Cryptocurrencies are “created” and managed through different mechanisms: through mining, staking, farming, and more. The pioneer cryptocurrencies were created through mining.
What is Cryptocurrency Mining?
Cryptocurrency mining is the process of creating cryptocurrency on a blockchain by using specialized computers to validate transactions and add them to a public ledger while earning mining rewards. Mining helps to secure and curb double-spending on the blockchain. Simply put, the blockchain is a chain of blocks containing a certain amount of cryptocurrency that can only be unlocked by solving a complex math equation. Unlocking this block publishes it on a distributed ledger that can be viewed publicly.
All mined cryptocurrencies use the proof of work consensus model to verify their miners and protect the network from attacks. Bitcoin, Ether, Litecoin, Bitcoin Cash, Monero, and Dogecoin require mining to make new coins. Mining rigs are the units used for performing mining, and they vary in scale, performance, size, efficiency, and price. Besides this, miners consider hash rate, energy usage, and adaptability when selecting a rig.
Crypto mining began on central processing unit (CPU) rigs. Although most mined cryptocurrencies now use upgraded rigs, Bytecoin, Monero, and Zcash still support CPU rigs, which achieve 8–20 kilohashes per second.
Graphics processing unit (GPU) rigs came after the CPU rigs, and they are still being used to mine Ether, performing between 10 and 60 megahashes per second. The application-specific integrated circuit (ASIC) rig was released in 2012 specifically for mining. Computing 90–100 terahashes per second, it is used by Bitcoin, Litecoin, and Bitcoin Cash, while Monero and Ravencoin are ASIC-resistant.
The field-programmable gate array (FPGA) rig is faster and more efficient, as it can mine a variety of coins. Its performance varies from 100 kilohashes to above 20 gigahashes per second.
Nevertheless, cloud mining is the fastest way to enter into mining, as it involves outsourcing the process to an intermediary as an indirect participant. There are also mining pools whereby miners can combine their resources to increase their mining capabilities. Mining pools can be found on CryptoCompare.
How Cryptocurrency Mining works
Crypto mining involves solving a hash, which is a complex equation consisting of random numbers and characters. It involves nodes, miners, transactions, hashes, nonces, consensus protocols, blocks, and the blockchain. Mining is successful when a block is validated and its hash functions are revealed. Steps to mine a cryptocurrency include obtaining a mining setup, creating a crypto wallet account, joining a decentralized mining pool, and setting up mining software to link everything together.
Mining begins when a transaction is initiated. It starts from the nodes, which are devices and individuals within the blockchain. These devices verify the initiated transaction to ensure it is legitimate. The transaction is then added to a group of other transactions to form a new block that requires validation.
After the block has met the required amount of transactions, the header data, hash of the previous data, and a new hash are added. The new hash is generated by adding the header data of a previous block with a nonce (a value that can only be used once).
After the block has been created, the miner’s job begins. Miners compete to be the first to solve the hash, thereby validating the block. The first miner to solve the hash is rewarded with some of the cryptocurrency. This happens after the miner has published the block on the blockchain as proof of work done.
The blockchain is updated at intervals by the nodes. The ledger is also updated regularly and encrypted using public-key cryptography.
Some Mined Cryptocurrencies
Bitcoin used to be mineable by rigs in basements and the like; however, the practice has since been overtaken by mining farms. These farms make use of numerous ASIC rigs that use the SHA-256 algorithm. Unlike when bitcoin mining was still new, the return on investment for people using CPU and GPU rigs has dropped drastically.
Ether (ETH) is used to power the Ethereum blockchain and is one of the most popular cryptocurrencies that can be mined at home. GPU and FPGA setups are prominent rigs used to mine ETH. However, moving Ethereum from the proof-of-work consensus algorithm to proof-of-stake will make hardware mining obsolete, since new ETH will be created by staking it.
Although Litecoin follows the same mining model as Bitcoin, it uses the Scrypt algorithm. This algorithm was initially made to be ASIC-resistant, but the resistance has since been broken. This has rendered the pioneer CPU rigs somewhat worthless.
Like Litecoin, Dogecoin uses the Scrypt algorithm, and it can be mined with CPU, GPU, and ASIC rigs. Since Dogecoin uses the same algorithm as Litecoin, miners can mine both cryptocurrencies together at times. Dogecoin has an average block time of one minute and rewards miners 10,000 DOGE.
Monero makes use of the RandomX algorithm, which is ASIC-resistant. As such, it can be similarly mined with CPU rigs as Zcash. The rewards for miners will remain at 0.6 XMR until May 2022. It is popularly mined by retail miners.
6. Bitcoin Cash
Mining for Bitcoin Cash, a fork of Bitcoin, is nearly the same as for its progenitor. Likewise, it uses the SHA-256 algorithm and can be mined with ASIC rigs. It can also be mined concurrently with Bitcoin.
Becoming a miner requires the purchase of a mining rig or joining a cloud mining platform by buying hash rates, which is more cost-effective. In addition, crypto mining apps and open-source or commercial software enable mining, support mining pools, and link miners with each other. They make it easy for anyone to be a miner.
Examples of commercial apps include Awesome Miner, Cudo Miner, ECOS, Ethermine, Miner Gate, NiceHash, and SlushPool. BFGMiner, CGMiner, EasyMiner, and MultiMiner are popular open-source mining apps.
Unlike when mining first entered the mainstream, profitability now keeps falling as more individual and commercial miners join the space. Aside from this, mining is not legal in some countries. Due to constant calls to protect the environment, new blockchains are dumping resource-consuming proof of work for the eco-friendly proof of stake consensus algorithm. This has made cryptocurrency mining devoid of a future. However, some popular cryptocurrencies still require mining to create new coins, so it will continue to stick around for some time yet.