Crypto mining is the name given to the process used in some A cryptocurrency is a digital asset that may be used as a medium of exchange. Cryptocurrencies typically exist on blockchain... to ensure that distributed computer systems can agree on a single transaction history. It is also a distribution mechanism for new units of cryptocurrency, which serve to incentivize miners to dedicate hardware and electricity resources to cryptocurrency mining.
Competition in crypto mining is fierce. To improve their chances of receiving rewards, crypto miners will often combine their computing power in what’s known as a mining pool. OKX provides users safe access to an established mining pool. Using OKX Pool, you can generate passive income more reliably while still supporting major crypto asset networks like Bitcoin and Litecoin.
However, before you consider getting started mining cryptocurrency, it’s essential to understand a little about it. This brief explainer will introduce beginners to the concept, defining what we mean by crypto mining before explaining how it works. It will also touch upon crypto mining’s legality and concerns related to energy consumption.
What is crypto mining?
Crypto mining is an essential element of proof-of-work crypto assets like BTC. The term cryptocurrency miner can refer to either an individual or company operating the computer hardware required to participate, or the hardware itself.
Crypto mining serves multiple purposes. Firstly, it is a mechanism to distribute new units of a cryptocurrency fairly. It is also a means of ensuring that all those working on adding new blocks of transactions can agree on a single historical record of transactions.
Cryptocurrency networks comprise many computer systems distributed globally and operated by independent entities that do not necessarily trust one another. These computer systems are responsible for updating a historical transaction record. There is no central entity overseeing crypto networks. Therefore, some mechanism is required to determine who can add new blocks of transactions to the A blockchain is a form of a distributed digital ledger — or database — most commonly used to record transactions....
To incentivize participation, crypto miners receive rewards for adding blocks of new transactions. These rewards come from newly issued units of the cryptocurrency and are known as block rewards.
Miners that attempt to add invalid transactions that do not follow the network rules do not receive block rewards, meaning the work they performed to be selected as the block producer is wasted. In this way, crypto mining aligns participants’ incentives to support a network — honest miners receive rewards, and dishonest miners do not.
Crypto miners are also responsible for maintaining the network’s rules. Crypto miners all run compatible code that produces a single network. If a group of miners suddenly decides to run code with an incompatible change, they would fork the network.
This occurred on the Bitcoin network in August 2017 when a group of miners wanted to increase the size of each block to facilitate more transactions per second. Because the increased block size was incompatible with the original code, a hard fork occurred, splitting the network and creating the crypto asset BCH and the Bitcoin Cash network.
How does crypto mining work?
Crypto miners use powerful computers — also known as crypto miners — to essentially brute force a cryptographic problem.
In Bitcoin, the network itself determines which participant will add the following block to the blockchain without needing a central authority’s oversight via an endless series of computationally intensive competitions. Crypto miners apply a cryptographic function called a hashing algorithm to unprocessed transaction data and a random number. The output of this process is a long string of characters called a hash.
If the hash produced falls below a network-determined threshold, the miner adds the block to the chain, and all the network’s miners begin the process again for the next block. If the resulting hash is above the threshold, the miner creates another hash using a different random number and the same transaction data. This process repeats until one miner on the network produces a hash that falls below the threshold.
Modern crypto mining hardware can produce hundreds of trillions of these hashes per second. The number of hashes produced per second is known as the hash rate of a device or collection of devices. The Bitcoin network’s hash rate is often used to measure network security and refers to the combined hash rate of every piece of hardware mining Bitcoin.
Another important crypto mining feature in terms of network operation is the difficulty adjustment. The time between miners finding blocks must be about the same for every block on average. If the total network hash rate suddenly doubled, miners would be making twice as many guesses combined and should solve the proof-of-work problem in about half the time.
To ensure that the time between blocks remains consistent, the network automatically adjusts the threshold at which it accepts blocks proposed by miners. The threshold itself is the number of zeroes with which the winning hash must begin. There will be an astronomical number of hashes with only a couple of leading zeroes. However, this number quickly reduces with every additional zero required.
The Bitcoin network measures the time between each block and raises the threshold if blocks take too long to find and reduces it if too many blocks are being found. These difficulty adjustments occur about every two weeks in Bitcoin. Since Bitcoin’s overall hash rate has grown over time, the network most commonly increases the difficulty to ensure that the average block time remains constant at 10 minutes.
The changing Bitcoin mining landscape
When Bitcoin was very young, few miners were on the network, meaning that proof-of-work could be performed with standard consumer computer hardware. As the BTC price rose, the incentive to deploy hardware grew and Bitcoin’s overall hash rate increased.
Since the hash rate is directly related to the probability of finding a valid hash and, therefore, the likelihood of receiving a reward, miners started to deploy increasingly powerful hardware to remain competitive. It soon became futile to mine on regular computers as more powerful GPU systems came to dominate the network.
Soon these too were replaced with specially designed hardware known as application-specific integrated circuits — or ASICs. ASICs can guess many billions or even trillions of hashes per second. However, they require a tremendous amount of electricity to operate. This is important because the increasing cost of hardware and electricity bolsters the incentive to produce valid blocks and not attempt to subvert network rules.
Crypto mining decentralization is essential for a network’s smooth operation. If a single entity controls too much hash power, it can effectively reverse previous transactions and spend the same coins twice.
The so-called 51% attack requires an attacker to control at least half of a network’s total hash rate, enabling that entity to produce an alternate blockchain containing blocks with invalid transactions. Because other network participants always consider the longest chain of blocks to be valid, the malicious actor could convince the entire network that their version of the transaction history is correct.
