The term cryptocurrency mining is derived from the fact that new coins are created (mined) whenever new transactions are recorded on the blockchain. Mining is an essential aspect of how most cryptocurrencies work. In order for a user to send or receive crypto coins, the user initiates a transaction which is then broadcast to the entire network. Before this transaction can be completed, it has to be validated and recorded on the public ledger.
That process is referred to as mining. The cryptocurrency networks rely on miners to validate transactions and add them to the public ledger and ensure that users are not trying to trick the system. New crypto-coins are also created and added to the network through the process of mining. As a reward for mining, miners are issued these newly created coins. In other words, miners act as bookkeepers for the cryptocurrency network and earn small fees and newly created coins as payment. Anyone can become a cryptocurrency miner as long as they have internet access and sufficient computer hardware.
The Block Reward
Cryptocurrency mining is based on the concept of block rewards. For cryptocurrency transactions to be verified, miners are required to solve complex, computationally demanding mathematical equations. The solutions to these mathematical puzzles are based on the results of the previous block solutions, therefore it is impossible for a miner to calculate the solution of a future block in advance without the solution to the previous block. A block is simply a collection of the cryptographic signatures of the transactions made within a specific period of time. The blockchain is formed by this history of block transactions and solutions.
The computers mining cryptocurrency is essentially competing with one another to solve these puzzles. The first computer to come up with a solution for the puzzles gets to add the next block to the blockchain. In return, this computer is rewarded with newly created coins and the fees charged for the transactions. This is what is known as the block reward.
Most cryptocurrencies are designed with a maximum number of coins that can be possibly released within the network. For instance, the maximum number of Bitcoins that will be produced is 21 million coins, while Litecoin has a limit of 84 million coins. To ensure that all the coins do not get mined at once, different cryptocurrencies employ different methods of controlling the rate at which new coins are released.
For most cryptocurrencies, the computational demanding mathematical puzzles have a difficulty value that can scale up or down over time depending on the effort miners are using to mine the cryptocurrency. The aim of this is to keep the rate of release of new coins fairly constant. For instance, the difficulty level of Bitcoins mathematical puzzles is set to adjust itself after every 2016 blocks mined, or once about every two weeks. When the computational power put into mining is increased, the difficulty level increases. When the computation power is decreased, the puzzles become easier to solve. By doing so, Bitcoin targets to have a block solution generated about every 10 minutes. Different cryptocurrencies have different approaches. For instance, the target for Ethereum is a block solution after every 16 seconds.
Cryptocurrency mining and the block reward can be compared to panning for gold in a stream. Some will get lucky and find huge gold nuggets, others will only find some gold dust while others will not find anything. Whoever is in a good location will find more gold. However, with cryptocurrency, the good location is represented by good mining hardware.
Setting Up Mining Software
There are several options when it comes to cryptocurrency mining. Some algorithms like CryptoNight can be run on CPUs. Others like Ethereum, Vertcoin, and Zcash are best to run on GPUs, while others like Bitcoin and Litecoin can only be run on ASICs (Application Specific Integrated Circuits). However, there’s more to mining besides having the mining hardware.
During the early days of cryptocurrency, it was possible for someone to solo-mine. All you had to do was to download or build a wallet for your preferred cryptocurrency and install the correct mining software. You would then configure the mining software to join your preferred cryptocurrency network and task your hardware with running the calculations in the hope of finding a valid block solution before other miners.
These days, however, a lot of things have changed. You don’t need to have the wallet software, since it is no longer necessary for mining and only ends up eating up your disk space and bandwidth. For instance, downloading the Bitcoin blockchain will take up about 350GB. Nowadays, websites have been built up to take care of this. However, this also led to an increase in the number of people who are mining cryptocurrencies. Ideally, if you provide a certain percentage of the total computational power expended in mining a particular cryptocurrency, you should find an equal percentage of all the blocks mined. However, with the increase in the number of miners, it is impossible to provide any substantial amount of computational power, which in turn means that your chances of finding a valid block solution are virtually impossible. This is where mining pools come in.
Mining Pools
With the increasing number of miners, solo mining is virtually impossible. To win block rewards, you have to become part of large mining guilds, which are referred to as mining pools. When it comes to mining, the bigger the mining pool, the higher the chances of finding valid block solutions. However, it is important to note that for security purposes, no single individual or mining group is allowed to have control of more than 50 percent of the total computational power (hash rate) in any cryptocurrency network. This would lead to what is known as a 51% attack.
Mining pools work by having every participant contribute their computational power to mining. Similarly, all rewards are distributed among all the pool members based on the percentage of computational power they provide. Your hardware is assigned small tasks by the pool, which it submits as shares. By joining a pool, you increase your chances of earning a small percent of a reward. If you were to solo mine, you would get to keep the whole reward for yourself, but your chances of finding a valid block solution would be next to zero.
To illustrate how hard it is to succeed as a solo miner, let’s consider the total network hashrate of the Bitcoin network, which stands at about 13 exahash (EHash/s). At the same time, a good Bitcoin ASIC is only capable of about 13THash/s. This means that your chances of successfully solo mining a block are one in a million or about one blocks in 19 years. On top of that, the hashrate keeps increasing with the increase in the number of users. This means that it would be easier to win the lottery than to succeed as a solo miner.
However, let’s assume you joined a large mining pool that provides about 25 percent of the hashrate in the network. This pool would ideally mine 25 percent of the blocks. Your 13THash/s would be equivalent to 0.0004 percent of the pool’s hashrate, and you would get a similar share of the block rewards. The block reward stands at 12.5 Bitcoins, therefore you would end up with about 0.00005 BTC per block. Since your pool would ideally find about 36 blocks in a day, you would earn about 0.0018 BTC every day. With one Bitcoin currently going at about $55800, you’d get earnings of about $100 per day.
The Actual Mining
With your hardware ready and having joined a mining pool, you are now ready to start mining. All you need to do now is to download the correct software and configure it to your hardware and pool. Most mining pools will help you with instructions on where to download the software and how to configure it. It’s good to note that your mining speed will be affected by things like memory, clock speeds, drivers, and even firmware revisions. To get the most out of your mining software, you should check various forums for ideas on how to optimize your hardware.
One challenge that many new miners often face is deciding on the best coin to mine. This is a tricky issue because of the high price volatility of cryptocurrency prices as well as the emergence of new coins every single day. For instance, Ethereum was just another coin that was potentially profitable to mine. All of a sudden, market forces pushed its value and it became insanely profitable in no time. Switching between different coins is also a time-consuming affair.
To avoid these problems, some miners use platforms such as Nicehash, WinMiner, and Kryptex, which allow you to lease your hashing to others. Payments are made in Bitcoin. This transfers the burden of figuring out the best coin to mine to others and ensures you don’t get stuck with some worthless coins. However, there are fees involved in this. Alternatively, you can set up a multi-algorithm mining software. Here, you create accounts for all coins you are interested in and set up rules to determine which coin will be mined at what time.
Is Mining a Profitable Venture?
Before you decide to get into cryptocurrency mining, it’s important to note that mining hardware does not come cheap. You should also consider the power requirements. The lower your power costs, the more likely you are to make profits from mining. Ultimately, the profitability of mining lies in the volatility that is being witnessed in the cryptocurrency market. With virtually unknown coins making over 1000% gains in a matter of months, you can easily hit the mother lode. However, it’s also important to keep in mind that the price of a cryptocurrency can also plummet just as fast. Therefore, if you decide to get into cryptocurrency mining, don’t risk more money than you are willing to lose.
