Updated: Mar 1, 2019
by Alexis de Girardier
In cryptocurrency’s jargon, “mining” is the validation of transaction. As there is no central authority or central banks, the only way to gather every transaction made on a specific cryptocurrency’s network in a block is to rely on network nodesthat carry out complex mathematical computations. These nodes are called miners. Whenever a set of transactions is gathered and formed into a block, it is combined to the blockchain.
Proof-of-work and how mining makes the blockchain more secure
Because mining is a time and energy consuming activity, successful “miners” obtain new cryptocurrency or tokens as a reward. Thanks to this rewarding activity, people are incited to contribute to the computing power of the network. But, to prevent miners from building too many blocks and in turn devaluating the currency, the mathematical task required to validate and join the block is made harder and harder to conduct. This is the so-called proof-of-work. The proof-of-work is a way to secure the network to prevent from any service abuses such as spams or denial of service attacks.
The only way to solve the complex mathematical code is to make your computer calculate as many hashes as possible and wait until you find the one matching the preceding one. You may view this activity as a race in which those with the fastest and most powerful computational machine have a consequent advantage over others (because they can try more combinations at the same time). Whenever you find the right combination, the block is formed and added to the blockchain and you get a token.
In addition to this, most cryptocurrencies have a finite number of tokens that can ever be generated. For instance, Bitcoin has a finite number of blocks that will ever be built: 20,999,999.9769 (close to 21 Million). This characteristic makes mining more and more difficult and is an extra-incentive to start mining in the early stages of the cryptocurrency.
The hash rate
The likelihood of success of your mining experience is based on your hash rate. The hash rate represents the number of combinations tried per second to solve the Bitcoin block puzzle. The combined hashing rate of the bitcoin network now amounts to 47.40 trillion of hashes per second. Which means that every second47,400,000,000,000 combinations are tried. Mining therefore requires specifically engineered hardware. Reaching the same hash rate with a common commercial hardware is almost impossible and very costly. To give you an example, 45 EH/s is the raw computational power that will be provided by approximatively 150 billion PS4 altogether! And a consumption of 50EH/S matches the energy consumption of countries like Switzerland!
For this reason, miners often band together and gather their resources to maximize their chances of profit from mining. They create “mining pools”. Today, due to the high-energy costs associated with the mining activity, the most attractive countries attracting miners are the countries with the lowest cost of energy and cold countries. In fact, a lot of energy can be saved by implementing its mining facility in a cold country where no air-conditioning has to be set. Iceland, Georgia, Canada, USA, Russia, Venezuela and Estonia are the main mining locations. (Mining one bitcoin in Iceland approximatively costs 4,000$).
As you can see on the graph above, there has been a huge drop in the hashing rate per second on the bitcoin network at the end of 2018; this is essentially due to the price of the bitcoin that dramatically dropped on very low-level making mining one bitcoin more expensive than the reward of mining one. It thus turned many mining pools into bankruptcy and was the main cause of this drop.
Become a miner
If you want to start mining a cryptocurrency you can start from your own computer and join a mining pool such as MinerGate. But if you want to get more hashing power, you’d either need to rely on graphic cards (AMD or NVIDIA’s ones) and pool several of them together or buy a specific hardware: Application Specific Integrated Circuits (ASICs). It has much more hashing power than graphic cards but is more expensive and most of them will be found in huge thermally-regulated data-centers with a low-cost electricity.
But of course, that is if you want to mine a Bitcoin, the most popular cryptocurrency in the world and therefore with the most miners and “competitors”. You can mine other cryptocurrencies, all of those featured by a “proof-of-work” reward system with your laptop. You will be more likely to obtain a coin and get rewarded but the coin in question won’t be as valuable as owning a bitcoin.
One last thing you need to consider when mining is what you are doing with the coin earned, you can either store them in a secured wallet (more on this later) and keep them safe, or you can decide to convert them into real money based on an exchange rate as soon as you receive it.