What is cryptocurrency mining?
What is crypto mining?
Crypto mining is when nodes in a proof-of-work blockchain (such as Bitcoin) compete for the right to add a new block of transactions to the blockchain. The winning node will add the new block and earn a block reward for doing so. This process is achieved using machines with enormous computational power, or hash power.
Cryptocurrency mining is the mechanism through which new coins are put into circulation on proof-of-work based networks.
Technically speaking, cryptocurrency mining is something any individual or organization can do with adequate hardware and energy resources. However, in reality, the huge amount of power required to compete with other huge operators means mining cryptocurrency is normally only possible as part of a large mining pool.
Let’s take a deep dive into cryptocurrency mining.
How does cryptocurrency mining work?
Blockchains are decentralized ledgers, enabling peer-to-peer value transfers. The network’s nodes are responsible for ensuring every transaction is valid before it is added to the blockchain.
Validation is effectively a race between mining nodes to solve a complicated mathematical problem. Whichever node achieves this first adds the new block and receives the mining reward.
But with no central authority, how can the network ensure miners validate blocks of transactions honestly?
The answer lies in something called a consensus mechanism. In proof-of-work based blockchains, validating new blocks requires miners to solve an incredibly complex equation. The problem itself has no real value. Rather, its purpose is to impose a cost on the miner nodes. In other words, miners must “pay to compete” for the block reward.
This system ensures there is no incentive to lie about new blocks of transactions. Doing so would compromise the security and value of the whole network, and decimate the value of the block reward.
For example, if you were trying to add a fake transaction to the ledger, you’d first need to solve the hash function. The computational power required to even attempt this is huge, leaving no incentive for bad actors to try and cheat the system. It is simply too expensive.
Proof-of-work explained
Thus, the proof-of-work mechanism has multiple purposes:
It ensures the integrity of blockchain transactions despite the absence of any central authority
It rewards miners for their expenses and effort, thus incentivizing them to keep the blockchain functioning
It deters threat actors who hope to manipulate the blockchain for their own gain, by making any such attempt too costly.
How to start mining cryptocurrency
Crypto mining requires extensive processor power and specialized equipment. This creates a barrier to entry for individuals who want to start mining. However, there are the different crypto mining options that exist, each one offering different rewards and barriers to entry.
Different methods of mining crypto
Here are your two main options if you want to start mining crypto yourself:
Operate a crypto mining rig
You can own and operate a crypto mining rig yourself. Mining cryptocurrency using your own crypto mining rig is known as solo mining.
If you choose solo mining, you take home all of the mining rewards. However, you must also buy the mining equipment yourself, and provide the significant amount of power required for the process.
Owning and operating a mining rig comes with the upfront cost of specialized hardware and ongoing operating expenses like electricity. Yet, it offers the most control and profit potential to miners.
Cloud mining
Cloud mining is when individuals purchase mining power (or hash rate) from a commercial mining operation. You will then earn a proportional share of the block rewards earned by the whole operation.
The advantage of cloud mining is that it doesn’t require an upfront investment from you. There is no need to buy an individual mining rig or provide power, or keep any equipment in your home. So it provides the option to benefit from crypto mining without the costlty barriers to entry.
19 Aug
