Cryptocurrency Mining Explained
Respective governments and corporate bodies control fiat currencies. So fiat currencies are part of a centralized economic system. Whereas cryptocurrencies are decentralized currencies. No corporate bodies control cryptocurrencies.
As there are no centralized bodies like banks in cryptocurrencies there’s no need for private ledgers. Instead, there is a public ledger, which is unique to each currency. This public ledger is called the blockchain.
In a centralized economic system, it’s a bank’s duty to update the ledger of its customers. But in cryptocurrency system, there are no banks or third payment processor. So we need someone or something to verify the transactions and add them to the blockchain. This is the job of a miner.
A miner is a computer or a node in the cryptocurrency network that verifies transactions. Miners run special software to remain connected to the network and participate in the mining process. And in exchange for their contribution, the system rewards the miners with a set amount of coins.
How Does Cryptocurrency Mining Work?
Let’s look at an example with Bitcoin, undoubtedly the king of cryptocurrencies. Suppose I send you 1 BTC. Now the system needs to verify the transaction to know whether it really took place or I am lying. That’s what miners are for. One of the miners look through the records and verifies the transaction.
After that, it adds it to the blockchain or the public ledger. In return, the protocol rewards the miner. This way miners create new currencies of that system out of nothing. So miners are very important for a cryptocurrency network.
But it’s not that easy. Remember, the blockchain is a public ledger. So if the mining process was this easy anyone could have set up a miner and start manipulating the system.
They could have verified transactions that didn’t happen and create false records. So to make the mining process as secure as possible the cryptocurrency system follows a set of steps.
Creating A Hash Out Of The Block
First of all, there are no single transactions. Instead, the system groups a bunch of transactions that happened at a set period of time and creates a block. For Bitcoin, the block size is limited to 1 MB. Whereas for newer cryptocurrencies it can be as high as 8 MB. After grouping the transactions, the network announces it to the participating miner nodes.
Now after this, miners compete against each other to create a hash out of the transaction block. For Bitcoin, miners use SHA-256 to create hashes, whereas in Ethereum Ethash is used.
The hashes are created using not only the transaction data included in the blocks but also from the hash of the block preceding it. This way blocks can be linked, thus forms the blockchain. It also increases security as miners cannot create blocks out of thin air. They need to create blocks that actually can be linked to the previous block.
Hashes are very secure in nature. You can easily create a hash out of the information you have using a set of mathematical formulas.
But once you create a hash you won’t be able to retrieve the information embedded in it if you don’t know the initial information. After the hash is created and is added to the blockchain, the system rewards the miner. For Bitcoin, this reward amount is 12.5 BTC per block.
This reward amount gets halved every 4 years or after creating 210,000 blocks. This is there to limit the circulation of Bitcoins. Because ultimately there will only be 21 million Bitcoin.
Computers are very fast at calculating, so they can create hashes rapidly. That’s why to limit the number of blocks that can be created each day the cryptocurrency network employs a certain set of rules.
Proof Of Work And Competition For Coins
The cryptocurrency network doesn’t accept any hashes. A hash of a block must meet certain criteria to be considered as a valid block. It doesn’t matter whether the miner has created a hash with proper data. It still has to match the rules the system sets for it.
The cryptocurrency protocol demands the miners to create blocks that look a certain way. Usually, a block’s hash should have a certain number of zeroes at the beginning. And the system doesn’t publicly disclose the format and it changes the format after each successful block.
If the hash of a miner doesn’t match the required format it needs to create another hash out of the block data. But the miner cannot manipulate raw transaction data, nor can it manipulate data from the previous block.
So a new random number is introduced – it’s called NONCE or a number that can be used only once. A miner repeats this process of generating hashes with NONCE until it or some other miner successfully creates a hash that the protocol approves.
So the miners are effectively competing against each other to get the reward. This kind of cryptographical problems is called Proof of Work. Every mineable cryptocurrency has some sort of difficulty adjustment algorithm that makes the whole mining process more difficult over time by making the miners calculate more complicated hashes.
What Are Mining Pools?
As a miner, you can mine as an individual or you can work alongside other miners to solve the proof of work problems.
A mining pool acts like an individual miner itself, but in reality, it is comprised of hundreds of other individual miners. These miners share their mining rigs processing power and work towards the same problem.
This way success rate increases heavily and the pool gets rewarded by the system. The miners receive their share of reward depending upon the amount of mining power they contributed.
What Are Mining Rigs?
Mining rigs are specialized systems that are built for the sole purpose of mining cryptocurrencies. Back in the 2010’s you could easily mine Bitcoin with your home PC just using your CPU’s processing power.
But CPUs are general purpose processing unit – they can do a lot of work but they are not specialized in any. That’s why people started mining with GPUs and found out GPUs mine way faster than CPUs. This increased the mining difficulty so much that CPU mining became irrelevant.
As the GPU mining space became saturated people started looking for alternate solutions. That’s when FPGAs for mining Bitcoin was introduced. But these FPGAs were not ideal for mining cryptocurrencies and they were very ineffective.
