Digging into crypto mining
As cryptocurrencies and blockchain technology accelerates in Lithuania, miners and mining farms begin to emerge as well. However, it is still difficult to understand what it does and how it works for most of the people. Ronaldas Budrys, a co-founder of company “Cryptodus” which specializes on smart contracts’ and blockchain solution’ services, tells about types of mining farms, value and future prospects.
The word “mining” in this context is used quite freely figuratively. To mine a certain cryptocurrency is enough to have a computer. It could be a desktop or laptop, and yet the most effective are specially designed ASIC devices with microchips used to mine bitcoins or other ASIC compatible cryptocurrencies. At the beginning of cryptocurrencies, miners were using processors (CPU), later on — graphics cards (GPU), and now, the majority of mining farms, especially the ones that store bitcoins are using ASIC devices that require a lot of electricity. The mining principle is based on blockchain technology: a computer is rewarded with some amount of cryptocurrency for the solved algorithms, in other words, for a mined block in the network. As in the daily life, distance is measured in meters and kilometres, cryptocurrency’s mining power is measured in hash units: megahash, gigahash, terahash, etc.
Two ways of mining cryptocurrencies
R. Budrys specifies two types of cryptocurrency mining: proof-of-work and proof-of-stake. Choosing the first method requires the use of ASIC computers. Even though they use a lot of power, they are necessary to mine the transactions and encrypt them into the block circuit. However, it is possible to mine using a standard computer. The latter has many graphics cards, nonetheless, ASIC computers are more effective when mining bitcoins. It is also notable some cryptocurrencies can only be mined only using graphics cards (GPU). The second, proof-of-stake method is a more modern way to maintain the blockchain network infrastructure. This method does not require a very powerful computer, processor or graphics card. Therefore, it is enough to have special software and the certain number of cryptocurrency units which are wanted to mine. At the moment when cryptocurrency’ holder, connects to the internet through special software and becomes a node, his computer begins to belong to the blockchain network. The node guarantees that the transaction was successful, legal and other network transactions were valid as well. Choosing proof-of-stake method requires the permanent (there are exceptions) connection to the internet — dividends are received for having a certain amount of cryptocurrency because blocks are mined on the network as well. A new cryptocurrency unit appears from every mined block which consists of new transactions. The reward is given to the miner who is the first to mine that block. Proof-of-stake method does not use a lot of power, moreover, it does not require rigs and computers, hence this method is considered as a more modern algorithm which eliminates huge mining pools from the game.
The strategy may be mixed
According to R. Budrys, the expert who consults start-ups and developed companies, declares that it is not necessary to follow only one mining strategy. In mining industry, it is essential to choose the right strategy and assess the risk. “If it is wanted to mine professionally and only bitcoins, I would advise using proof-of-work as this way will not change soon, thus to start with proof-of-stake method is not worth. The ecosystem of bitcoins has grown widespread; hence, changes can be slow and take time. Everyone involved in mining should accept the changes” explains R. Budrys. He also advises not to focus on only one cryptocurrency. When you mine several cryptocurrency units, automatically you gain more flexibility. If any network of blockchain crashes or there appears some new technological gaps and errors, there still remains another one that allows staying in the mining industry. Now, most of the cryptocurrencies are mined using the collective method, when the reward is distributed proportionally to the participants who have contributed to the block mining. These unions are called mining pools — which consist of multiple individual miners. They consolidate their recourses and redirect them to blockchain network and then mine with a huge power. The reward is distributed proportionally. Therefore, those who put in the major part of their recourses receive the biggest part of the reward.
Future depends on legal regulation.
Today position of the Bank of Lithuania is flexible for innovations and technologies regarding blockchain. Currently, the bank is not taking any bans or strict regulations. Furthermore, the website of the State Tax Inspectorate has enough information for those who want to start mining cryptocurrencies. R. Budrys says that the situation in Lithuania is really promising. “Currently, there are many individual miners with two or three computers, but there are only few larger mining farms. On the Internet, there are plenty of groups (e.g. on Facebook) with various tips and instructions on how to start mining. There is enough information, you just need to take time and understand all details of legal regulations, so you do not have to face unexpected problems when it comes to paying taxes”. Asked if he does not think that cryptocurrencies’ bubble could explode soon, R. Budrys says that bubble mainly has emerged due to a lot of speculations. According to him, the situation may change if the crypto market would be regulated globally with drastic measures: there could be restrictions for buying and accepting cryptocurrency or huge tax halter would be placed. Personally, he does not expect this bubble to explode due to the technology which mining farms are based on, he is very confident because the usability and adaptability of cryptocurrency are very clear.
