As more people around the globe get interested in cryptocurrency, they’re looking for ways to own more crypto and to learn crypto trading as well. One of the best ways to buy cryptocurrency right now is by using a crypto exchange. Cryptocurrency exchanges can be classified as either centralized or decentralized.
Buying and holding cryptocurrency in your crypto wallet is not the only way to earn money from it. There are many other ways to earn passive income with the help of cryptocurrency, and mining is one of them.
Introduction to Crypto Mining
Cryptocurrency mining is a process in which a person allocates their computer resources to participate in the blockchain consensus process and earn cryptocurrency as a reward.
Crypto Mining lets people from around the globe participate in the blockchain consensus to avoid the network from getting targeted by hackers and scammers.
This process helps keep the control of the whole blockchain in a few selected hands and keeps the entire process of generating, buying, and selling cryptocurrencies safe.
By allocating your computer’s computing power to the mining process, you can start getting rewarded immensely for your efforts.
While crypto mining can be a hard process to participate in, the rewards are also great.
For Example, Mining a block of Bitcoin can earn you around 6 Bitcoins. This is equivalent to around $150,000 according to the current market value of Bitcoin. Developers have set the rewards to become half after every 4 years. However, the substantial increase in Bitcoin’s value keeps it worth mining.
In order to become a cryptocurrency miner, you’ll need a combination of specified mining hardware.
Since the difficulty of the mining process (especially in the case of cryptocurrencies like Bitcoin) is increasing by the day, miners are required to use powerful computers made just for the mining and an ASIC designed specifically for the cryptocurrency they’re looking to mine. Some blockchains can still be mined by using a high-end graphics card in a computer.
Working Mechanism of Crypto Mining
Depending on the algorithm used to verify transactions, there are two main types of blockchains in existence, including Proof of Work (PoW) and Proof of Stake (PoS).
When you talk about mining, it relates to the transaction verification process used by the Proof of Stake blockchains.
The proof of work consensus mechanism is used by cryptocurrencies like Ethereum and Bitcoin, which together make up a significant part of the whole cryptocurrency market.
How Does Proof of Work (PoW) Work?
PoW is used by many blockchains to compile a list of transactions into one large block and list it on the public ledger permanently. These blockchains use validation nodes to keep the network safe and secure.
Every node is made by combining a network of miners and serves its purpose by processing transactions and compiling them into blocks to be saved permanently on the blockchain.
In order to validate a block of transaction data, miners use the computing power of their mining setups. Once a block of transaction data is added to the blockchain, it cannot be removed or edited.
In order to learn more about the proof of work consensus mechanism, you should learn about its steps one by one. Let’s simplify PoW for you by dividing it into four simple steps.
A New Transaction is Started
Whenever a person initiates a new transaction on the blockchain, the first step it goes through is the period of being recognized as an unconfirmed transaction.
For Example, Person A sends some cryptocurrency to Person B through a blockchain. The transaction is labeled as an unconfirmed transaction. At this time, the whole transaction only contains the amount of crypto being sent and the details of both the sender and the receiver. The transaction is added to the blockchain permanently.
The Transaction is Added to the Mempool
Every piece of mining hardware connected to the blockchain keeps monitoring the network for any new transactions. The unconfirmed transaction is added to a waiting list which is available on every miner’s computer. The waiting list is called Mempool (short for memory pool).
Every miner connected to the network has their own mempool. At any given time, the mempools of two miners might slightly differ, as every node sends unconfirmed transactions to its miners at different times. The default Mempool size for every miner is 300 MB at maximum.
Transactions are Added to Blocks
After entering the mempool on a miner’s computer, all the transactions start gathering into a block. These blocks are not final yet, and that is why they are turned as “candidate blocks”.
Each candidate block has over 2000 transactions listed in it and is around 2MB in size.
Since the mempool on every miner’s computer is different from one another, the composition of candidate blocks also varies across different miners.
