What is cryptocurrency mining and why is everyone talking about it?

Though mining is a rather painstaking process, it has always had great appeal thanks to the reward paid to cryptocurrency miners. Many cryptocurrency users perceive it as a source of income, though cryptocurrency enthusiasts perform this work by conviction. Trying to be independent of centralized structures such as banks and governments, they are engaged in the activity because they like the concept of independent money not regulated by some centralized bodies. 

But what this process is in reality? Investopedia defines mining as the process of creating new bitcoins by solving a computational puzzle. Though this definition is concise enough it creates more new questions rather than closes the gaps.

In this article, we are going to review in detail the basics of this process, how it has evolved in time and what challenges the participants face.

The basics of mining

The key functions of mining are to help new cryptocurrencies enter circulation through miners’ rewards and to verify new transactions. In order to perform them, miners solve cryptographic puzzles to find out the hash of the next block in the chain, i.e. the unique ID that is obtained by cryptographical encryption of the data to be put into this block. In this way, miners validate data blocks and add records to the blockchain public ledger. 

All blocks include hashes that combine the header data from the block confirmed previously and a nonce, which is a random number added to the hash. This is exactly the figure that miners try to determine by solving a mathematical equation. We’ve given more details on what phishing is and why it is important in one of our previous articles.

When the nonce is found and a new block is confirmed by all other network participants, the block is added to the blockchain and can’t be modified after that. The unconfirmed transactions are bundled together and create a list that enters an unconfirmed block.

Blockchain.com: Miners perform the guesswork trying the find the cryptographic hash of the next block

The block also includes additional information such as header data along with the hash taken from the previous block and a new hash for the new block in the chain. At this stage, the header of the previous block is combined with a nonce for the generation of a new hash, which is added to the unconfirmed block and waits to be verified by the next lucky miner. Other miners verify the block’s hash to ensure its legitimacy which means that the proof of work is complete now. 

Adding the previous transaction to the block is necessary to create a consistent, public record that is not subjected to modification and avoid double-spending. This action doesn’t allow to manipulate the ledger and change any data in it and it helps to make blockchain so secure.

How difficult is mining?

Mining difficulty is a measurement unit that shows how hard it is to find a solution to a cryptographic puzzle. The difficulty depends on a cryptocurrency and its popularity with Bitcoin being an undoubtful leader in this area. As the number of miners in a given system changes over time, the mining difficulty adjusts correspondingly.

Why does it happen at all? The increase of difficulty is necessary to make the system work efficiently since it helps to preserve the block time. The periodic adjustment of difficulty is also a must as the mining difficulty depends on the combined hashpower. For instance, Bitcoin’s mining difficulty is 19.93 trillion at the time of writing.

YCharts: Bitcoin mining difficulty may grow as well as decrease in different periods of time

The evolution of mining equipment

In the early years of Bitcoin, it was enough for miners to use the CPUs of their personal computers for mining. Pursuing better efficiency, miners started using graphic cards, which are more power-consuming. But the evolution continued and manufacturers have come with special equipment developed exceptionally for the mining process. Miners started using ASICs or application-specific integrated circuit chips to mine Bitcoin.

Coindesk: since Bitcoin’s mining difficulty has grown multifold, it can only be mined with specialized equipment now

At present, there are a lot of facilities that launch mining pools for this goal. Numerous miners come to these resources to join forces and combine hash rates as huge amounts of computational power are necessary to solve crypto puzzles and earn rewards.

As searching for the right hash can be compared with the search for a needle in a haystack, it is easier to win the competition if you join forces. The reward is divided between the participants of the mining process proportionally depending on their share of computing power in the mining pool. Some of the biggest mining pools include Antpool, F2Pool, and BTC.com.

Types of mining

Now let’s talk about how the mining process can be differentiated based on the type of equipment employed. There are 3 basic types of mining: GPU mining, CPU mining, and ASIC-based mining. The first two employ mining based on video cards and processors correspondingly, while the last one employs special mining equipment working on certain algorithms. 

The process of setting up the mining facilities looks like this. Amateurs employ several video cards for mining or only one rig that includes a set of video cards, for instance, 6-8 items. The rig is connected to a motherboard that features minimum RAM and a cheap processor. 

Several rigs put together can make the whole farm and increase the earnings. This is not an amateur level any longer but industrial mining. A bigger room for equipment is needed to cool it easier, therefore miners often accommodate equipment in huge hangars. For instance, there are a lot of such facilities in China that are often located in the mountains making use of natural cold weather. Key factors taken into consideration when choosing the location include the cost of electricity and the capability of cooling. Therefore, geographical factors matter much when a crypto mine is arranged. 

Mining can also be classified in the following way:

1. Individual mining

This type of mining is performed individually, collective efforts are not required here. 

2. Collective mining in pools

The mining process is performed with the help of a server that combines the computational miners’ power. It becomes necessary with the growing complexity of the blockchain network, especially in the case of highly demanded cryptocurrencies. 

3. Cloud mining

Using this type of mining, miners rent the computing power from special services that are engaged in mining on an industrial scale. The procedure becomes available for all, not only for miners who have enough resources at their disposal for mining. When you rent mining equipment, it becomes possible to start mining coins without huge investments. 

The future of mining

Many cryptocurrencies including Bitcoin rely on the proof-of-work software protocol for mining. However, with the staggering growth of the sphere, miners encountered several challenges. Miner consolidation, miner income volatility, and an immense consumption of computing energy required for mining are, perhaps, the most basic problems that miners face today. 

As a result, numerous blockchains switch to a more energy-efficient method of transaction verification such as proof-of-stake and proof-of-authority. The appearance of alternative methods and the problems that only tend to get more acute over time raise the questions of mining viability in the long-term perspective.