What Is Crypto Mining?
Defining Mining
This week on Understanding Crypto (our iTunes international top rated investment podcast… not that we like to brag!) myself and co-host Paul Abercrombie aka Captain Crypto explore, simplify and attempt to easily define what is crypto mining. We break down the process, the challenges and the new trends that are happening in the sector.
And hopefully, through the show, we even manage to demystify why mining Bitcoin is so difficult as well as the pros and cons of proof of stake.
So where shall we pick up from? Let’s define mining first and foremost. Mining is the process used by Bitcoin and several other ‘cryptocurrencies’ to verify new transactions. It involves vast, decentralised networks of computers around the world that verify and secure blockchains — the virtual ledgers that document cryptocurrency transactions. In return for contributing their processing power, computers on the network are rewarded for the work they have done — often the ‘reward’ is paid in the currency of the network that the computer is working on i.e. if you are ‘donating’ your computational power to the Ethereum network, you will be rewarded in ETH.
It’s a virtuous circle; the miners maintain and secure the blockchain, the blockchain rewards the miners in the currency they are working on, and the ‘rewards’ provide an incentive for the miners to maintain the blockchain.
How Do You Mine?
Previously, the necessities for mining were pretty basic; practically anyone with a decent home computer could participate. However, you now need specialised computers to successfully mine cryptocurrencies. Especially Bitcoin, as it has grown to the point where the computational power required to maintain it has drastically increased. Bitcoin was designed to work as a decentralised currency that was not connected to a major financial institution, Federal reserve, or bank in any way. In order for it to work, independently managed computer power was necessary; if a sole server was set up to operate Bitcoin, it would betray the premise of the entire concept of the ethos.
The Downsides of Mining.
One of the biggest restrictions is cost. For example, the finances required to compete with specialised companies to mine Bitcoin is almost impossible to match these days. It is estimated that the computation power to mine a Bitcoin right now is 12 Trillion times as much processing power as you would have needed when it was first created! So a lot of miners are now focusing on alternative networks as work can be undertaken by GPU machines (which are still relatively high powered and much more costly than your average PC or Mac!), these are plugged into standard internet connections and operate on other cryptocurrency networks or blockchains.
These machines receive the rewards in the native currency of the blockchain they are working on but, as such, this is far from a set and forget situation.
Depending on market volatility, the smart thing to do may be to swap the currency that has been mined for alternative crypto assets like Bitcoin or Ethereum which may pay a bigger ROI.
One of the other major challenges that mining has right now is its reputation for being uber-ecologically negative. There is a real narrative around this right now, with popular media and large entities (who have a vested interest for the status quo to stay the same by the way!) basically trying to pin the smoking gun of global warming on the crypto world.
Of course, mining machines — like any form of computer — use electricity, but contrary to popular belief, they are not the carbon death machines that mainstream media would have you believe.
As it stands right now, the internet in general (and I realise this is a seriously general term!) accounts for around 20% of global carbon emissions — crypto meanwhile accounts for about 0.2%. So, quite a gap there I think you’ll agree.
But, emissions of course need to be considered as the sector grows and one of the ways that efficiency in the space is being tackled is a proposed shift towards a new trend called ‘proof of stake’, where you effectively lock your crypto assets into the network and then that provides the consensus mechanism.
Proof of Stake
While the crypto space is talking a lot about proof of stake there has been a shift towards this new format for quite a while… and the date to make the jump seems to have been getting pushed back for years now. Ethereum has launched a completely new blockchain which will work entirely via proof of stake. The original Ethereum (think of it like ‘Ethereum Classic’) will most likely remain as a ‘proof of work’ mechanism whereas Ethereum 2 works on proof of stake.
However, as mentioned above, this has been a long time coming; POS has been talked about since 2016, which goes to show how long this shift to proof of stake will take, if it’s taken roughly 6 years for a currency as large as Etheruem to switch.
So whilst miners need to be mindful when investing in the hardware to make substantial web3 mining gains, it is unlikely that proof of stake will kill mining on blockchains such as Ethereum and even if there are substantial changes within one of the major networks, there are still plenty of other currencies that still exist and require mining to make the whole web3 world keep spinning.
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