What is crypto mining and how does it work?

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“Crypto mining” is a term that is very commonly used within the cryptocurrency industry, but does everyone really know what it is?

The term has a very specific and limited meaning, which is often obscure to most people.

What is it and how does crypto mining work? Let’s start with Proof-of-Work

Crypto mining has to do with what is known as Proof-of-Work (PoW).

It was first created by Satoshi Nakamoto, who designed it in 2008 and put it into practice starting in January 2009, when he mined the first block of Bitcoin’s blockchain.

The blockchain is the file in which all validated transactions are recorded.

It is so called because it is composed of a chain of blocks, to which new blocks are continuously added, one after another, so that they are concatenated to each other. That is, each new block must be concatenated to the last one added previously.

On 3 January 2009, Satoshi Nakamoto mined the first block, or block zero, and six days later he mined the second block by concatenating it with the first. To date, nearly 780,000 have already been mined and added to the blockchain.

Individual blocks contain transactions, and mining a block means finding the cryptographic hash that validates it. Validating a block also validates all the transactions in it, and concatenates it to the previously mined block.

The process of finding the cryptographic hash that validates a block is called Proof-of-Work, because it requires a certain amount of work to be done by the machines that search for hashes. The hash is nothing more than a long string of text that matches the contents of the block.

The search is done randomly, but the more attempts that are made, the better the chance of finding the single hash that validates the block.

Proof-of-Stake-based protocols: the main differences with PoW

Given that PoW consumes a lot of energy, as one has to try several billion times before finding the correct hash, many cryptocurrencies have chosen another system, called Proof-of-Stake (PoS), to validate blocks faster and, most importantly, with far lower costs.

On 15 September 2022, Ethereum switched from PoW to PoS. Thus, to date there are few cryptocurrencies still based on PoW.

The most prominent is Bitcoin, which alone is worth more than all other PoW-based cryptocurrencies combined.

By now there is no other first-tier PoW-based cryptocurrency, but there are two second-tier ones: Dogecoin and Litecoin.

There are also two third-tier ones, namely Ethereum Classic and Monero.

In addition to these, Bitcoin Cash, Dash, Bitcoin SV and Zcash should also be mentioned, as well as the new Ethereum PoW that originated as a fork of Ethereum when the latter has moved to PoS. There are actually also many others, but they are minor.

Crypto mining in detail

Crypto mining can only be done with PoW, hence, for example, Ethereum is no longer minable, and Binance Coin (BNB) never was.

It is worth noting that non-native tokens, such as USDT or USDC, would not be minable anyway, because only native cryptocurrencies, i.e., those with which fees are paid to have a transaction added to the blockchain, can be mined.

Therefore to date Bitcoin is by far the most important minable cryptocurrency in the world, and there are only four other minable cryptocurrencies of any importance.

Mining means running special software on special machines that look for the hashes that validate the blocks.

For this, miners must equip themselves with specific machines, often expensive, in order to find the hashes and collect the reward.

Bitcoin mining

However, it should be pointed out that Bitcoin mining is decidedly different from that of all other PoW-based cryptocurrencies.

Indeed, it is so difficult to find the hashes that validate Bitcoin blocks that about 300 billion of them must be randomly mined every second. This is why Bitcoin mining consumes so much energy.

All other minable cryptocurrencies have far lower requirements, with much lower consumption.

As for Bitcoin, a block is mined every 10 minutes or so, and the miner who can find the hash that confirms it is given a prize of 6.25 BTC. Initially the reward was 50 BTC, but every about 3 years and 10 months this reward is halved. In the spring of 2024 it will be halved again, and thus brought down to 3.125 BTC.

Since the reward is given only to the miner who validates a block, and since a block is validated every 10 minutes or so, crypto mining is in fact a competition.

In other words, each miner has to try to find the confirmation hash before the others in order to grab the entire prize. There are more or less 10 minutes before someone finds the hash.

The hashrate

The number of hashes that are randomly extracted on average every second is called a hashrate, and it is measured in Eh/s, or ExaHash per second. Exa means a thousand times Peta, and Peta means a thousand times Tera. Tera in turn means a thousand times Giga, and Giga means a billion.

Therefore, Exa means one billion billion.

It must be said that initially, when only Satoshi Nakamoto was mining Bitcoin, it probably only took a few hashes per second to be able to find the good one. But over time the competition increased, causing the global hashrate to increase as well.

In 2016, or seven years after Bitcoin mining began, a hashrate of 1 Eh/s was first reached globally, and now we are up to over 300.

With these numbers, it is easy to understand how high the competition is. This is why many miners often join together in so-called “pools,” in which they combine their computing power, and share any revenues proportionately.

Nowadays there are about 5 major Bitcoin mining pools around the world, which together hold more than 80% of the world’s hashrate.

The consumption of crypto mining

It is worth noting that Bitcoin in theory would have no need for all this hashrate, so much so that in 2009 very little was allocated to it.

It is individual miners who decide how much to allocate, but they are obviously driven by competition to allocate as much as possible.

Because this causes a real hashrate explosion, in the end the power consumption of crypto mining worldwide turns out to be huge. But it is only due to independent and specific choices of the miners, and not from the real needs of Proof-of-Work.

That is why in theory it could be reduced simply by legally forcing miners to consume less.

It is worth noting that miners choose to allocate more or less hashrate on crypto mining depending on how much they cash in. That is, the more they cash in the more they can afford to spend on more hashrate, the less they earn the more they are forced to shut down less efficient machines in order to avoid mining at a loss.

Indeed, while at the end of 2021 the total global power consumption of Bitcoin mining was estimated at more than 200 TWh, when the price of BTC was at its peak, it has now dropped to less than half.

The fact that miners only receive BTC, while they have to pay for their electricity in fiat currency, means that they are forced to sell some of the BTC they receive, and if these have a lower market value, their earnings may be lower than if they receive the same amount of BTC.

In addition, there is no guarantee of receiving BTC by mining Bitcoin, because in order to collect the rewards, it is necessary to be able to validate a few blocks.

 

Image credits given by Bybit (bitcoin mining)