Your Ultimate Guide to Crypto Mining
Crypto mining is a topic that often comes up when people talk about Bitcoin, Ethereum, and other types of cryptocurrencies. While most people are aware of cryptocurrencies, many are not aware of what mining is.
This can be because cryptocurrencies, for the most part, are used as an investment opportunity. This leaves many people wondering what has mining got to do with digital currency.
You may find people mining for different reasons. Some people mine because they are looking for an extra source of income. Others mine because they want greater financial freedom from centralized authorities, such as governments and banks.
Whatever the reason may be, crypto mining is an extremely important aspect of the blockchain. Let’s have a look at what it is.
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Many people think that crypto mining is simply a way of creating new coins. However, crypto mining is much more than that. It involves validating cryptocurrency transactions that take place on a blockchain network. After validating the transaction, it is added to a public record (distributed ledger) that is the blockchain.
People use computers and cryptographic processes to carry out crypto mining. These people who carry out this process are called crypto miners.
Miners solve complex equations to clear a transaction and record it onto the blockchain. Similar to physical currencies, when one person spends cryptocurrency, the digital ledger is updated debiting one account and crediting the other. Some people think that digital currencies are vulnerable and prone to online attacks. However, cryptocurrency blockchains only allow verified miners to carry out transactions.
Meanwhile, new coins are also generated to reward miners for their work in securing the network. This is because miners have a crucial role in cryptocurrencies and public ledgers. Since blockchains lack a central authority, the mining process is vital for validating transactions. For this reason, miners are incentivized as they secure the network by participating in the validation process of transactions.
The Consensus Mechanism Protocols
Let’s have a look at the consensus mechanism protocols that miners use to validate transactions.
1) Proof-of-Work
To make sure that only verified miners can mine and validate transactions, a proof-of-work (Pow) consensus protocol is put into place. Pow is the most frequently used and well-known consensus protocol and also works to secure cryptocurrency platforms against online attacks. When miners validate a transaction, new crypto coins are released into circulation. Miners use machines and high-power computers to solve mathematical equations in the form of cryptographic hashes.
A hash is a digital signature of each chunk of data. Hashes secure the data on a public network. Miners compete with other miners to crack the code. Whichever miner solves the equation first and adds the block to the ledger receives the reward.
Each block uses a hash function to refer to the previous block. This forms a chain of blocks, leading back to the first block. Thanks to this, all the peers on a network can make sure that each validated transaction is solved correctly to receive the reward.
2) Popular Consensus Mechanism Protocols
The most commonly used consensus protocols besides the Proof of Work (PoW), are as follows:
- Proof of Stake (PoS),
- Practical Byzantine Fault Tolerance (PBFT),
- Delegated Proof of Stake (DPoS),
- Proof of Importance (PoI),
- Ripple Protocol Consensus Algorithm (RPCA),
- Stellar Consensus Protocol (SCP)
The Different Methods of Mining Crypto
Here are a few ways that miners carry out mining:
1) Individual Mining
Individual mining is used to be one of the most common methods for crypto miners. Miners use specific hardware, including a motherboard and high-end GPUs, to participate in the mining process.
While carrying out this process was easier back in the day, it has since become expensive. As new protocols and cryptocurrencies emerge, the cost of purchasing and powering a mining setup is very costly and energy intensive.
Another name for this method of mining is GPU mining.
2) Mining Pools
A mining pool is a group of cryptocurrency miners. They combine their computational power to increase their chances of finding a block and mining it successfully.
If the pool is successful, they all receive a reward in the form of the relevant cryptocurrency.
3) Cloud Mining
People can also mine by renting time on a cloud mining service.
They have to pay a monthly fee to do so. This method is relatively inexpensive and does not require a costly setup.
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Who Pays for Crypto Mining?
Put simply, the users of the blockchain itself pay for crypto mining every time they perform a transaction. Whenever someone transfers bitcoin or any other cryptocurrency, the miner receives a fraction of that amount as a reward for validating the transaction.
How to Mine Cryptocurrency?
