What is Cryptocurrency Mining?
Many cryptocurrencies rely on a distributed and decentralized verification process for appending the incoming transactions facilitated by the network. This process requires hardware, electricity and time to set up and maintain. Cryptocurrencies like Bitcoin, Litecoin, and Ethereum have thousands of nodes contributing computing power to the network, continuously performing their protocol’s hashing function to produce blocks. The nodes contributing processing power are called miners and make up a decentralized network that maintains the blockchain’s integrity and processes transactions. The individual contributions all work towards ensuring that the blockchain is operating as it should be, verifying that there are no malicious actors. For many of the most popular cryptocurrencies, a mining operation of immense (and arguably infeasible) proportion would be required to challenge the network’s security, providing a real-world relation in the physical requirements necessary to threaten the network.
Miners are what keep coins like Bitcoin, Litecoin, and Ethereum trustworthy, performing the functions necessary to achieve an adequate level of security. Often, mining operations have large energy requirements as they are mining 24/7 which can result in substantial costs. Depending on the rate per kWh available to the miner, these costs can be severe enough to make mining unprofitable. That being said, many local and federal governments have taken steps towards changing policy to prompt a mass migration of miners seeking lower energy rates. The Quebec government has been cooperative with large mining entities and certainly have the energy surplus to satisfy the large energy requirement for industrial level mining operations . Many cryptocurrencies have built-in rewards hard-coded into the protocol whereby miners are compensated for their computational contribution. Bitcoin, for example, has a block reward that halves every 210,000 blocks and currently emits 12.5 BTC per block.
Source: ARK Investment Management LLC, data sourced from Bitcoin Wiki
For top cryptocurrencies, the total computational power of the network is immense, and as a general rule, the chances a miner wins the block is directly proportional to the miner’s hashrate relative to the total network hashrate. Thus, the chances that an individual miner will have enough processing power to win a block and receive the block reward is minuscule. To make mining profitable for smaller operations despite increasing difficulties and the ever-increasing total hashrate, miners combine their processing power in pools to increase the chance that their pool wins and that the individual miners still profit.
Source: BitcoinEnergyConsumption.com, data from February 10, 2017 to March 27, 2018.
When a pool wins a block the reward is divided up amongst the participants of the pool, adhering to the distribution rules set up by the pool operators. In many networks, pools make up large portions of the total hashrate and present the threat of de-facto centralization which should be avoided as decentralization plays a vital part of the network’s integrity. Though calls have been made to counteract pool domination, pool resistant tokens have yet to rise into prominence. In addition to the block reward given to the winners of the block, many payment schemes exist where miners are paid in transaction fees in a manner designed to supplement the block reward. Most schema are designed such that transaction fees gradually replace block rewards, presenting a perpetually profitable mechanism to continually incentivize miners.
Mining is possible with any computer component that can run the required algorithm. Depending on the token in question, Computer Processing Units (CPUs). Graphics Processing Units (GPUs) and Application Specific Integrated Circuits (ASICs) can all suffice. That being said, due to the computational requirement and mathematical nature of the operations being performed by the hardware, GPUs and ASICs have proven to be the most efficient. GPUs are designed to process high-resolution graphics, making them apt to run the hashing algorithms utilized by the various minable coins. ASICs on the other hand, are specifically designed to run the algorithm in question and are specialized towards that one task. The ASICs designed for any single algorithm will outperform any GPU in both hashrate and efficiency for that algorithm, rendering GPU mining competition null. However, ASICs are to produce in both in capital and labor, resulting in a more expensive unit. Though ASICs are more costly than GPUs, once they become available it becomes inefficient for GPU miners to compete and ASIC mining becomes the standard for that token. There have been cryptocurrencies like Vertcoin which have implemented GPU-optimization and lower the capital barrier for entry and combat ASIC domination in crypto-mining. Though GPU-optimization implies a higher degree of decentralization, the centralizing effect of pooling should be considered. GPU mining remains relevant despite the development of ASICs as they are more versatile overall and are not so easily rendered useless, as older ASICs are when newer iterations are released.
Digiconomist. (2018). Bitcoin Energy Consumption Index. Retrieved March 27, 2018 from: https://digiconomist.net/bitcoin-energy-consumption