What is Cryptocurrency Mining? Mapping The Modern Mining Landscape.

You've probably heard of “cryptocurrency mining” before, but what does it actually mean? In this article, we’re going to breakdown what mining is, why it exists, and how it works for different major cryptocurrencies. Who knows, maybe you might even want to become a miner yourself.

What is Cryptocurrency Mining Anyway?

Just like traditional fiat currency, each cryptocurrency is a collection of coins or tokens. Mining cryptocurrency creates new coins and awards them to the individuals who did the mining. The mining computers (nodes) exist as parts of a network of similar nodes that are constantly working to conform cryptocurrency transactions and keep the network running.

The easiest way to think about a cryptocurrency is to look at it like it’s a piece of software, which it is. Software cannot run without hardware and cryptocurrency is no different. Unlike standard software, cryptocurrency networks are decentralized meaning they exist on many different nodes at once.

The technology that allows for this decentralization and interoperability is known as blockchain technology.  

Understanding the Blockchain

For a full explanation into what blockchain technology is and how it works check out this post, but here is a simple breakdown. "Blockchain" is a term used to describe a distributed ledger database that must have its accuracy confirmed by the majority of the nodes in the system in order to be valid.   

A block in the chain is a bundle of transactions that have occurred in a given period of time. A block is verified through the combined computational power of many nodes on the network. If all the nodes on the network can reach a consensus about the transactions in a block then it is added to the chain.

Key Mining Terms

While not every cryptocurrency requires that mining take place, the ones that do usually operate on a proof-of-work model. There are a few key concepts related to mining that you should understand before we continue:

Proof-of-Work (PoW): Is the method used by some cryptocurrency networks to guarantee that the actors in its network don’t gain too much control. It requires that computers expended processing power and energy searching for complicated cryptographic hash solutions in order to participate in the validation process. Bitcoin and other major cryptocurrencies use this method to mine, but its high energy cost makes it less than ideal as a permanent solution.

Block time: Is the rate at which a new block can be created. This number will vary between networks and determines the speed at which transactions can occur on the network.  

Hash rate: Is the speed at which a particular piece of mining hardware operates. It is represented in Hashes per second (H/s) and can be used to describe a single machine or an entire network. The better the hash rate, the more cryptocurrency a machine can mine in a given time period.  

Difficulty: This is how hard it is to find the correct hashes at any given time. Networks automatically adjust the difficulty to help keep mining on the network fair and control the value/supply of the currency.  

How to Mine Cryptocurrency

Mining can be seen as a business venture, a show of support for a particular network, or simply as a hobby. In order to mine you need to have control of a computer that has the necessary hardware to do it. Each cryptocurrency will have a slightly different hardware setup for mining optimally, but the concept is relatively the same.

There are two main ways to mine: building your own mining system and cloud mining remotely.

Building Your Own Mining Rig

Back in late 2017 when the cryptocurrency market saw strong price increases and Bitcoin was flirting with $20k, mining was very profitable. Building your own miner means that you need to do some math to figure out if you’re going to be profitable. There are three major costs associated with cryptocurrency mining: Hardware, electricity, and network. Balancing these three costs will dictate if mining will be profitable for you or not.  

Hardware: Depending on the types of crypto you want to mine, prices for optimized hardware can vary wildly. ASIC (Application-Specific Integrated Circuits) are specialized hardware that are only meant for mining. ASIC systems are expensive, but they boast a significantly higher hashrate than non-specialized systems. Rigs can cost sometimes $10k and above

Standard miners are built by chaining many GPUs (Graphics Processing Units) together on one motherboard. The best motherboards can support about 13 GPUs at the moment and rigs range in the thousands of dollars to build. You can build smaller miners for under a thousand, but yields will be low.

Electricity: Cryptocurrencies have drawn criticism because of the large amount of energy that is required to operate them. In order to be effective at the job, mining computers need to be up and running 24/7 and that means using a lot of power. The price per kilowatt needs to be considered and work its way into your calculations. You can use online calculators like CryptoCompare to factor in to help you get a sense of your profitability before you actually switch on your machine.  

Network: This is a no-brainer, you need to be connected to the internet if you’re going to mine. However, you don't need to have anything out of the ordinary. A standard DSL connection is more than enough to maintain a mining operation, but the cost should still be factored in.  

Cloud Mining

If you don't want to buy your own hardware, then you can always rent equipment and use it remotely via the cloud. The concept is simple, a cloud mining service builds a large and efficient cryptocurrency mine and then sells contracts for people to use computing power for given periods of time.

This arrangement is good for miners who don’t want to deal with the maintenance and other issues that come along with having your own hardware. The mining service is betting that the cash they receive in fiat currency will be more valuable than simply using their hardware to mine for themselves, and the miners are betting on the opposite. As you might imagine, these types of services are considerably less profitable than running your own mine, but they are also much more accessible.  

Joining a Mining Pool

As the cryptocurrency market has grown, so has the people who participate in it. As we mentioned before, cryptocurrencies reward miners who discover new blocks, but with so many miners this means that it could take years for a lone miner to ever get a reward. This is where mining pools come into play.

A mining pool is a group of people who have all decided to pool their computing resources to find blocks and evenly distribute their rewards. The practice allows miners to enjoy more consistent rewards which incentivize more people to join the pool.

The Future of PoW Cryptocurrency Mining

Is the PoW model the way of the future, or is there a better option for everyone. Markets like the PoW model because it makes it easy to attribute value and scarcity to a particular cryptocurrency. If you have to expend all this energy to make more of it, then it adds a layer of difficulty to the system that protects against inflation.

The only issue with the model is that it's wasteful. Adding arbitrary difficulty to a system is counter-intuitive and less than ideal. Many major coins like Ethereum have already announced that they will end the practice, and more are sure to follow suit. Where would such a change leave miners?  

Proof-of-Stake Model

The main alternative to Proof-of-Work is something called Proof-of-Stake (PoS). PoS is unique because it bases trust of a node on how many coins that node possesses. Validators collect transaction fees instead of block rewards, which greatly reduces the amount of computing power required to run the network.

The PoS model uses much less energy and frees up computer power to actually process/validate transactions which brings a serious level of scalability and efficiency to the system. Energy savings are a big deal when you consider that the Bitcoin network now uses 57.6 Twh/yr which is similar to the annual energy consumption of Columbia.

Because every validator/miner has a stake in the system, there is a greater potential for them to positively contribute to network health instead of “turning and burning” as many miners do on PoW systems. In the PoS model, all the coins that will ever exist are created in the beginning, miners are incentivized by fees instead of newly minted coins.

The main issue with PoS is that it is still relatively untested from a security standpoint when compared to PoW. The security of a blockchain network fails when one group of actors controls more than 50% of the nodes on the network, this means they can validate what they wish without the rest of the network needing to confirm it.

Proof-of-Work models naturally defend against 51% style attacks by making the amount of computing power a group of people would have to control unreasonable. Proof-of-Stake does not have a natural defense against a 51% attack, so individual networks will need to come up with ways to deal with the issue. Ethereum plans on having a “deposit model” when they start doing PoS, basically, validators would have to make a deposit in an account that could be confiscated if they violated a specific set of rules.

Conclusion

For the moment, cryptocurrency mining is here to stay. The alternative options are just not established or proven enough to replace the PoW method. Coupled with the fact that Bitcoin, the largest cryptocurrency by far, currently uses PoW means that the practice will be here for a long time to come. Whether or not it will be profitable for you to engage in mining will be a calculation you’ll need to make on your own.