Crypto Mining

Crypto mining is the process of verifying transactions on a blockchain network and being rewarded with new coins. What does crypto mining mean in terms of its blockchain functionality? Let’s find out.

What is crypto mining?

Crypto mining is fundamental to proof-of-work (PoW) blockchains like Bitcoin (BTC) as it provides the cryptocurrency network with security. To verify transactions and create new blocks, crypto miners solve complex puzzles and add transactions to a distributed ledger. For that, they are rewarded with new coins.

The term crypto mining was inspired by gold mining. Digital tokens are designed to be scarce. One of  their modes of issuance is via crypto mining. Similarly to gold miners who spend time and effort to obtain the precious metal, cryptocurrency miners are required to work hard and use electricity to power the process of crypto creation. 

Key points

Crypto mining explained: Proof-of-work

It's crucial to grasp the basics of the PoW consensus mechanism to fully understand the definition of crypto mining.  

PoW networks like Bitcoin are designed to generate computational proof of the chronological order of transactions. These transactions are verified, finalised, bundled into blocks and added to the public ledger in order to keep transactions transparent and irreversible.

In a PoW consensus mechanism, miners spend time and computational power solving complex mathematical puzzles to verify and finalise transactions. Without miners, the cryptocurrency network could be exploited by users falsifying transactions, leading to “double spending”.

Miners are incentivised to secure the network by earning rewards of newly minted cryptocurrencies. Crypto miners also receive transaction fees in addition to block rewards.

How to become a crypto miner?

What is required to become a crypto miner? The minimum tools needed to start mining cryptocurrencies are:

• Mining rig 

• Electricity supply

• Mining equipment - ventilation, energy monitoring, electrical wiring

The majority of crypto miners primarily focus on mining bitcoin. BTC was the first PoW cryptocurrency and is the most valuable crypto, as of October 2022. 

Other PoW cryptocurrencies include dogecoin (DOGE), litecoin (LTC), ethereum classic (ETC), monero (XMR) and bitcoin cash (BCH).

Ethereum (ETH) operated as a PoW network until September 2022, when it completed The Merge, transitioning to a proof-of-stake (PoS) consensus mechanism. PoS does not require miners to secure its network.

Types of crypto mining

According to Bitcoin.org, cryptocurrency mining has two forms: 

Solo mining

Solo mining is exactly what it sounds like: an individual mining cryptocurrencies and generating new blocks on their own. 

The payments are relatively large because the solo miner receives the entirety of the block reward. However, solo crypto mining may come at a higher variance, where the wait time between payments is longer than usual due to competition among miners.

Pooled mining

Pooled mining is a type of crypto mining where a miner pools resources with other miners in order to create blocks at a higher frequency than with solo mining.

Here, the block reward is shared among the mining team. According to Bitcoin.org, the proportion of rewards received by an individual miner in a mining pool is roughly correlated to the amount of hashing power contributed by that individual.

Pros and cons of crypto mining

What are the pros and cons of crypto mining? Let’s take a look:

Pros

• Proof-of-work, which uses crypto miners to secure their network, is considered the most secure consensus mechanism. Attackers attempting to control more than 50% of the computational power in a PoW network would require an enormous amount of expensive mining equipment and electricity to succeed.

• A surge in cryptocurrency prices will largely benefit cryptocurrency miners who receive coins as rewards for securing the network.

• Crypto miners have a range of PoW cryptocurrencies to choose from.

• Crypto miners do not have to stake their cryptocurrencies in order to participate in mining and therefore are not subject to penalties like slashing.

Cons

• The biggest criticism of cryptocurrency mining is its extensive use of electricity, which can be damaging for the environment. According to the Columbia Climate School, bitcoin mining consumes an estimated 150 terawatt-hours of electricity annually, which is more than the power consumption of Argentina.

• Due to crypto mining’s power consumption and pollution problems, the sector has become a target of regulatory scrutiny.

• Crypto mining is not always profitable. Intense competition among miners, expensive mining rigs and sporadic power supply can make crypto mining unprofitable, especially during crypto bear markets.

• Certain crypto mining rigs are very expensive. Bitmain’s Bitcoin Miner S19 Pro+ Hyd, which can be used to mine BTC, BCH, and BSV, is priced at over $15,000, as of October 2022.

• Crypto miners are also vulnerable if a network chooses to transition to a PoS consensus mechanism. In September 2022, Ethereum ditched PoW to operate as a PoS chain thereby making Ethereum miners redundant.

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