We often talk about mining, mining farms and energy consumption of cryptocurrencies. But what is mining in 4 simple words?
As we have already read, the blockchain is made up of concatenated blocks, inside which data or financial transactions and payments are written.
In order to avoid scams, counterfeits or even tecnical errors in payments, the data contained in the blockchain must be verified and this is exactly what mining is about.
Mining represents the verification procedure that is carried out by exploiting the computing power of the computers owned by the individual miner or by the mining farm. A mining farm is nothing more than a place, often a warehouse, with a very large number of computers that work and produce blocks.
Once a block verification process is complete, the miner who created the new block will be paid for his verification work. Mining keeps the blockchain alive.
To validate transactions within a blockchain network There are several systems implemented to achieve consensus
A “blockchain protocol” is a common term for consensus methods.
Some of these require investors to purchase physical mining equipment, while others require no physical hardware and only possession of coins.
Let’s see the details aboud different consensus methods:
– PoW: Proof of work – This type of consensus is generically called mining and consists in the creation of computational power thanks to mining rigs formed by serialized graphics cards. This computational ability solves the coin algorithm and creates the blocks. Bitcoin is based on this system, which is not particularly eco-sustainable.
– PoS: Proof of Stake – the type of consensus to create blocks is defined staking and is based on the possession of a large number of coins that, when placed in staking in one’s wallet and therefore not available on the market, allow the owner to mine the blocks of this blockchain. Ethereum is based on this method, which is greener than proof of work
– DPoS: Delegate proof of stake this type of consensus for the creation of blocks is defined forging and is based on delegates voted by the community of coin owners. Lisk and rise work with this system, which is as eco-sustainable as proof of stake.
In DPOS systems, forging is another way to mine coins in order to validate their transactions and put new money into circulation. This system consists of 101 delegates located around the world who keep a node (server) online where the coin client runs.
This software allows you to maintain the decentralized network, validate transactions, issue new money into circulation and reward delegates for their service. Delegates don’t have to be 101 but can be 51, 201, 301, 501, etc. according to the needs of the network. To become delegates there is a voting system based on the amount of money owned (stake).
If you want to become a delegate you need to reach a sufficient number of votes to be able to enter the top 101 (approval).
The DPoS (Delegated Proof of Stake) system is a method aimed at ensuring a network of digital tokens that takes place by processing transactions and achieving distributed validation inherent in the ownership of money without the need for a central authority.
This system represents an evolution that started from PoS (Proof of Stake), also developed in order to reduce costs and the inefficiency associated with the consumption of electricity typical of PoW (Proof of Work) systems, used for example by Bitcoin.
Mining how to do
This block creation can become a profitable business if done with the proper criteria. Obviously we are currently talking about large initial investments in material and hardware.
Before starting, however, we must understand that the two main problems you will encounter will be the exploitation and consumption of the hardware, which will shorten its useful life, and the energy costs given by the electricity bills, which will skyrocket compared to a normal household use. . After that it must be said that each coin is different and that some coins in particular require specific hardware.
Let’s see how to mine
The first idea that comes to mind is to use our home PC, or an old laptop set aside in some dusty closet. Old hardware could be an obstacle to profitable mining given the possible low computing power if you use old hardware.
In this case, the mining of coins that are at the beginning of their life and that do not require particular computing power should be considered. But dont put to much hope in that solution.
A second solution can be to participate in a Mining Pool. Basically you participate with your hardware and your computing power in a group where other people gather computing power to undermine. The large number of devices made available means that the possibility of mining blocks in the blockchain is much higher and therefore potentially profitable. The proceeds will then be divided in proportion to the computing power made available. You will have againt the tipical two problems of energy cost and consumption of the hardware, and in addition there is the possible lack of transparency of the group of miners, who could remunerate the individual less than due, cheating him.
A third way could be to rent computing power through CLoud Mining services, services that provide dedicated paid packages for a defined period of time. Since you do not operate with your own hardware, the cost of wear and energy is reduced, but these are replaced by the cost of renting the computing power. In this case, however, there is the possibility of being scammed on the amount of coins that are recognized by the service for the same hashing power rented, a quantity of coin that over time becomes less and less, justified by the growing difficulty of extracting the coin.
Finally, a fourth way is to go big and create your own mining farm, with a lot of networked computers that mine our crypto currencies. In this case we are talking about very high budgets, well over 200 thousand dollars.
In this case, we must take it into our head to become entrepreneurs, so first of all we will have to think about locating the farm in a country with a low cost for electricity. Later we will have to think about what to mine, because for each coin or type of coin there are different hardware that are more suitable. Mining Bitcoin or ethereum is not the same thing. And let’s remember that we have to mine a profitable coin, which is not so obvious today.
The supply of hardware for the creation of the farm will be a problem to consider given its possible scarcity and cost, and also its replacement given the premature wear that we will encounter.
We will also need at least one or more professionals dedicated to the management and replacement of parts.
Since the farm has to operate 24/7, it will be a long and demanding job. Creating a farm is not easy and not always profitable, in fact these are general indications. Many farms have been opened and closed in a short period of time not only due to the inability of the entrepreneurs but also due to the volatility of the market. It is a difficult market and it is necessary to have very in-depth specific knowledge, both in the technological and in the economic field.
Cryptocurrencies to be mined.
If you have decided to dive into the world of mining, you must know that it is important to carefully choose which currencies to focus your efforts on, in fact, depending on the currency chosen, mining may require specific hardware or even more or less power. Furthermore, with a view to evaluating the investment, it must be considered that the trend in the value of the currency (heavily influenced by the progress of the underlying project and the size of the community) affects the results.
What if the miners suddenly stopped?
What if miming no longer generates profits? That is, what would happen if the revenues did not cover the costs of the equipment and the electricity used and the miners decided to stop or switch to another currency? Is it true that without miners, Bitcoin would stop working or become too slow?
No it does not. a blockchain continuously adapts its criteria to keep the creation rate constant. If there were 90% fewer miners, then 90% fewer calculations would be needed to approve a new block, and the operation would not be affected.
The absolute value of the reward for a new block decreases over time, all programmed according to the rules that govern Bitcoin. During the first 4 years of its creation (2009-2012) the reward was 50 bitcoins
However, in the event that the miners all stop their activity, the blockchain would stop and consequently it would no longer be possible (until the mining activity is resumed) to carry out any transactions or add blocks to the blockchain.
Learn more about Mining from an investor perspective here.