Winner Candidate Blocks are Chosen
This is the final process of the whole chain, and the actual proof of work consensus mechanism starts working at this step. Machines used by miners add their own numbers to the numbers provided by the blockchain. The resulting number is run through the algorithm used by the cryptocurrency being mined by the miner.
Whenever the algorithm is used to process a number, it uses its specifications to choose a randomized number to make the output different. The generated number is then compared against a value generated by the system, and it must satisfy specific criteria to be accepted.
After the randomized number gets accepted, the candidate block gets verified and becomes a normal block on the blockchain.
After getting verified, the verified block gets added to the blockchain permanently as a transaction record. The minor whose candidate block gets accepted receives the reward for making this happen. Currently, the reward for Bitcoin is 6.25 bitcoins per block.
The biggest goal of every miner is to get their value as close to the system-generated value as possible to get their candidate block accepted. To make this happen, the computers used by miners are set to add nonce (a random number) continuously until their block gets accepted.
Computers or mining pools with high hash rates have a greater theoretical chance of getting their candidate block verified. The most modern ASIC machines are capable of adding trillions of nonces (hashes) per second.
The whole block mining and verification process is completed and repeated every 10 minutes. After which, all the miners start working on the next block, and the race continues.
After a candidate block gets accepted, other miners stop trying to get their blocks verified and reset their hardware to start working in the next block. This is the whole PoW (Proof of Work) mechanism in a nutshell.
The competition among miners to mine new blocks and get them verified is really intense and requires a lot of energy. This is the main reason why the speed of blockchain networks based on PoW is slower as compared to their counterparts. One might wonder why all of this computing power is used to process simple crypto transactions.
When it comes to the rationale behind PoW usage, it comes down to the security and safety of a blockchain network and keeping the network safe from fake transactions and spam. This also helps maintain the decentralized nature of a blockchain platform.
Proof of Work is so power intensive and needs so much hash power to keep operating that a single person and even a group of people can’t possibly take it over and solve all of the problems by themselves.
The huge amount of computational power needed by the PoW system ensures that people from around the globe come together to contribute towards its security. This way, it safeguards the decentralized nature of a PoW blockchain.
Some good examples of PoW-based blockchains are Bitcoin, Monero, Ethereum, Litecoin, Dogecoin, and others.
How Does Proof of Stake (PoS) Work?
Proof of Stake is an alternative method used to validate transactions on a blockchain and used in place of PoW (Proof of Stake). The key selling point of PoS is that it doesn’t require you to use a lot of computational power to solve transaction blocks.
Instead, validator nodes are used in PoS blockchains, and these nodes automatically validate transaction blocks and add them to the blockchain without requiring a miner to perform the job manually.
Validator nodes are generated with direct shares in the native cryptocurrency of that blockchain. The cryptocurrency needs to be staked in order to generate a validator node.
The probability of a validator node to keep receiving transaction blocks to validate depends directly on its percentage shares in the native cryptocurrency. Validator notes are always chosen randomly by the blockchain itself.
For example, a node with 15% shares of a cryptocurrency staked in it will have a 15% chance of getting a transaction block to validate.
Since the proof of stake mechanism is not energy intensive, blockchains based on this system are always faster as compared to proof of work blockchains. Moreover, the network based on this technology is smooth and fast.
Blockchains like Binance, Avalanche, Solana, and Cardano are good examples of proof-of-stake blockchains.
Since the PoS mechanism has proved its worth and usability, the ETH blockchain is also planning a smooth move from its PoW system to the faster PoS system. The project is called Ethereum 2.0, and is set to resolve the typical slow speed and high network fees related problem of the Ethereum blockchain.
Crypto Mining Methods
There are a total of three popular cryptocurrency mining methods a miner can choose from when they decide to start mining any cryptocurrency. All of these methods can provide the miner with rewards in the form of cryptocurrency.
Let’s take a brief look at each of these methods.
