What is mining and how to do it properly?

Intermediate
March 24, 2023
Read time:
6m

Cryptocurrency mining is the process of validating transactions and adding them to the blockchain by using computers or specialized devices such as ASICs. Correct solutions to complex equations are rewarded with a new cryptocurrency added to circulation.


Mining is essential for blockchains that use a Proof of Work consensus, such as Bitcoin. The process creates a chronological order of transactions that ensures previous entries in the "open ledger" cannot be changed.


How to mine cryptocurrencies?

The transaction has to be compressed into a block to be approved and entered into the blockchain. Since cryptocurrencies like Bitcoin do not have centralized organizations to authorize transactions, miners manage it. The result of this process is new units of cryptocurrency.


With the development of cryptocurrencies and their increase in popularity, mining has become significantly more difficult due to the growing competition between miners. On the other hand, the more miners participate in the process, the more secure the network becomes, as manipulation turns out to be practically impossible.


The mining process, although complicated, can be summarized in a few steps. It begins by selecting the cryptocurrency you are interested in. It should be noted that mining does not apply to all cryptocurrencies, while some of them immediately require expensive, specialized equipment (for example Bitcoin, which requires an ASIC).


However, if we find the right cryptocurrency, we need to install the appropriate mining software to control the entire process. The purchased hardware should be connected to the software and run - you have to enter such data as the address of your crypto wallet, to which the mining rewards will be sent. After that, you have to monitor the process, ensure it runs smoothly, and adequately maintain the equipment.

Mining rewards

After correctly implementing a new block into the blockchain, miners are rewarded with new crypto units, such as BTC.


Following this cryptocurrency's example, miners were initially rewarded with 50 Bitcoins, and after 2012’s halving - the number dropped to 25. Since then, the reward reduction has occurred regularly - once every four years.


It currently stands at 6.25 BTC. You can see the countdown to the next halving here: https://www.bitcoinblockhalf.com


The higher the difficulty of the mining process, the lower the income, as the rewards are distributed among more miners. This means that each miner receives a smaller reward pool allocation.


Before starting the process, it is crucial to ensure that compensation will exceed the cost of mining. Mechanism also consumes a great deal of energy, which may significantly impact the profitability of mining.

Types of mining

  • ASIC mining – The subject of ASICs has been covered by a separate article. In summary, ASIC is designed to fulfill one specific task, which in the case of mining, is to solve complex mathematical algorithms when processing transactions and building new blocks on the blockchain.
  • CPU mining – CPU mining uses computer hardware to run hashing functions until finding a correct result. It is important to note that CPUs do not have as much mining power as ASICs or GPUs, and because of that - profits from this type of mining are much lower.
  • GPU mining – A form of mining that involves using at least one advanced graphic processing unit, also known as graphics cards. GPUs can process hashes faster than CPUs but slower than ASICs. They are commonly utilized in altcoin mining.
  • Cloud mining – Process of renting or leasing mining equipment from a cloud mining service provider. The company owns and operates the required gear, and the miner's role is reduced to selecting the company, registering, and paying. This removes the responsibility for taking care of the technical aspects of mining.
  • Solo mining – As the name suggests, this refers to mining on your own. This method allows you to remain independent and collect all of the rewards. However, it requires high hardware power and can take much longer than other mining methods.
  • Mining pools – This method involves gathering miners and combining their processing power to mine a block as quickly as possible. If successful, the reward will be distributed among members based on a contribution percentage in the mining pool.

Summary

Crypto mining validates and adds transactions to the blockchain, resulting in new cryptocurrency added to circulation. Mining is essential for blockchains that use Proof of Work algorithms, such as Bitcoin. For cryptocurrencies to be mined, they must be compressed into a block, verified, and approved by miners on the network.


There are several ways of mining, including ASIC, CPU, GPU, cloud, solo, and mining pools. Despite the potential increase in the value of a given cryptocurrency, it's essential to ensure that the compensation exceeds the cost of mining, as rewards decrease over time.

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