An Essential Overview Of Cryptocurrency Mining (updated)
[This post has been updated as of August 31, 2018]
It has been already 8 years since cryptocurrencies debuted as an alternative to paper money and during this time they have also become a substitute for stock options trading. The idea behind the digital coins is to break free from the power of a state and a central bank and to allow the participants of the network to ensure the accuracy, security, and compliance of the transactions as well as the release of new currency.
In fact, the mining process consists of these two activities: keeping updated copies of the transactions log and solving mathematical problems to create new currency. The reward for each challenge is a fixed number of crypto coins.
The fundamental element of any cryptocurrency is the blockchain, a digital ledger of all the transactions that occurred with that currency since its inception. Before being recorded in the blockchain, each operation is verified by different entities (miners) since once it is written, it cannot be undone. The number of verifications is different from one cryptocoin to the other, Bitcoin requiring 3 and Ethereum 30 checks. The security of the blockchain is ensured by the fact that this record is decentralized and distributed so no single entity can control it, but anyone using it can verify it.
This technology is safe as long as no one controls more than 50% of the network’s computational power, a situation named a “51% Attack”, which is dangerous since it offers the controlling entity the possibility of blocking transactions and double spending the same coins.
The mining process
The mining process aims to collect rewards for helping to keep the ledger and new currency is created from the small fees associated with each transaction and by helping to solve problems. These operations require vast amounts of computational power.
A brief history of mining types
While in the beginning, a performant CPU was enough to do the mining, the current degree of sophistication requires powerful hardware and the initial idea of Satoshi to mine with your own computer was abandoned.
GPU mining is still viable, although on a smaller scale and it is the DIY solution, and an excellent start to learn about the process. You need to take into consideration the card memory, cost and power consumption and the fact that for a decent return rate you will need more than one card. You can still use such a set-up for mining alt-coins that are not so popular yet, but it is not a viable option anymore for bitcoins. The argument for this set-up is its versatility, so the same configuration could either mine or be used for gaming.
When GPU mining became too competitive, the solutions was to use Field-Programmable Gate Array. FPGA entered the market in 2011 and was preferred for their superior computational power and lower energy consumption compared to GPUs. The jump in quality was about ten-fold compared to GPU.
The next step in mining technology is the Application-Specific Integrated Circuit which has created specific tools for Bitcoin and Litecoin mining. This was so revolutionary, that when KNCMiner launched their preorders for the ASIC miners, they received $25 million in orders in the first 5 hours. This highly specialized piece of machinery has only one purpose and has become the gold-standard of bitcoin mining.
The evaluation of mining gear is done either by its hash power, which for ASICs is measured in Gh/s or by its efficiency (J/Gh) and ASIC is again 10 times better than FPGA.
The mining pools
Cryptocurrency mining is an idea that rewarded its early adopters. Joining the bandwagon now when companies such as Google and Microsoft have already invested millions of dollars in blockchain research and gear seems a bit late.
Yet, to give a chance to anyone joining the game, the mining pool is helping miners split risks, costs and earning by putting together their resources. There are numerous mining pools that you can join based on whatever computational power you can afford. By entering such a guild, you secure your chance of being rewarded with the fraction corresponding to your efforts.
It sounds tempting to join the bigger pools and get rewards quicker and more often, but that is dangerous for the health of the network, since it leads to a hazardous power concentration, potentially leading to the aforementioned 51% situation.
Gear and costs
Mining with your CPU or even GPU is not too efficient and will probably result in power costs that are not covered by your bitcoin earnings, let alone profit. Currently, investing in ASIC gear is the best option and price per unit ranges between $100 and $3000 (Antminer S9) without counting the associated costs with cooling equipment, a dedicated power supply, and the racks to store them. A starting second-hand system is between $300-500.
On the other hand, the software is open-source and free. If you want to join a mining pool, they will help you install all the programs you need and make the right configurations.
Following the SaaS trend, now there are numerous options for Mine-as-a-Service, where they take care of the initial investment, updates, and maintenance and you only pay a fee to join the mining pool and are rewarded as a regular miner would be, without worrying about infrastructure.
Is it profitable?
All the hype surrounding these massive price increases act as an incentive for more people to join the crypto trend, yet anyone interested should be aware that this is still highly volatile and due to its deregulated and decentralized character, it is not subject to usual hedging tactics.
An investment in crypto mining should be approached like any other possible way of spending your money with hope for ROI. One should think about initial investment costs including the necessary hardware, regular upgrades and the daily energy costs required by the system to function at top parameters.
This is a guest post wrote by Maria Weinberger, technology journalist writing on subjects such as blockchain, IoT, AI and innovation for a range of publications.