Solo mining vs. pool mining
There are two main forms of crypto mining — solo mining and mining in a pool.
Solo mining refers to deploying hardware to mine crypto assets alone. If your miner can guess a valid hash, its proposed block is added to the chain, and you receive the full block reward.
Pool mining has become increasingly popular as mining competition has increased. Most miners today mine as part of a pool.
A pool is a group of miners working together to find valid hashes. Each miner deploys hardware individually but connects to a pool with other miners. If any single miner within the group finds a valid hash, the whole pool shares the block reward. Because the hash rate of thousands of miners is greater than that of a single piece of hardware, the chance of the pool finding a valid hash is much greater than when solo mining.
When mining in a pool, you can expect to receive many small shares of block rewards regularly. When mining alone, there might be long periods when you don’t receive any reward. However, when you find a valid hash, you will keep the full reward yourself. Given these dynamics, pool mining is much more suited to those with less powerful mining hardware.
Meanwhile, companies mining with massive data centers packed with ASICs might prefer to solo mine. Since they control immense hash power, the probability of finding a valid hash will be reasonably high, and, on average, they won’t have to endure as long periods without rewards. In addition to receiving the entire block reward, the other advantage of solo mining is that there are no mining pool fees to pay.
OKX operates its own crypto mining pool. If you own or are planning to buy ASICs or GPUs to mine cryptocurrency, you can connect to OKX Pool to benefit from mining as part of a larger group.
Examples of proof-of-work crypto assets
Bitcoin is the most famous proof-of-work crypto network. However, several others use the consensus mechanism, including:
- Monero (XMR)
- Litecoin (LTC)
- Ethereum Classic (ETC)
- Dogecoin (DOGE)
- Bitcoin Cash (BCH)
- Zcash (ZEC)
- Dash (DASH)
Some of the above cryptocurrencies can still be profitably mined using GPUs. Meanwhile, others will require miners to operate ASIC units to remain competitive. If you know your hardware’s hash rate and the cost of electricity in the location you want to mine, you can estimate your setup’s profitability using a mining profitability calculator.
Is crypto mining legal?
In most of the world, cryptocurrency mining is perfectly legal. However, some jurisdictions, such as China, have outlawed it. The most common reason for banning crypto mining is the activity’s energy consumption.
Elsewhere, regulators have mused about banning crypto mining. In early 2022, Members of the European Parliament voted on the issue, eventually determining not to enforce any immediate restrictions on the continent’s crypto miners. Again, the lawmakers’ main grievance was the amount of electricity required to mine.
While some areas have considered banning the activity, others actively embrace it. Following its adoption of BTC as legal tender in 2021, the government of El Salvador announced it would support Bitcoin mining using clean geothermal energy harnessed from its volcanoes.
If you’re considering starting mining yourself, you should check your local laws regarding the activity. It’s also worth noting that few jurisdictions have regulated either way on cryptocurrencies in general, and even fewer have specific policies relating to crypto mining. As such, regulations in your country could change in the future.
Top countries for crypto mining
Crypto mining requires a lot of electricity. Therefore, miners typically flock to areas with abundant cheap energy. Additionally, the hardware generates heat. Miners, therefore, prefer to set up in cooler parts of the world so that they can spend less on cooling equipment.
Before China clamped down on crypto mining in 2021, the nation was by far the leading contributor to Bitcoin’s hash rate. However, since the ban, other countries have emerged as major centers for mining. They include:
- The United States
Crypto mining energy concerns
One of the most significant objections to cryptocurrency from those opposed to the technology is crypto miners’ energy consumption. Requiring powerful, specialized computer hardware running constantly draws a lot of electricity and in a world constantly moving toward greener technologies, some believe mining to be incredibly wasteful.
The EU has already voiced concerns about proof-of-work’s energy consumption, as have other jurisdictions worldwide. Given these objections, many cryptocurrency enthusiasts seek alternate consensus mechanisms to achieve the same results using much less power. While there are compelling arguments in favor of mechanisms like proof-of-stake, there are equally valid arguments against it.
For example, a common objection to proof-of-stake is that it encourages hoarding rather than distributing new units of a cryptocurrency. In Bitcoin, miners are pressured to sell the BTC they mine because they have to maintain their hardware and pay for the electricity to power it.
Validators in proof-of-stake systems have far lower operational overheads and, therefore, have less reason to sell the assets they receive. In fact, on many networks, the amount of currency staked is directly proportional to the likelihood of receiving block rewards. Such implementations incentivize stakers to hold their rewards, meaning those who can afford the initial stake get richer.
Meanwhile, the barrier to entry grows alongside the price of acquiring a large enough stake to validate transactions since the selling pressure needed to lower the price is reduced. Eventually, such a dynamic may result in greater validator centralization, reducing overall network security.
The future of crypto mining
Although many are against crypto mining because of its energy consumption, some observers argue that the activity is actually beneficial to the world’s fight against fossil fuel use.
Crypto miners typically seek low-cost, abundant electricity and do not need to be particularly close to population centers. This can incentivize the creation of renewable energy harvesting operations by making otherwise unprofitable or barely profitable locations economically viable. Over time, this should increase the amount of green energy available worldwide and may well reduce human reliance on fossil fuels.
Much of the backlash against crypto mining stems from outdated studies that make inaccurate presumptions about the energy sources used. Sensationalist headlines about Bitcoin requiring as much electricity as a small country fuel the debate. However, they routinely fail to consider much of the nuance in the discussion.
Rarely does mainstream media mention crypto mining encouraging the creation of new renewable energy harvesting operations. As more evidence of mining incentivizing renewable energy use emerges, mining may eventually become integral to nations’ climate change policies.
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