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What Is Crypto Mining?

Mining used to be about precious metals, but it has acquired a new meaning. In this article, learn about crypto mining and how it works.
Dec 16, 2022
Crypto Mining

Key Takeaways: 

  • Mining, in the crypto lexicon, is the process of verifying transactions on a blockchain using computer equipment, while earning cryptocurrency in return.
  • Mining is performed using a computer’s Central Processing Unit (CPU), graphics card or Graphics Processing Unit (GPU), or specialised equipment called Application-Specific Integrated Circuit (ASIC).
  • Cryptocurrency mining involves performing complex arithmetic and cryptographic operations to validate transactions using a specific algorithm. In many cases, miners join forces in mining pools.
  • Factors that influence the profitability of mining include algorithms, difficulty rates, hashrates, and reward rates, amongst others.

How Do Crypto Blockchains Work?

To understand crypto mining, we first must understand blockchains. Cryptocurrency blockchains work by maintaining a decentralised, public ledger of chain-linked blocks (hence the name ‘blockchain’). These blocks include validated and vetted transactions that have been added to the blockchain and cryptographically signed to avoid tampering, fraud, or unauthorised transactions. Each transaction added must be validated in one of the several ways to ensure the integrity of the entire blockchain. 

The system that ensures this is called a consensus mechanism. Three examples of different consensus mechanisms are Proof of Work (PoW), Proof of Stake (PoS), and Proof of Authority (PoA). Miners mine on PoW networks.

What Is Crypto Mining?

While this may sound relatively easy, the difficult part is yet to come. Miners aim to find the next block of a blockchain by discovering the target hash using a specific hash algorithm.

Every cryptocurrency PoW network uses a specific hashing algorithm. A hashing function — an irreversible method of encryption — is used to simplify it. Think of making hash browns: Not hard to make, but impossible to reverse back to a potato. Similarly, a hashed ciphertext can’t be reversed back to the clear text, but all possible clear texts can be put in a sequence to see if they would produce the same ciphertext.

Crypto miners perform these laborious mathematical equations using their mining equipment to try to ‘break’ the hash and mine the next block. There is usually a block reward involved, often in the form of some of the network’s native coins (e.g., Bitcoin miners would receive a block reward of bitcoins, or BTC tokens).

All About Hashes, Hashrates, and Algorithms

Breaking the hash involves attempting to come up with a 64-digit hexadecimal number (a hash) that is less than or equal to the target hash. The first miner to discover the solution of the said hash puzzle is the one who reaps the block rewards within that block. As the total hashing power increases, however, each individual miner’s chance of finding the hash decreases: Hashing power increases when more miners join the network and/or the mining equipment evolves.

In addition to block rewards, miners are also afforded voting rights with regards to network changes and improvements to the blockchains in which they mine. That means that miners have a degree of influence over the said blockchains and their future development. Voting power is proportional to the hash power of a miner, which means the higher the hash power of a miner, the more weight their vote carries. 

Once the block is mined by one of the miners and there is consensus on the network, the block is packed up and includes the current pending transactions from the Mempool (the distributed pending transaction register). The process continues for the subsequent block. 

Miners are the backbone of any PoW network, keeping it secure and running while collectively maintaining the ledger of transactions (the blockchain) and verifying all additional transactions. The name Proof of Work refers to the miners proving they have ‘worked’ to earn their reward by running the necessary cryptographic functions to solve the mathematical problems.

Crypto Mining Difficulty

As the number and the processing capacity of miners of a specific network each increases, the network mining difficulty also increases. In some cases, the block reward can decrease over time, such as the Bitcoin halving, which happens over specific periods of time. 

This is important in order to balance the supply and demand of mining power versus rewards, and to keep the networks viable. If mining is not rewarded, it is likely that fewer miners will work on the network, which could threaten the network’s viability. If there are too many miners, the difficulty would increase to adjust for the increased supply, and so on. 

Three Types of Crypto Mining

Over the years, as blockchains have evolved, mining equipment has evolved as well. Mining equipment can utilise any of the following:

  • Central Processing Unit (CPU) 
  • Graphics Processing Unit (GPU) 
  • Application-Specific Integrated Circuit (ASIC) 

Central Processing Unit (CPU) Mining

In Central Processing Unit (CPU) mining, miners often use a standard computer and mining software utilising the computer’s CPU to mine the blockchain. Usually, the higher a network’s difficulty becomes, the more CPU power is required, which then requires a higher-end computer — and more energy consumption — in the process. 

Bitcoin initially started with CPU mining. However, as mining difficulty increased, and more blockchains came into existence using different hashing algorithms of varying difficulties, more processing power became necessary.

Graphics Processing Unit (GPU) Mining

Graphics Processing Units (GPUs) are dedicated graphics cards found in most computers; they are used for rendering graphics in videos, games, and 3D models. Rendering of complex graphics usually involves far more mathematical operations than most standard computer applications. 

Blockchain developers were drawn to the capability of GPUs for performing more complex mathematical operations in parallel with better time and energy efficiency compared to CPUs. 

