What is cryptocurrency mining?
By mining cryptocurrencies you participate in the verification of the transactions carried out in your network and in the issuance of new cryptocurrencies. For this, there are two types of algorithms that are crucial to understand the operation of how to mine a particular cryptocurrency: the mining algorithm and the consensus algorithm.
Mining algorithms are algorithms in charge of making cryptocurrency mining possible, they are very complex cryptographic hash functions and can adjust the difficulty of mining.
Consensus algorithm: it is related to the agreement between all users or members of a cryptocurrency network regarding its operation, which transactions meet the validity criteria, the order of the blocks in the chain, etc. You will learn more details about the functions of the mining and consensus algorithms later. For now, we will focus on the two most popular types of consensus algorithms among cryptocurrency networks: proof-of-work (PoW) and proof-of-stake (PoS).
How do you get the reward and how much?
The miner who validates the block approved by consensus will get the reward. Each cryptocurrency has different rewards, in the case of bitcoin it is rewarded with 6.25 BTC, and approximately every 4 years it is halved by the Halving event.
Using Pow (proof or work) is a consensus algorithm that is based on solving a puzzle using mathematical calculations.
The miner tries to get the answer to the puzzle as quickly as possible, which will allow him to attach a new block of transactions to the blockchain.
The disadvantages of PoW is that it requires quite expensive powerful hardware that consumes electricity.
Is it possible for two miners to have the same answer simultaneously?
NO. It is practically impossible. Each block puzzle requires a different and random solution, so it cannot be easily predicted. This mechanism seeks to prevent the double spending of currencies; that is, that someone who has already transferred a cryptocurrency can transfer it to someone else as if he had never spent it.
Solving the puzzle of a block implies obtaining the reward it offers. In order to get to that answer before other miners your hardware must process large amounts of data at high speed. For this, powerful and adequate specialized equipment is required to mine the desired cryptocurrency.
Why mine cryptocurrencies?
The interesting thing about mining cryptocurrencies is that, on the one hand, you contribute to the validation of blocks in the network, allowing transactions to be carried out between users, favoring decentralization, and on the other hand, you get the reward. Also, if you decide to hold the currency, in the long term the price can revalue and obtain higher profits.
What do I need to be able to mine?
We will explain the different things that are needed to be able to mine an effective form:
Hardware
We refer to the physical equipment to mine the desired cryptocurrency. It can range from generic equipment to dedicated processors optimized specifically for mining.
Deciding on the hardware depends on several factors: the budget you have to be able to invest and the type of mining algorithm with which the cryptocurrency is programmed.
For example, Bitcoin uses the SHA256 algorithm and Ethereum uses Ethash.
The algorithm is responsible for establishing the rules for encryption and decryption of information. Turn an easy-to-understand message into something indecipherable. Furthermore, it makes sure that it is impossible to repeat the same result with another message. In this way, network security is achieved and it is guaranteed that no cryptocurrency can be counterfeited.
Software
The software is the program that is needed to be able to start mining. There are different types of software or programs that allow your hardware to interact with the cryptocurrency network and be able to mine it. Depending on the type of hardware, different software will be used.
Among the most popular are CGMiner and Claymore for mining Bitcoin and Bitcoin cash and the second for mining ethereum, eth classic. If you want to mine altcoins that are not mineable you can use unmineable, which by mining ethereum converts them to the desired currency.
To track the performance of the mining process these already include the power at which you are mining, eg 20mh/s (20 mega hashes per second).
On the mining pool website you can see the performance of your hardware.
Refrigeration
Mining involves doing complex mathematical calculations that require power, causing processors to overheat. In this way we must control the cooling of our hardware to prevent it from overheating
The most effective ways are:
- Incorporate cooling in hardware
- Cool and ventilated environment where the miners are placed
- Use liquid cooling systems
- You should always monitor temperature and performance so that you can get the best mining results by optimizing profits.
