Cryptocurrency Mining Explained

What is Crypto Mining?

Cryptocurrency mining is the spending of computational power to solve complex math equations; being the first to correctly solve it, thus finding a new block in the blockchain, you, the miner, are rewarded with the block reward often paid in cryptocurrency. Mining is an integral part of a proof-of-work algorithm, which incidentally is set up to incentivize the network to grow economically, or in other words, gain more miners as its value increases. Generally, people start mining to receive an economic benefit from the network and overlook the fact that they are increasing the security of the blockchain. To learn more about how mining secures a cryptocurrency network, head on to our Blockchain guide.

Different Mining Algorithms

Mining software is the code compiled by a computer to run, solve, and find blocks in a blockchain. Many cryptocurrencies use different algorithms for their network; for example, Bitcoin uses the SHA-256 algorithm, while Ethereum uses Equihash. Each algorithm provides a set of rules and limitations, i.e., newer, advanced algorithms allow for faster and cheaper transactions. To better understand the differences between algorithms, we will compare the hardware requirements to mine said algorithms.

While theoretically able to mine Bitcoin with a CPU, it would result in wasted energy and a hefty electricity bill. This inefficiency is mainly caused by competition, as the more hash rate in a network, the greater the difficulty of finding a block since all hash rates compete to solve the block. In Bitcoin’s case, it is only economical to mine with ASIC machines as they are thousands of times more efficient in that task than regular CPUs.

It is important to note that some algorithms limit the mining hardware that a miner can use. For example, the RandomX protocol allows for CPU mining only, while Equihash is ASIC-resistant, allowing CPU and GPU mining.

Mining Hardware

Mining hardware comes in many shapes and forms but is identifiable in four main groups CPU mining, GPU mining, ASIC mining, and FPGA mining. 

Essentially, computing power increases going from a Central Processing Unit to a Graphics Processing Unit, to a Field-Programmable Gate Array, and lastly to an Application Specific Integrated Circuit.

CPUs are found in every computer and are the brain that powers it. A GPU is the computing power that makes the image visible on a screen, and while every computer, to a degree, has a GPU, only powerful high-end ones have a dedicated GPU, which is used in GPU mining. Lower-end devices generally possess an APU or an Accelerated Processing Unit, essentially a CPU combined with a low-end GPU in the same silicon. 

FPGAs are programmable compute machines used by computer software and hardware designers as they are flexible and can handle all their development needs. While similar to FPGAs, ASICs are locked to a specific task and, once manufactured that way, cannot be reprogrammed to do a different task, i.e., a Bitcoin mining ASIC built to run SHA-256 code can’t mine Dash, which runs the X11 code.

Mining calculators

Anyone interested in the economics of mining has probably visited one of the many online sites providing a mining “profit calculator.” It is important to note that almost all of these calculators are misleading as mining profits are highly volatile and are usually never the same going from one month to the other.

Mining calculators are generally wrong as the actual revenue is based on today’s price of the mined cryptocurrency and the current difficulty. These calculators don’t consider the varying mining difficulty, which increases as more miners enter the network and the currency’s future price as they don’t possess a crystal ball. These missing factors cause users who look at these calculators to overestimate profits and underestimate the time needed for their return on investment.

Mining Methods

Pool mining is when several miners pool their hash power together to increase their odds of solving a new block, the mining reward is then split amongst the different miners on a percentage based on their hash rate power compared to the pool’s entire hash rate. Pools often charge a 1-2% fee for each block mined.

Solo Mining is when an individual mines on their own, competing with the rest of the network for the block reward. Solo mining can be very rewarding when the miner finds a block but at the same time has a minuscule chance of solving the block as the competition is ever-increasing.

Cloud Mining is when you purchase hashrate power, effectively renting mining hardware from a mining company, allowing you to participate in the network and economically benefit without having to deal with the hardware itself. Note: cloud mining providers often have the advantage of enforcing strict terms of service and charging overpriced electricity fees.