1) Pick a Cryptocurrency to Mine
You can mine many cryptocurrencies. The methods they all use to verify transactions are different. Some currencies use the Proof-of-work (Pow) protocol. That means members solve random mathematical equations to secure the system against attacks. Some prominent crypto coins that use Pow are:
- Bitcoin
- Ethereum
- Ethereum Classic
- Monero
- Litecoin
It is best to steer clear of Bitcoin mining. Since it is so popular, there are loads of miners competing to earn rewards on the Bitcoin blockchain. This makes it extremely difficult to make a profit by mining Bitcoin.
2) Buy Your Equipment
Once you have picked your cryptocurrency, it is now time to start looking at GPUs or ASICs that you can use to mine it. A CPU simply won’t cut it since mining cryptocurrency requires a lot of power. You won’t make much profit mining with a CPU.
You can compare mining devices by using a profitability calculator, such as the one offered by Crypto Compare. These calculators allow you to plug in a machine’s hash rate and your electricity cost. They then tell you how much you would make per day by mining.
You can use this information to estimate how long it would take to pay off the cost of the mining device.
3) Set Up a Crypto Wallet
You will need a crypto wallet to store your earned rewards after validating a transaction. Fortunately, this is very easy to do. To know more about the best crypto wallets out there.
The cryptocurrency you choose will have compatible wallets. Many digital wallets are available free of charge.
Further reading: Best Cryptocurrency Wallets for Your Digital Money
4) Get Your Mining Device Ready
Once you have your mining hardware, you need to do a few things to get it ready for mining. You first need to download the mining software for the cryptocurrency. This software is easily available on the cryptocurrency’s website.
Secondly, you need to make sure that your mining hardware is in a safe location. This means that you need to keep it in an area that allows for plenty of cooling. Mining devices generate a lot of heat due to the high load of work and there can be a fire risk if you are not careful.
How to Mine Cryptocurrency
5) Join a Mining Pool
While is it very much possible to mine cryptocurrency on your own, it’s riskier and costlier. Earning rewards when mining alone is very hard.
I recommend starting with a mining pool. Most miners opt for pool mining. Since a mining pool has a group of miners, it’s more likely that their efforts to validate a block will be successful. Hence, everyone has more of a chance to win a reward in mining pools.
Is Bitcoin Mining Legal?
Cryptocurrencies have gained wild popularity around the globe. Many governments, though, are not too keen on their idea. In countries like Russia and China, bitcoin trading is either illegal or restricted. This is due to its decentralized nature which gives power to the people and poses a threat to traditional central institutions, like banks and the government and their authority. In addition, cryptocurrencies are often subject to volatility, and they can be used for other purposes like potential criminal activities.
In many countries, the status of the legality of cryptocurrencies is unknown.
Countries like Germany, France, and other EU nations – along with Canada, Australia, the U.S., and the U.A.E. – have made bitcoin and its mining completely legal.
How Much Does a Miner Earn?
How much a miner earns depends on a bunch of different factors, including the cryptocurrency they are mining. We will take Bitcoin as an example. The rewards for mining Bitcoin halves almost every four years or so.
Bitcoin was first mined in 2009. At the time, mining one block would earn a miner 50 BTC. In 2012, that amount changed to 25 BTC. By 2016, this was halved again, coming at 12.5 BTC. On May 11, 2020, a Bitcoin miner would earn 6.25 BTC per transaction, half of what they earned in 2016.
As of March 2022, the price of Bitcoin is around $39,000 for one bitcoin. This means that for completing one block, a miner would earn a little over $240,000 (6.25BTC x $39,000).
Final Thoughts
Cryptocurrency mining is an interesting topic and one that not many people touch upon. It is, however, important to the concept of the blockchain and cryptocurrencies. It is a great alternative to the traditional systems of centralization that our world currently works on.
Crypto mining is another cog in the wheel of decentralized systems that bring power to the hands of the user and that is what makes it so great.
If you enjoyed this article on Your Ultimate Guide to Crypto Mining or have any questions for me, please feel free to leave them in the comment section below!
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