What is cryptocurrency mining?
In the most basic sense, crypto mining is the process in which digital currency transactions are verified and added to a blockchain. In this context, the word “mining” generally refers to a type of validation model known as “proof-of-work” or PoW.
The proof-of-work model is used to mine many of today’s top digital currencies including Ethereum, Bitcoin, and Litecoin. This model involves a person (or often a group of people) using high powered computers to solve advanced mathematical puzzles, which are part of what’s known as an encryption mechanism. The first individual, or group, to solve the equation, earns the right to authorize a transaction – and receives payment in the form of cryptocurrency for their services. In mining circles, this payment is known as a “block reward.”
As mining expert and EZ Blockchain co-founder Sergii Gerasymovych explains, “crypto mining is not just printing money at home. It’s an entire process which requires a lot of energy, equipment, and effort. Today, it is a highly optimized operation.”
As Gerasymovych alluded to, PoW mining requires specialized equipment, but that wasn’t always the case.
Roughly a decade ago, in 2009, a standard PC or laptop could be used to mine bitcoin. However, as bitcoin’s popularity and value has increased – the mining process evolved to meet the growing demand. By 2013, the relatively complex ASIC computers that keep the Bitcoin network running today had become commonplace in the mining scene.
These days, at the very least, miners must have computer hardware with an application-specific integrated circuit (ASIC) or a specialized graphic processing unit (GPU). Interested parties will also need an always-on internet connection, crypto mining software, and a way to keep their hardware from overheating.
The specific set up needed to participate in the process will vary, depending on which type of digital currency one wishes to mine. For example, bitcoin requires a specialized ASIC graphic chip to validate transactions – while most tokens require less specialized (and usually less expensive) graphic processing unit.
There are even companies like EZ Blockchain that provide custom mining units for clients.
One of the controversies surrounding crypto mining, particularly the PoW model, is the amount of electricity used in the process.
In 2018, Arvind Narayanan, an Associate Professor of Computer Science at Princeton, presented written testimony to the United States Senate, in which he claimed that bitcoin mining accounted for 1 percent of the world’s energy consumption.
However, EZ Blockchain’s Gerasymovych has his own take on energy consumption as it relates to mining;
“To blame crypto miners for using too much electricity from a grid is the same as blaming a heavy load truck for driving on the same highway as a small car. Both of them use built infrastructures – just on a bigger scale.”
As the cost of electricity varies from place-to-place – so too does the price associated with mining crypto.
Case in point – according to 2018 CNBC article – it cost the equivalent of $26,170 (USD) to mine a single bitcoin in South Korea. Conversely, mining that same bitcoin in Venezuela would have cost just $530 (USD) at the time.
The location a person or organization chooses to mine will have a major impact on their success in terms of profitability.
To offset some of the difficulties and costs associated with the proof-of-work method, miners’ band together to form what is known as mining pools. These pools allow miners to combine their resources to generate blocks faster and thus receive block rewards more frequently. These rewards are generally split based on the amount of work and resources each individual contributes to the effort.
The size of these groups can vary greatly. Some mining pools are made up of only a few hundred people, while other pools have well over 100,000 members.
Slush is an example of a major mining pool that has, at press time, over 164,000 active workers. Slush was the first mining pool and currently mines around 11% of all block on the bitcoin blockchain. According to their website, they have mined over 1,000,000 bitcoins since 2010.
There are also other heavy hitters like BTC.com and Antpool that that combine mine over 25% of the total blocks.
The fact that so many people are part of these operations means that more people have a say in the direction the digital network with the PoW model.
The Proof-Of-Stake Model
For those who aren’t interested in dealing with supercomputers or worrying about energy costs – there’s the proof-of-stake (PoS) mining model. With this model, instead of solving mathematical equations, stakeholders (folks who own the type of crypto their mining) randomly receive the right to validate transactions. With proof-of-stake the more cryptocurrency a miner owns, the more likely it is that they’ll be chosen to validate a block. In this instance, as the old saying goes, “it takes money to make money.”
Another difference, with PoS, is that miners don’t receive a block reward as with Proof-of-work. Instead, they get a fee for each completed transaction. While this method is less expensive and more energy efficient, it also has its drawbacks.
According to The Motley Fool’s Steve Williams,
“Arguably the biggest issue with the PoS model is that major stakeholders can have a much larger say in the future path of a digital network. Whereas PoW networks are massive and incorporate the opinions of a lot of people, PoS networks lose some of the decentralization that makes cryptocurrencies special.”
That being said, PoS remains the preferred option of many.