How does crypto mining work?

03 Jun 2021

What is mining?

Mining is a crucial part of blockchain technology. When a group of transactions need get added to the blockchain, there needs to be a way to ensure this new block is authentic and secure. To do this, miners have to solve complex mathematical equations. This equation ensures the accuracy of the block that is being created and guarantees that there is no double-spending of the same coin from each wallet. As a reward for solving this problem and the computing power needed to do this, a miner is given a predetermined amount of the specific cryptocurrency or collects the fee charged on each transaction. This is known as the "block reward". For Bitcoin, this reward is halved every 210,000 blocks or about every four years. The purpose of the halving event is to reduce the rate that new coins are created. As more people use the currency there will be more blocks created so reducing the rate that the coin is created to keep the supply competitive. Since demand is growing, and relative supply remains consistent the currency will grow in value over time. A more valuable currency means more people are willing to invest and the cycle continues upward.

To receive a block reward a miner will need to verify 1 megabyte of transaction data for accuracy. This can be one very large complicated transaction or several thousand smaller transactions. The next step is solving the math equation mentioned earlier. This is called "proof of work". The purpose of this proof of work is to "guess" a hash value that is less than the target hash. The challenging part of this is that the hash is made up of a 64-digit hexadecimal number. This is intentionally difficult, really difficult in fact!. The difficulty even gives a score, which for Bitcoin currently is around 1 in 25 trillion! Miners have to be extremely fast and are ranked based on how many hashes per second they are capable of producing. The best of the best are measured in terahashes per second (TH/s) or trillion hashes.

Is mining cryptocurrency worth it?

Pulling a new coin out of thin air that is potentially worth thousands of dollars seems pretty appealing, right? As you can imagine the competition is pretty fierce. When Bitcoin was still unknown, you could be a pretty successful miner with just some software downloaded onto a regular laptop. With the exponential rise in popularity miners now absolutely need to be at the cutting edge of technology to be competitive. Cryptocurrency miners a usually built from the ground up so they can be optimized for the specific coin being mined. The "brain" of the computer you are reading this on is most likely a CPU or central processing unit that is good at doing a lot of different types of tasks but not built for speed directly. The graphics processing unit (GPU) in your computer is very specialized and extremely fast. This is an ideal candidate for a cryptocurrency miner!

When you are pushing your computer to its limits with a graphically intense game or 50 tabs open in your browser you might notice that the computer gets pretty hot. This heat is produced by the electricity quickly moving through the components to handle the computational load. The more computing power, the more electricity is needed. As mentioned before, the whole design of the blockchain is built around heavy computation requirements to solve hash functions. Electricity costs will quickly add up on top of the extremely expensive hardware.

After all of this, you are not even guaranteed a block reward if another miner beats you to solve the equation! You will be competing with mining farms that combine hundreds of miners to increase the likelihood of mining a new coin first. These mining farms often have an optimized power grid and cooling system to improve their efficiency even more.

Grab your digital pickaxe

A quick search on Amazon for miners shows Bitcoin miners that range from $2,000 all the way up to $15,000! This does not factor in the electricity cost to run these machines either. While mining Bitcoin is probably not worth it for a small operation, less popular cryptocurrencies are less competitive and might be profitable on a smaller scale. An even better alternative to mining small altcoins will most likely be found in the upgrades from Ethereum to Ethereum 2.0. These upgrades will drastically reduce computation requirements and reduce energy needs. The effects will eventually allow you to stake some of your Ethereum to become a Validator (instead of a miner). Validation rewards are randomly selected, thereby removing the competitive arms race to have the most computation power. The introduction of Shard Chains sometime in 2022 will reduce the computing power down to the point that you could validate even on your mobile phone!