Understanding Cryptocurrency Mining
If you are new to mining, I would assume that you are fairly new to the cryptocurrency world in general and came across it only when the prices went high in the fall of 2021. Cryptocurrency is a digital asset just like the dollar unless it runs fully digital. It has no central entity controlling it, which is why it is called decentralized and one of the main arguments for cryptocurrency. There are many cryptocurrencies released daily or hourly as new developers spot some advantages and shortcomings of existing projects. With cryptocurrencies, you store your money in a wallet that is made up of a public and private key. You can think about your public key as your email address, and your private key as your password. To receive or send money you will be using your public address, which means that if you lose your private key or send money to the wrong address, you have no way of getting it back. Cryptocurrency is anonymous, but it is not difficult to track down. Although there are some cryptocurrencies built for complete anonymity. Before we go all-in on something else in a bid to make things clearer to you, let us go straight to the point of this article and learn about cryptocurrency mining.
What is Cryptocurrency Mining?
Cryptocurrency mining is the process of validating transactions and minting new coins from blocks. Mining is an activity carried out by network participants which involve the solving of blocks and the generation of new coins for miners who first successfully solve a block and verify transactions in that block. Proof-of-work requires a hard and complex calculation known as a hash puzzle which needs to be solved to validate transactions.
These puzzles help the network to function effectively and to continue exchanging transactions with other participants. Nodes on decentralized networks verify transactions by checking against a long list of criteria including checking for double-spending, tracking the source of the funds being spent, and checking that the transaction volume is within the range allowed.
Verified transactions are added to meme pools where they remain until they are added in a block. Miners compete to solve a new block and check that the transactions in that block have not been added in previous blocks. After collecting and verifying transactions the miner creates a block header.
The block header is made up of the transaction data in the block which links it to the previous blocks on the network, a timestamp showing the exact moment the block was created, and a valid proof-of-work done to create the block. The output of processing the block data results in a string of data known as the block hash created using the network’s hashing function. Bitcoin’s hashing function is SHA256. There are more in-depth explanations to this, but you should keep in mind that mining is the creation of blocks and verification of transactions on a decentralized network.
How are Cryptocurrencies Mined?
There are two ways of mining cryptocurrencies as we know them, and they correspond to something known as a consensus algorithm. The consensus algorithm is simply how a blockchain network reaches an agreement on the state of transactions. The most common type of these algorithms is proof-of-work and proof-of-stake. Mining a block means that you have successfully verified the block and added it to the chain of transactions.
Proof-of-work Mining
Proof-of-work is the oldest consensus algorithm used in Bitcoin and most of the mining hardware available falls under the proof-of-work category. Some of this hardware are GPUs, ASICs, FPGAs, etc. This mining hardware solves randomly generated cryptographic puzzles using electricity and computational power. Finding the right solution is the same as mining, and you will be compensated according to the amount due going by the network rules. On the Bitcoin network, for example, miners earn 6.25 Bitcoin for correctly solved blocks.
There are many different algorithms that cryptocurrencies fall under, and some mining hardware can excel better at certain algorithms than with other coins. The measurement for your mining power is the hash rate, and it is considered the solution attempt to the puzzle posed by the algorithm.
Proof-of-stake Mining
Proof-of-stake mining means being a node which is almost the same as being a shareholder in a company. To verify transactions in a proof-of-stake-based network, you must own a certain number of the platform’s cryptocurrency or governance tokens which is, for example, 32 ETH in the case of Ethereum. Staking this amount of the token on the network enables you to validate blocks of transactions on the network and most nodes validate based on the rewards they get per block for verifying these transactions. Validating transactions also mint new coins into circulation. In most cases, the staked coins are locked and cannot be moved, although, there is some proof-of-stake network that uses soft staking which is more flexible. Any PC can be used to run proof-of-stake in as much as it can be up 24/7 and has a stable internet connection.
Mining Rigs
There are also different types of mining rigs as we shall see in this part of the article. These rigs are hardware used for solving puzzles and earning rewards in the mined cryptocurrency. They are therefore important for mining and all miner activities.
ASICs
ASICs are application-specific integrated circuits, which are mostly used to mine certain coins with a high output of computational power and electric consumption. For example, if you bought an S19 in May of 2020, you would get a computational power of 110 terra hash, and consume 3250 watts of electricity in the process of mining. The hardware is however limited because it can only mine coins that use the SHA256 algorithm such as Bitcoin. With such an immense hash rate your mining profitability will still be low due to the network difficulty.
hash rate
FPGAs
FPGAs are in between the ASICs and GPU miners. They are made for a handful of algorithms, although only some FPGAs can mine every coin. They are similar to GPUs, but they are more efficient and profitable which explains why they are sometimes expensive. The original meaning of the acronym is a field-programmable gate array, and they are semiconductor devices built using a matrix of configurable logic blocks. They are different from ASICs in that they easily push the 500 MHZ performance barrier.
GPU Miners
GPU mining is the use of graphic cards to get more computational power so the more and better GPUs you have, the more mining power you have. GPU is the most residential-friendly way of mining because ASIC miners produce a lot of heat and noise. FPGA miners are the closest to GPU miners considering the fact that they are residential friendly ways of mining.
CPU Mining
It is also possible to mine cryptocurrencies using your computer CPU, but this method is not efficient for most cryptocurrencies because the network difficulty may be so hard that CPUs will not stand the chance. When the Bitcoin network was launched, however, you could mine Bitcoins with your CPU but as we said before, the current difficulty could see you spending tons of electricity for nothing. There are a few cryptocurrencies like Privacy Coin and Monero, which are optimized for CPU mining, but you must keep in mind that a better CPU, increases the chances that you will successfully mine a block. By a better CPU, think about this as more cores, threading, and speed. Other networks that support CPU mining are Dogecoin, and Electroneum, although the best options for CPU mining are solo mining and mining pools.
Storage Mining
Some networks require that you provide bandwidth in form of storage space for verify transactions on the network. On these blockchain networks, the requirements for becoming a node include the provision of idle storage space which is used to store data on the network and to keep the network running. Most of these networks work like could infrastructure using the original BitTorrent idea to store pieces of information across computers to prevent attacks and downtimes. Examples of these networks are Flux, ICP, and Helium.
Conclusion
We have now learned about cryptocurrency mining, what it means, and seen examples of some of the hardware and things you will need to get started mining. Mining is a competitive activity in most decentralized networks and the difficulty almost makes it impossible for most participants on the network to engage in this activity successfully. There are different types of mining rigs and some of them are not great to have in your neighborhood as we have seen. We do hope that you enjoyed learning about mining and reading this article. See you soon.
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