What is cryptocurrency mining?

Mining is a fundamental part of the cryptocurrency industry and essential to the proof-of-work (PoW) consensus mechanism. The process, which uses a global network of computers all running the same piece of code, ensures that all cryptocurrency transactions are legitimate and verified. Mining is also what brings new cryptocurrency coins into circulation.

Bitcoin, the most valuable cryptocurrency on the planet, is one of many that relies on the mining process. However, others, such as Ethereum — the second-most valuable cryptocurrency in the world — have instead chosen the proof-of-work (PoW) consensus mechanism in an effort to reduce the industry’s environmental impact.

In this AAG Academy guide, we’ll teach you what mining is, how it works, what you need to start mining at home and the pros and cons of the mining process.

Most of the cryptocurrencies in existence today are decentralized, which means that they actively avoid a central entity, like a bank, that would usually be responsible for validating transactions. They instead rely on a massive, worldwide network of computers that work together to process and validate transactions and keep the blockchain running smoothly.

Until the PoS system was introduced in 2012, mining with the PoW mechanism was the only way to effectively complete this process at scale while ensuring the security and integrity of the blockchain. Without it, cryptocurrency as we know it simply wouldn’t have been possible. 

How does cryptocurrency mining work?

Many cryptocurrency fans think of mining as a way to generate coins and make some money. While it’s true that mining offers that opportunity, it’s just a small part of the overall process. The most important aspect of mining is what makes decentralized cryptocurrency possible, and that’s digitally validating all transactions and keeping the blockchain up to date.

To validate transactions and record them in what we call a block, miners employ powerful computing hardware to solve complex cryptographic calculations. These calculations generate what’s called a hash — a unique digital signature — that can be used to secure the data that’s being stored and prevent it from being compromised by bad actors.

Each block contains a bunch of transactions that have been validated, and the blockchain itself contains a complete ledger of every transaction ever processed. The unique hashes that are assigned to each block prevent the data within it from being tampered with. If the data inside a block changes, so does its hash, and then it won’t be recognized by the blockchain.

Miners compete against each other to fill blocks, give them a hash, and add them to the blockchain, and the more powerful your hardware, the better your chance of generating a hash before anyone else. Once a block is successfully filled and added to the blockchain, the miner is rewarded with new cryptocurrency coins, which they can then use as they wish.

Why is cryptocurrency mining necessary?

When you make a purchase or send money with traditional fiat currencies, it is up to your bank to first ensure you have enough money in your account, then to process the transaction and maintain a ledger of transaction activity. Without this centralized system, cryptocurrencies rely on the community, or miners, to take care of those responsibilities themselves.

Offering new cryptocurrency coins as a reward for those who successfully process new blocks helps ensure an active and healthy blockchain that is always available. After fixing a bug that caused a temporary outage in 2013, Bitcoin has been active 100% of the time. Ethereum, which also used the PoW system until recently, has never suffered an outage in its history.

Furthermore, mining gives the blockchain the robust security it requires to fend off attacks and malicious actors. The cryptocurrency industry as a whole is currently worth almost $1 trillion. Last November, before economic conditions caused most cryptocurrency values to fall, it was worth $3 trillion. An industry of this magnitude needs the best possible security to succeed.

You might be interested in: What is Proof of Work?

What is needed to start cryptocurrency mining?

In addition to installing the software that’s required for mining on a particular blockchain, which is usually free to download, miners will need a cryptocurrency wallet for storing the keys they’ll need to collect any rewards they earn, as well as the right hardware. This is usually a powerful computer, which may be specifically built for mining.

One of the most important aspects of a mining computer is its GPU or graphics processing unit. This is the component that handles the toughest work — generating the hashes required to secure new blocks. Not all GPUs are suitable for this task, and many of those that aren’t compatible still aren’t powerful enough to compete with other mining rigs.

With that being the case, many miners use the newest, most powerful GPUs from NVIDIA and AMD, then combine them with fast processors, plenty of RAM, robust power supplies, and all the other essentials a computer needs. Some miners, if they have the resources, combine multiple GPUs to increase their hashing abilities and their chances of success.

Some cryptocurrencies require more mining power than others. Bitcoin, due to its size and popularity, is one of the toughest to mine, but it also offers the biggest reward. If you want to mine a cryptocurrency like Bitcoin but you don’t have the resources to invest into a high-end mining setup, you may choose to join a mining pool instead.

A mining pool is a group of miners who combine their computing power to be more competitive. By working together, the individuals in the team increase their chances of generating cryptographic hashes and processing blocks before others. When they are successful, they each take a share of the profits received.

Is cryptocurrency mining still worth it?

Cryptocurrency mining is still an incredibly lucrative hobby for some — and indeed an essential part of the cryptocurrency industry. However, whether it is worth it for you personally depends on whether or not you have the resources to be competitive. You not only need to think about acquiring some of the best computing hardware on the market, but also paying for the energy costs that come with running that hardware all day, every day.

If you don’t have the resources required to acquire the best hardware, you could end up with a mining rig that simply cannot compete, and then you’re unlikely to earn the rewards that you’ll need to recoup the money you’ve spent. However, if you already have a relatively powerful computer, you may choose to join a mining pool instead.

The sad reality is that the average cryptocurrency fan is much more likely to earn a profit by trading cryptocurrency rather than mining it.

Pros and cons of mining cryptocurrency

We’ve already covered one of the biggest cons of cryptocurrency mining, which is the cost of the hardware (and energy) that is required to be a part of an incredibly competitive group. Another is the environmental impact of the PoW consensus mechanism, which is one of the biggest criticisms leveled at the cryptocurrency industry in recent years.

Although the cryptocurrency industry as a whole has been moving toward more renewable energy sources — and the more efficient PoS consensus mechanism — a large portion of today’s mining rigs, which require a substantial amount of electricity, are still being powered by fossil fuels. And we all know that burning fossil fuels is not good for the planet.

The biggest pro of cryptocurrency mining is the potential profit. Bitcoin miners are currently awarded 6.25 BTC for every block they successfully add to the chain, and at today’s prices, 6.25 BTC is worth more than $120,000.

References

• What is Bitcoin Mining? How Does It Work, Proof of Work and Facts You Should Know
• How does bitcoin mining work
• What is mining
• How does Bitcoin mining work
• How to Start Mining Cryptocurrency