What is cryptocurrency mining?
Simply put, cryptocurrency mining is the act of adding transactions on a blockchain that uses the proof of work (PoW) consensus mechanism like Bitcoin. Ethereum used to be a PoW-based platform but has ditched the mechanism and embraced proof of stake (PoS). Entities conducting crypto mining activities are called miners. A miner who successfully adds a transaction on a blockchain is automatically awarded using the blockchain’s native crypto and using transaction fees charged to users of a decentralized protocol.
If it’s just validating transactions, why is it called mining? Well, the process can be compared to mining precious metals since crypto miners replace heavy machines used to dig through the earth with computational power, electrical energy, and customized devices to bring new crypto into circulation.
Crypto mining is legal in most countries including the United States but China has put a blanket ban on mining activities.
5 popular terms used in the crypto mining industry
- Hash – A mathematical function meant to guarantee the unity of information.
- Hash rate – A mining device’s computing power calculated in hashes per second.
- Mining difficulty – How complex it is to verify a transaction.
- Mining rig – A combination of several mining devices to increase the overall computational power. A rig is made up of similar devices such as a combination of ASICs or GPUs.
- Node – A blockchain-connected computer. A miner operates a node.
Types of cryptocurrency mining
Virtual currency mining is a general term that can be branched into different types. These types also largely determine what cryptos can be profitably mined.
ASIC mining
This type of mining applies to those who use specialized devices known as application-specific integrated circuits or ASICs to verify transactions on a decentralized network. ASICs are the go-to devices for miners targeting to interact with the Bitcoin blockchain. Popular examples of ASIC crypto miners include WhatsMiner M50, Antminer S19 Pro, AvalonMiner 1166 Pro, DASH Antminer D9, and iBeLink BM-K1. Most high-end ASICs cost a few thousand dollars.
CPU mining
This utilizes a computer’s inbuilt processing power to mine crypto. Although this type of mining worked during Bitcoin’s early days, it’s no longer viable to mine BTC due to rising mining difficulty. Some coins that can still be mined through this method, but not profitably, include Monero.
GPU mining
It’s the use of graphics processing units (GPUs) to validate transactions on the blockchain. While GPUs are specialized devices interfaced with a computer, they aren’t as specialized as ASICs since they also enhance a computer’s processing power to handle mining unrelated tasks. Examples of GPUs include the AMD Radeon AsRock and the GeForce RTX 3080
However, most PoW-based blockchains supporting this type of mining discriminate against ASICs to provide a level playing field. Cryptocurrencies that can be mined profitably using GPUs include Vertcoin, Ravencoin, and Dogecoin.
Mining pools
This involves miners joining forces to mine certain crypto as a single entity and then share the rewards. A miner who is not in a pool is called a solo miner. This type of cryptocurrency mining is ideal for blockchains with a high mining difficulty since it increases the amount of hash rate.
How does cryptocurrency mining work?
Now that you know what cryptocurrency mining is and the different types of crypto mining, let’s briefly look at how the process works.
- First, all unconfirmed transactions go to a “central” location called a memory pool. An example of a transaction can be a user sending BTC to a friend or digital artists creating Bitcoin NFTs using the Ordinals project.
- A miner connects to this pool and prepares to bundle some of the transactions into a single block.
- A miner then employs their computing power to solve a complex mathematical equation whose answer, also known as a hash, is the key to adding the block onto the block-chain.
- The hash then circulates among other miners on the platform for validation before the block is permanently engraved on the blockchain.
- The first miner to provide the correct hash is rewarded in the network’s native coin and a share of the transaction fees. The rewards are automatically sent to a miner’s wallet.
- Once a block is added, the process is repeated.
Conclusion
Although our above discussion on “what is cryptocurrency mining and how does it work,” makes everything appear simple, factors such as the mining difficulty, the type of electricity a miner uses, the coin mined, and the computational power will determine whether mining is a profitable venture.
Leave a reply