What is Cryptocurrency Mining?

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Contributor, Benzinga
January 4, 2024

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Crypto mining is the process of verifying blockchain transactions for a reward. Miners are paid for their work, kind of like how Visa takes a cut for verifying credit card transactions. The difference is, crypto miners are random individuals all over the world. When a group is properly incentivized at scale, the verification becomes theoretically "trustless". This was Satoshi Nakamoto's genius idea that made Bitcoin a global phenomenon.

Every few minutes, crypto miners all across the world reach consensus about the current "state" of the network. From recent transactions to the balance of every wallet, state data is aggregated in a size and time restricted "block". When the network agrees on all the data in the most recent block, they "chain" it to the previous blocks and collect the network reward for keeping the data in check.

Users of any given blockchain network, be it Bitcoin or Ethereum, must pay a transaction fee to the miners for their services. This fee, along with a hard-coded block reward, makes mining a lucrative business to be in. Becoming a miner has never been easier in the history of digital investing, and you can get started in minutes.

What is crypto mining? Should you become a miner? Or is there a better way to make money from cryptocurrency? 

What's the Purpose of Crypto Mining?

Before we dive into how crypto mining operation works, let’s get some blockchain basics out of the way. 

People all around the world contribute their computer's power to a shared global computer (blockchain) in exchange for payment. Mining is the process of contributing power, and miners earn a network fee along with newly minted coins. Think about the blockchain like Amazon Web Services, but powered by the people instead of Bezos. No central company or government owns or controls the blockchain, it's decentralized.

  • Decentralized. Anything not controlled by a single central entity or group. 
  • Blockchain. A decentralized global computer assembled by people all over the world and accessible to anyone with internet connection and some money.
  • Hashing. Hashing is the processes of compressing data into an irreversible jumble of bits. Each set of data has a unique hash; changing the data will require computing a new hash value.

Mining is the process of validating and recording new transactions on a blockchain, as well as hashing them to prevent shenanigans from sliding under the radar. However, depending on the consensus mechanism of the blockchain, typically proof of work or proof of stake, the mining process will be different.

What’s the Incentive for Crypto Mining?

Validating and recording all the new cryptocurrency transactions that come across the network is not an easy task. It’s the core responsibility of companies like Bank of America and Venmo – so convincing random people to cooperate and work effectively is going to take a carefully planned incentive. 

The rules of any successful decentralized system must be created in such a way that it is in the best interest of random people around the world to help maintain it. 

Satoshi Nakamoto incentivized people to maintain Bitcoin’s blockchain by rewarding them with newly-minted Bitcoin. This created a permanent and transparent inflation strategy that gave crypto miners confidence their work will be rewarded with a currency worth holding.

Who Mines Cryptocurrency?

Miners are the people who dedicate significant computing power (often entire buildings full of dedicated mining computers) to solving hashing puzzles in order to add new blocks to the blockchain. Miners who have less computing power often join mining pools; this way, users can earn a more steady stream of income from mining.

If you mine crypto with just a few mining computers, then you should join a pool. If you mine independently, you're essentially playing a game of luck. You'll have a very slight chance of solving a block on Bitcoin's blockchain, and if you do, then you'll receive the entire block reward of 6.25 bitcoin. However, this is extremely unlikely, and you'd be better off joining a pool to receive a steady stream of a small portion of block rewards.

Proof of Stake Blockchains

Proof of stake blockchains are also verified by a decentralized community, but without the intensive computing. Instead of mining, proof of stake chains employ "validators" who stake money to earn more. Validators stake or lock up money for the right to validate a chunk of blockchain interactions, and earn the network fees associated. These fees add up quickly, and can earn a validators between 5-20% annual yield on their staked value.

With added benefits like quick transaction times, cheap transactions and sustainability, cryptocurrencies are turning to proof-of-stake consensus to power their blockchains. Proof-of-Stake doesn't require computer processing power to secure blocks on the blockchain; instead, proof-of-stake uses financial stake to incentivize users to work in the best interest of the token or project.

Currently, Ethereum is in the works of upgrading to proof-of-stake with its ETH2 upgrade. Although the launch date isn't set, it's expected to transition to ETH2 by early 2022. Staking Ether tokens on Ethereum 2.0 can earn you mining rewards that equate to about 7% annual interest. This interest is paid in Ethereum, so if the price of the token appreciates, then your interest rate will effectively be higher. You can sign up for Gemini to begin staking Ethereum today, or you can join the staking waitlist on Coinbase to stake Ether on the platform once approved.

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    Sum of median estimated savings and rewards earned, per user in 2021 across multiple Coinbase programs (excluding sweepstakes). This amount includes fee waivers from Coinbase One (excluding the subscription cost), rewards from Coinbase Card, and staking rewards. ³Crypto rewards is an optional Coinbase offer. Upon purchase of USDC, you will be automatically opted in to rewards. If you’d like to opt out or learn more about rewards, you can click here. The rewards rate is subject to change and can vary by region. Customers will be able to see the latest applicable rates directly within their accounts.

Mining: Building a Blockchain

A blockchain “block” is a chunk of data containing two things:

  1. Some relevant data to be added to the database. (For example, all the bitcoin transactions that occurred within the last 10 minutes.)
  2. The hash value and ID of the block before it in the chain.

By including the hash of the block before it, each block is “chained” to the block before it – all the way back to the beginning. An edit to any historical block will require recomputing every hash that comes after it. Recomputing every hash would take years, and everyone else on the network would immediately notice. Security via math!