As GPU mining became mainstream, it put the nail in the coffin for CPU mining for most blockchains — bar for a few special cases that have adapted to GPU-resistant algorithms to prevent GPU mining altogether.

GPU mining prevailed on blockchains for many years, but it was not the end of the mining ‘arms race’.

Application-Specific Integrated Circuit (ASIC) Mining

Many miners turned to Application-Specific Integrated Circuits (ASICs), which are integrated circuits (or chips) designed and customised to perform a specific purpose. In other words, it is hardware designed from scratch to perform very specific operations. Conversely, CPUs and GPUs are general-purpose chips that can be utilised for a multitude of purposes.

Since ASICs can be designed with a specific function in mind (e.g., mining a specific coin using a specific hashing algorithm), it gives them an efficiency advantage in both the processing power (hashrate) as well as energy efficiency compared to CPUs and GPUs. 

Several companies developed ASICs for specific blockchains. And, as one would expect, once ASICs became prolific for mining a specific blockchain, CPU and GPU mining became economically unfeasible, practically ceasing to exist. Some networks, though, deployed changes to resist ASICs to avoid network takeover by industrial-grade ASIC miner farms, keeping the mining only possible with standard CPU/GPU equipment. 

However, the major drawback of ASICs is their inflexibility, since they are designed as a very specific purpose-built hardware. Any changes to a network’s algorithm or structure could potentially make ASICs obsolete, unlike in the case of CPU and GPU mining, where a software update would adapt to such changes. 

Additionally, as ASICs keep evolving, new-generation ASICs consistently offer higher hashrates while consuming the same amount of energy as their predecessors, causing older ASICs to rapidly become obsolete.

How Mining Pools and Farms Work

As we outlined, mining is a resource-intensive operation that usually requires expensive equipment, high consumption of energy, and technical acumen. 

As blockchains have evolved, mining has become more difficult. As more miners joined the networks over time, the probability of finding a block by any one miner on their own has become statistically near impossible.

Hence, the idea of mining pools was born, where groups of miners join a pool and split the work required between them, sharing the rewards regardless of which individual miner in the pool finds a block.

Think of this as a group performing a treasure hunt in a large area. The group leader divides the entire area into sectors, giving each member several sectors in which to look for the treasure. Eventually, if one of the members finds the treasure, it belongs to the group and is split amongst them.

Of course, there is no guarantee this group would find the treasure first, as other competing groups would also form. Statistically speaking, if there are 10,000 treasure hunters, and each looks individually, each treasure hunter’s chance is 1 in 10,000; whereas, if 100 groups form, each with 100 members, then each group has a 1 in 100 chance of finding the treasure, which is then distributed to the members of the group. 

Some corporations eventually decided to take things a step further and established industrial-scale mining farms with hundreds, sometimes thousands, of mining rigs running at the same location. However, this practice has raised concerns of centralisation of blockchains, as hashrates can consolidate in specific countries with large mining farms.

Is Crypto Mining Worth It?

The question every aspiring miner has is: Is it worth it? The economics of mining involve — amongst other factors — the following in which to consider:

Return on Investment (ROI)

How long would it take to recover the initial capital expenditure, such as the cost of mining equipment required (especially if that equipment cannot be repurposed)? While GPUs can be repurposed and used for gaming, 3D design, and several other applications, ASICs are not as flexible. 

Additionally, what is the risk of equipment being outdated before the initial investment or upfront cost is recovered? 

Electricity Costs

Energy prices vary significantly depending on location and access to free sources, such as solar panels. Additionally, mining equipment can have varying energy efficiency, which is measured by the hashrate unit per energy unit (e.g., terahash per watt/hour). Some commercial mining operations are located closer to energy sources (power stations), where they can benefit from excess energy generated. 

Mining Difficulty

Does the desired blockchain to mine have a varying difficulty that automatically adjusts? How often does it adjust: as-you-go depending on hashrate availability, or on specific dates (e.g., on a specific future date, is difficulty expected to double)?

Reward Rates

What is the reward rate? How much is expected to be made per hashrate (and subsequently, per energy units spent)? Is the reward rate expected to drop soon? 

Flexibility/Versatility

Can the same setup be used to mine multiple blockchains? This is only possible when blockchains share the same hashing algorithm. Is the blockchain expected to migrate away from PoW to another alternative (such as the Ethereum ‘Merge’ to PoS)? This can mean the end of mining on that blockchain.

Other Factors

Mining capital (equipment) and operating expenditures (energy bills) are usually paid in fiat, while rewards are usually paid in cryptocurrency, which is subject to cryptocurrency market conditions and fluctuations.

Final Words – Should You Start Mining Bitcoin?

Cryptocurrency miners play a crucial, indispensable role in running Proof of Work (PoW) blockchains, validating transactions, and securing networks. Mining has evolved over the years in terms of both equipment, difficulty, rewards, and techniques, including the use of mining pools. Every time someone submits a transaction on a PoW network (like Bitcoin), a miner behind the scenes has their equipment working hard to validate and include the relevant transaction in the next block.

Due Diligence and Do Your Own Research

All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, cyber-security, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. 

Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.

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