Cloud Mining
This is one of the best passive ways to mine cryptocurrency without using any mining hardware directly. To start cloud mining, you will have to find a good cloud mining platform and join it. Cloud mining platforms charge their subscribers with a monthly or yearly fee in order to rent them their hardware for mining purposes.
After you pay them the fee, the cloud mining platform will start mining cryptocurrency on the blockchain specified by you on your behalf. At the end, the rewards received by the cloud mining platform are shared with you as well. In this method, you will have to pay more to get access to higher hash rates and to increase the number of rewards you get.
Cloud mining is becoming popular as an alternative to other mining options since it does not require you to own and maintain a mining rig. This makes mining possible for people living in countries in which mining is banned or is impractical because of the lack of electricity.
However, before you sign up with any cloud mining platform, you should carefully understand their fee structure and do proper research about their reputation. Only a few cloud mining platforms have reliable fee structure which keeps your mining activity profitable in the long run.
Solo Mining
If you want to mine cryptocurrency and earn the rewards on your own, you can totally do that by investing in necessary mining gear, setting up a mining rig, joining a blockchain, and installing the required software to register yourself as a node.
Although the chances of a single miner getting a whole block verified are slim, if it does happen, you’ll get to keep the whole reward to yourself without sharing it with anyone else.
Theoretically, anyone with a PC and GPU can process the blocks and mine cryptocurrency; the rewards have become negligible and even zero for PC miners due to the fierce competition amongst miners, especially on major blockchains. These days, miners must use ASIC machines for mining if they want to get reasonable rewards in return.
Even if you have an ASIC machine, being a solo miner on big blockchains like Bitcoin might not be worth it. That’s because there are lots of mining pools that are competing against each other, and a single miner doesn’t stand a chance against them.
Mining pools are generated by miners who’re willing to combine their resources and computational power to dominate a blockchain’s PoW system and win more blocks. Every miner gets their fair share of the reward afterward.
If you’re a new miner and are just exploring a few options to choose from, you should use online mining calculators to calculate the mining difficulty for different cryptocurrency networks before choosing the right one. You’ll need to put some information into these calculators, and they’ll tell you whether or not your mining would be profitable.
Mining Pools
In this type of mining, a large number of miners pool their resources together in order to substantially increase their computing power, and to significantly increase their chances of mining more blocks. The hash power of thousands of computers from many miners is combined in mining pools.
Whenever a cryptocurrency block gets solved within a pool, every member gets a fair share of the cryptocurrency reward distributed according to their percentage hash rate share in the pool. Since mining pools contain thousands of computers in them, the chances of these pools getting new blocks are significantly higher as compared to solo miners.
So, if you are looking to mine a popular cryptocurrency like Bitcoin or Litecoin, you should definitely join a mining pool rather than becoming a solo miner. Even if you’re mining hardware is not so powerful, the chances of your Bitcoin mining becoming profitable greatly increase as soon as you join a mining pool. Mining pools can also decrease your rewards but make them more consistent in the long run.
Because of the substantial increase in competition on the leading proof of work blockchains, a solo miners might never receive a reward for their hard work or receive it very infrequently.
Crypto Mining: Pros and Cons
Let’s take a look at the pros and cons of cryptocurrency mining.
Pros
One of the biggest advantages of cryptocurrency mining is definitely the potential for high rewards. While the proof of work is a labor-intensive process requiring lots of energy, it is usually a passive way of earning income.
For example, you do not have to sit in front of your computer all day to earn cryptocurrency as a reward for your mining efforts.
Once your mining rig is properly set, it will continue to function forever without requiring any input from your end. This way, my name is a great method to earn passive income in the long run.
Moreover, a less significant benefit of mining for a miner is that he is contributing towards keeping the whole network decentralized and secure.
Cons
There are lots of disadvantages of crypto mining as well. One of the major disadvantages of cryptocurrency mining for miners is that the profitability of the process is always highly volatile. Because of the fears of competition between major mining pools, the mining process may not always be profitable for a solo miner.
Another major disadvantage is the price of the mining rig you have to set up in order to start earning through mining.