To add a new block to the blockchain, a computational 'puzzle' must be solved to compress the blocks data into a 256-bit hash except it's not exactly a puzzle. Mining is the act of finding the hash – a task that is not so easy. Crypto miners essentially guess numbers until they randomly get it right. Imagine trying to guess a 256-bit number! The first miner to successfully hash the block, making it safe to share across the internet, is awarded crypto for their work. The winner shares their results with all the other miners, who verify the encryption is safe and the work is done. This is called “proof of work.” Once verified by the other miners, the winner securely adds the new block to the existing chain, and all the other nodes update their copies.

The Halvening

You many have heard of the Bitcoin “halvening”. Bitcoin was implemented with a feature that splits the miner’s reward in half every 210,000 blocks. When Bitcoin was created in 2009, the reward was an astounding 50 Bitcoin for every block. 

Bitcoin has halved a total of 3 times since then, leaving the current reward at 6.25 BTC as of May 2020. Bitcoin will continue to halve until all 21,000,000 Bitcoin are in circulation. Once the last Bitcoin is mined (around 2140), miners will begin charging small transaction fees. 

Mining Pools

Many individual miners lack the necessary equipment to ever mine a block on their own. To still have a chance at making some profits, they join mining pools. These pools allow miners to combine (or pool) their hashing power and split the earnings. Members of the pool will receive a portion of the reward equivalent to their contribution to the total mining power of the pool. 

These pools are controversial in the community as they tend to centralize power rather than further decentralization. 

Source

Mining Computers

The rules of the crypto mining incentive system dictate that those with the fastest computers make the most money. This has started a computational arms race across the world. 

Most computers are capable of mining Bitcoin, but aren’t efficient enough to profit (earn a reward more than the cost of the electricity usage required to attain it.) This is why areas with the cheapest electricity costs have the highest concentration of mining power. 

GPU Mining

What is mining? It can be a lucrative way to enter the crypto market, but it’s not the same for everyone. Nearly any computer can run crypto mining algorithms, but some are much better than others. A modern computer has a CPU (central processing unit) and a GPU (graphics processing unit). If the CPU is the brain of the computer, then the GPU is the muscle. CPUs are designed to perform a wide range of tasks quickly whereas GPUs can split tasks up across hundreds of cores processing thousands of threads at a time. This means that GPUs can use all those cores to guess hashes much faster than the few cores a CPU has can, making them drastically better hardware for mining.

Modern GPUs like the GTX 3080 are powerful and efficient enough to make mining profitable – even in the United States, where electricity costs are typically really high. This may change after the Ethereum Merge, however, because Ethereum has long been the most profitable crypto to mine.

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ASIC Computers

As Bitcoin mining grew in popularity, mining companies like Bitmain and Antminer emerged to build and sell specialized computers that could only perform 1 operation: mining. 

These ASIC (application specific integrated circuit) computers began to dominate the network power, and people began to collect hundreds of them to start mining “farms”. 

ASIC computers are so specialized that they can often only mine one specific token. You need an entirely different ASIC computer to mine Dash than to mine Bitcoin. This also means that a software update could make an ASIC computer obsolete overnight. 

ASIC vs. GPU Mining

ASIC computers are entirely useless for anything other than crypto mining – but they smoke every GPU on the market. Mining with ASIC computers carries more risk than GPUs, but it’s much more cost effective. ASIC computers comprise the majority of mining power on most blockchains, including Bitcoin. 

Certain miners and mining pools with the largest ASIC operations tend to centralize mining power on the network. For this reason, Ethereum and many other cryptocurrencies are designed to prevent ASICs from mining on their network. By only allowing GPU mining, it becomes much more expensive to dominate the network. 

Should You Mine Crypto?

If you have a PC with a modern GPU, you should consider using it to make money while you aren't using it yourself. It's easier than you might think!

ASIC mining is not for everyone. Unless you live in China, the cost of your electricity usage is probably too expensive for you to consider mining at a large scale. 

But don’t lose hope, there might be another way to profit off of your newfound mining knowledge.

  1. Proof-of-stake. Ethereum 2.0 promises to eliminate the need for expensive mining equipment. Instead of a race between the miners to secure the data, miners will stake Ether in order for the right to secure a portion of the transactions. 
  2. Rent mining power. NiceHash is one of the largest mining pools in the world. They offer a service to rent mining power produced by machines in countries with low electricity costs. This way you can mine without ever getting technical.
  3. Invest in the industry. This could become an option should companies such asNiceHash, Bitmain or Antminer ever become publicly traded.

The cryptocurrency industry is still young, and mining has a long way to go before reaching maturation. Whether or not you should pursue an investment related to mining is up to your risk tolerance. Nearly any industry this new and underdeveloped is likely to contain a lot of uncertainty, but with uncertainty comes the potential for profit. Just be careful. 

Frequently Asked Questions

Q

Is crypto mining profitable?

A

It can be, but typically not on normal computer hardware. Some cryptocurrencies, like Ethereum, can be mined using powerful graphics cards. Other cryptocurrencies, like Bitcoin, are typically unprofitable to mine in the United States unless your electricity cost is low. Also, you’ll need ASIC miners to profitably mine Bitcoin.

Q

What's the best cryptocurrency to mine?

A

You’ve asked the important question; what is mining? However, what is the best token for mining? The best cryptocurrency to mine depends on the hardware you’re using to mine. You can use a mining calculator to estimate your profits from different cryptocurrencies, or you can simply use a program that always mines the most profitable cryptocurrency at any given moment.

Q

Is it illegal to mine Bitcoins?

A

In the United States, it is not illegal to mine Bitcoins. However, the legality of Bitcoin mining varies from country to country. Some countries have strict regulations or even bans on Bitcoin mining, while others have more lenient or supportive policies. It is important to research and comply with the laws and regulations of your specific jurisdiction before engaging in Bitcoin mining.

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