Wallet
In order to receive payment for the cryptocurrency you are mining you need a wallet address. You can use a physical wallet like Ledger or a virtual one like Exodus, or simply use the address of an exchange like Coinbase or Binance.
If you are looking for security, the ideal is to have the cryptocurrencies stored in a physical Ledger wallet, in which you own the seed words and they are impossible to hack directly.
Mine alone or in a pool?
If you decide to mine alone and you manage to validate a block, you get the entire reward. But the power of one device is insignificant compared to the hashrate of the entire network. If you decide to mine “alone” you should have hundreds or thousands of powerful devices to be able to compete with the hashrate of other miners or pools.
So the chance of your little miner competing is technically nil.
There is only one correct result for each puzzle proposed in a cryptocurrency network and only one way to obtain this answer. The probability that a mining node will solve such a puzzle depends on its mining power compared to that of the other mining nodes in the network. For this reason, for the vast majority of miners it is more convenient to mine in a pool and distribute the rewards.
Staking
Staking means leaving your cryptocurrencies on the network for block validation. It is an alternative to PoW that does not require hardware, thus reducing energy costs.
In order to stake, you need to own that cryptocurrency and lock it on the blockchain. This certifies that you will not use those funds for purposes other than for transaction validation. Giving guarantee of your commitment, since if you act irresponsibly wanting to damage the ecosystem you could lose all the cryptocurrencies that you have blocked.
The selection of the validator node that will add the next block to the chain is semi-random, but the more cryptocurrencies you have assigned to it, the better the chances of being chosen. Consequently, you will earn more money.
It can also be seen as the process of restricting the commercial use of crypto currencies for the purpose of earning rewards.
What does it take to to stake?
Validating Proof of Stake transactions does not require a electrical consumption high cost involved in mining nor does it require specialized hardware. It is enough with internet access, a pool and having a minimum of coins.
Through Binance you can now start doing blocked Staking.
Mine Bitcoin or Altcoins?
Bitcoin (BTC): The most famous cryptocurrency in the world is not profitable due to high competition and mining farms that are spread all over the world. The more people decide to mine bitcoin, the algorithm becomes more complicated, so more and more computational resources are needed to obtain a hash.
- Algorithm: Proof of Work (PoW)
- Reward: 6.25 BTC
Ethereum (ETH): The second cryptocurrency with the most market capitalization. Today it is still a good option for mining but you need a computer with a minimum of power.
- Algorithm: Proof of Work
- Reward: 2 ETH
Monero (XMR): This cryptocurrency has a high level of privacy and decentralization. The advantage is that you can use to mine both CPU and GPU.
- Algorithm: Proof of Work
- Reward: 2.47 XMR
Litecoin (LTC): Litecoin is an option to mine because it is a fairly stable currency, (although in the crypto world this is not a guarantee) and it does not require a large investment to obtain profits.
- Algorithm: Proof of Work
- Reward: 12.5 LTC
Dogecoin (DOGE): This cryptocurrency was born as a meme but has now become quite popular. Elon Musk and other influencers have promoted this coin with the aim of making it reach 1 USD in value.
- Algorithm: Proof of Work
- Reward: 10,000 DOGE
However. If what you want is to get bitcoin, one option is to mine the cryptocurrencies mentioned above and then exchange them for bitcoin. This way you can mine more affordable cryptocurrencies with cheaper hardware and get bitcoin just the same.
projection into the future
Undoubtedly, cryptocurrencies are still a very recent phenomenon that have only been around for a little over 10 years. And third generation cryptocurrencies like ADA Cardano are 5 years old and have a very long way to go.
So if your question is whether you should invest in cryptocurrencies, the answer is yes. You must investigate and understand how each coin works, its ecosystem, what problem it solves and the human team of people behind the coin. In this way you can know if in the long term the cryptocurrency can be useful and appreciate its value considerably.
Also another great opportunity of cryptocurrencies comes from promoting mining with cheaper green energy.
