As the value of cryptocurrency continues to increase, more and more people are showing interest not just in its trade and investment but also in its mining. Crypto mining is a popular topic in most crypto forums and it is often mentioned in many cryptocurrency contents too, which may leave you wondering what it is all about.
At a glance, crypto mining is the process by which network members get cryptocurrencies as a reward for maintaining the blockchain network. Anyone can be a crypto miner, but you need the proper equipment, funds and more than enough knowledge in it before you successfully earn your reward. To get a more in-depth understanding of crypto mining starting from its process up to its profitability, read on below:
What is crypto mining?
Creating cryptocurrency is not as easy as printing banknotes like how fiat money is made. Since it cannot be printed, the only way to generate new coins is through a process called ‘mining’, wherein you verify blocks of data transactions by solving complex mathematical puzzles and updating the blockchain.
The blockchain is a decentralized distributed ledger accessible to anyone where all transactions are recorded. But since no central body confirms every transaction, nodes and miners are tasked and incentivized to do this instead.
To verify transactions validity, crypto miners race to perform various computational processes. Afterwards, they include the verified transactions in a block and upload them to the chain, completing the process and making it irreversible. The first miner to successfully update or add a new block to the blockchain gets the mining reward.
For a more detailed explanation of the process, take a closer look at how crypto mining works below.
How does crypto mining work?
For a crypto miner to be rewarded with coins, four essential steps must be completed. Read on to check out what they are.
Validation of transaction nodes
A crypto transaction is confirmed using a network of high powered computers called nodes. They validate the data in every transaction against a long list of criteria depending on the cryptocurrency. For instance, in Bitcoin, the transaction is validated through a number of checks and balances done by:
- Tracking the source of the Bitcoin transaction
- Checking within the blockchain if there are similar transactions to avoid double-spending
- Checking if the transaction is within the allowed range of 0-21 million Bitcoin
Formation of the block
Once transactions are validated, the miner will need to hash the block’s header which contains the summary of the data inside the block. To do that, the miners need to combine the hash of the previous block in the chain with a nonce.
The nonce is a random number the miners need to solve to get the block’s header hash. Once the hash has been generated, it gets added to the new block. The miner who guessed the hash will then broadcast it to the network.
Verification of the block’s hash
Other miners in the network check the validity of the new block’s hash. This process of solving for a new hash and proving its legitimacy through the validation of the miner nodes is called Proof-of-Work (PoW).
Addition of the block to the blockchain
Once the new block gets added to the end of the blockchain, the mining reward in the form of cryptocurrency is given to the successful miner who did the PoW.
Profitability factors of cryptocurrency mining
After all the steps required to complete the crypto-mining process, you might wonder whether it is profitable and worthy of all your time, effort and resources. When calculating the profitability of crypto mining, the answer depends on the factors listed below:
Back when cryptocurrency was not as popular as today, there were not a lot of miners and using your Central Processing Unit (CPU) alone was enough for mining. However, as competition between crypto miners arose, they looked for more powerful solutions to carry out more complex calculations. Due to that, the Application Specific Integrated Circuit (ASIC) miner was introduced solely for crypto mining which has a hash rate of up to 110 TH/s.
Hash rate determines how many hash code guesses your computer can make. Since a block’s hash is the mathematical problem your mining computer needs to solve, it needs to have a high Hash Rate too which can be measured in:
- Mega Hash per second (MH/s)
- Guga Hash per second (GH/s)
- Terra Hash per second (TH/s)
- Peta Hash per second (PH/s)
A higher hash rate means greater performance and better chances of creating more blocks. However, be informed that the computers used for mining are more expensive than the regular computers you typically find in homes. Thus, you will need a bigger capital which can affect the time it takes for your profits to break even or meet the cost of your initial investment.
Crypto mining requires huge amounts of resources such as electricity to power the computers. Keep in mind that the higher the hash rate your mining computer has, the higher power it needs to generate guesses faster. To calculate the profitability of your crypto mining, you need to find out your electricity rate and weigh it with how much you are earning on crypto mining.
Say you already have high-powered computers, it is still not guaranteed that you will easily get the chance to successfully mine a block. Before mining for a specific coin, research how large its mining community is and how difficult the process would be to help you gauge your profitability. For instance, in the case of Bitcoin mining, the more miners join, the harder it becomes to solve the problem and vice versa, which can affect your chance of profitability.
Block rewards are what crypto miners receive once they have successfully verified and added a new block to the blockchain. The rewards depend on the cryptocurrency you are mining. For instance, Bitcoin started rewarding their miners 50 BTC back in 2009, but due to the Bitcoin Halving events roughly every 4 years, the mining incentive as of May 11, 2021, is now at 6.25 BTC.