This gave birth to ASIC mining rigs. An Application Specific Integrated Circuit is a specialized system made for doing only one particular task. In this case, it is cryptocurrency mining.
Right now there are so many ASIC mining rigs mining Bitcoin that GPU rigs have become irrelevant. But for cryptocurrencies like Ethereum, Zcash etc where ASIC mining rigs cannot be used, GPU rigs are still the king.
So to recap, CPU rigs are irrelevant now. GPU mining rigs are cheaper but less powerful than ASIC rigs. But ASIC rigs are expensive, to say the least. Plus you can get respectable resell value for GPU rigs but used and inefficient ASICs are just burden.
If you are building a mining rig you must also make sure that you maintain your mining rigs.
So if you have the money and want to become a serious miner, then use ASIC rigs. Right now the best cryptocurrencies to mine with ASIC rigs are Bitcoin, Namecoin, Litecoin, Dogecoin etc.
Cryptocurrency Cloud Mining
You may have already seen advertisements regarding cloud mining. These cloud mining service providers rent out their highly efficient mining rigs and you get to keep the profit these miners make.
In return, you will have to pay a certain amount to acquire the mining power. You don’t have to worry about equipment costs, electricity bills and cooling solutions. But they make take some form of maintenance fee to maintain the rigs for you.
Unfortunately, most of these cloud mining services are plain scams. They will take your money, invest it in the way they like and show you fake stats. When the times comes they send you cryptocurrencies that they bought not mined.
But there are legitimate cloud miners too. Cloud mining services like Genesis Mining, Hashflare etc are very reputed companies and very popular amongst cryptocurrency enthusiasts.
But because of their popularity, ty their mining rig slots fill up too quickly and sometimes have several month long waiting list.
Best Cryptocurrency Mining Software
If you are operating a GPU rig then you need to configure the whole system yourself. This includes installing the hardware components as well as installing and configuring the required software.
There are many mining software available depending upon which cryptocurrency you want to mine and which graphics card you are using.
Then there are all in one mining software like Nicehash. But in Nicehash you won’t be mining for yourself. Instead, you will be renting your rig to someone else. And you will get the rent money instead of mining profits.
Some General FAQ
Mining Vs Buying Cryptocurrency – Which One Should I Do?
If you still have this question in your mind then I will suggest you read the article once again. Mining and buying are two different things.
By mining, you are securing a cryptocurrency network and generating new coins and in return getting rewards. But if you are buying cryptocurrency you are just investing in it.
If you aren’t tech savvy enough or don’t like taking risks then don’t try to mine instead buy. But if you are up for the challenge then start mining!
Is Cryptocurrency Mining Worth It?
I hear this question from time to time. And my answer will always be yes unless each and every cryptocurrency ditches proof of work completely.
But the worth it question depends upon a lot of things, especially the cryptocurrency you want to mine. Currently, Bitcoin mining is very expensive.
If you want to setup your own rig then you need to buy ASICs. But if you want to buy cloud mining, they are pretty expensive too.
And to make profits you need plenty of hashing power too. But if you mine fairly easier to mine currencies like Ethereum, Zcash, Monero etc then it can be very profitable. Plus by mining you are not only profiting you are also helping a cryptocurrency to grow.
Is Cryptocurrency Mining Legal?
I tend not to answer this question as there are many ambiguities regarding it. But I do believe it is legal in most countries and region.
Still, it’s always a good idea to check your local laws or talk with a lawyer. If you are still unsure and don’t wanna get into any trouble then use a cloud mining service like Genesis Mining or Hashflare.
What Is The Best Cryptocurrency To Mine In 2018?
In late 2017, we are seeing a lot of cryptocurrencies being introduced that are mining focused, especially GPU mining.
So 2018 can very well be the year of cryptocurrency mining.
The Future Of Mining And Final Words
Cryptocurrency mining is very resource heavy and wastes a lot of energy. The environmental footprint of mining is very alarming.
For example, currently, Bitcoin mining consumes roughly about 901 KWh electricity per month. Let me visualize this for you, this amount is enough to power 2.26 million American homes at any given time. Shocking enough?
That’s why more and more cryptocurrencies are slowly switching to Proof of Stake based transaction verification algorithms.
The PoS protocol doesn’t require the nodes, called validators or forgers, in this case, to complete unnecessary cryptographic puzzles. Instead they get to become validators for having a stake at the cryptocurrency network – kind of like voting rights. You can read more about Proof of Work and Proof of Stake here.
Ethereum made it to news for considering switching their platform to PoS from PoW. They have already made changes to their network to support their proposed PoS protocol Casper. Some other popular cryptocurrencies that are PoS based include – Ripple, Dash, NEO etc.
But there are some cryptocurrencies that are against PoS based cryptocurrencies. And these currencies want to carry forward the legacy of mining.
It’s still very early to draw conclusions about cryptocurrency mining’s future but I do believe better protocols will be introduced and cryptocurrency mining won’t be in the same form as we now know.