increase, they can earn more together and split the rewards. Many miners join mining pools to achieve a more consistent and predictable result.
• Cloud Mining: Cloud mining platforms charge consumers a monthly or annual subscription to rent their internal mining hardware resources. In exchange for a fee, the cloud platform will perform mining activities on a blockchain network on your behalf. Any earnings earned from mining are distributed to you. The higher the charge, the more hash power you can rent; consequently, your rewards should be more significant. This choice, however, is dangerous because there is no guarantee that you will reap the benefits of your investment. Many of these services have even been exposed as scams.

To Conclude

Crypto mining is a potentially fruitful way to earn cryptocurrency. It can be an energy-intensive activity, but once set up, it’s relatively hands-off. You don’t have to monitor the network actively. Another advantage of mining is that it allows you to contribute to keeping the network decentralised and strengthen it against malicious attacks.

The instability of mining profitability is one of the most significant drawbacks investors must consider before becoming miners. Because of the fierce rivalry among miners on the top PoW platforms, crypto mining is a risky and unpredictable industry in terms of profitability. There are several considerations when setting up a mining operation, such as the cost of electricity and environmental conditions. Even the source of the electricity can be scrutinised.

Another disadvantage is that some cryptocurrencies may demand a large initial investment in equipment to participate in crypto mining. Furthermore, because of its highly energy-intensive nature, it may cause environmental concerns. The Bitcoin blockchain alone consumes more energy per year than Norway.

Also, although cryptocurrencies and crypto commerce are prohibited in several nations, crypto mining is forbidden only in a few. Earlier this year, the EU regulators called for a ban on PoW Bitcoin mining to save renewable energy.

So, before becoming a miner or investing in mining, investors must make sure they understand the risks and the potential profitability.

~ By Jordano M. Z. ~

~ This article does not imply an endorsement of any cryptocurrency listed above; they were listed only for educational purposes. Investors should do their own research before investing. Investors do so at their own risk. ~