A basic overview of cryptocurrency mining

A basic overview of cryptocurrency mining

The digital currency has been around for eight years as an alternative to paper money, and during that time it has also become an alternative to stock options trading. The idea behind Bitcoin is to get rid of the control of countries and central banks, ensure the accuracy, security and compliance of transactions participating in the network, and issue new currencies.

In fact, the mining process consists of two activities: saving an updated copy of the transaction log and solving mathematical problems to create new currency. The reward for each challenge is a certain amount of digital currency.

Blockchain

The fundamental element of any digital currency is the blockchain, a digital ledger that records all transactions that have taken place with the currency since its creation. Each operation is verified by different entities (miners) before it is recorded in the blockchain, because once written, it cannot be undone. The number of verifications required varies for each digital currency, Bitcoin requires 3 and Ethereum requires 30. The security of the blockchain is ensured by it: this record is decentralized and distributed, so no middleman can control it, but anyone who uses it can verify it.

This technology is secure as long as no one person controls more than 50% of the network's computing power, a situation known as a "51% attack" which is dangerous because once it exceeds 50%, the entity with this computing power can block transactions and double-spend the same coins.

Mining process

The purpose of the mining process is to help keep the ledger and create new currency, thereby earning rewards from tips associated with each transaction and being rewarded for solving problems. These operations require a lot of computing power.

A brief history of mining types

While in the beginning a decent CPU was sufficient for mining, the current level of complexity requires powerful hardware, so the idea of ​​using your own computer to mine digital currencies has long been out of the question.

GPU Mining

GPU mining is still possible, albeit on a smaller scale, but it is a DIY solution and a good start to understanding the mining process. You need to consider memory cards, cost and power consumption, and how many cards you need for a reasonable return rate. You can still use such a configuration to mine coins that are not yet popular, but Bitcoin is no longer a desirable option. The reason for choosing this setup is its versatility, the same configuration can be used for mining and gaming.

FPGA Mining

When GPU mining became too competitive, the solution was to use field programmable logic arrays. FPGAs entered the market in 2011 and offer more computing power and lower energy consumption than GPUs. It represents a 10x jump in quality compared to GPUs.

ASIC Mining

The next step in mining technology was specially made integrated circuits, which developed specially customized tools for Bitcoin and Litecoin mining. This was so revolutionary that when KNCMiner launched a presale for ASIC miners, they received $25 million in orders in the first 5 hours. This highly specialized machine has one purpose and has become the gold standard for Bitcoin mining.

The evaluation of mining equipment can be measured by hash power, which is measured in Gh/s, or by efficiency (J/Gh). In comparison, ASIC is 10 times better than FPGA.

Mining Pools

Mining digital currencies is a reward for early adopters. When companies like Google and Microsoft have already invested millions of dollars in blockchain research and equipment, it seems a little late to join the bandwagon.

However, in order to give anyone who joins the game a chance, mining pools are helping miners share risks, costs, and benefits by combining their resources. You can connect to many mining pools according to the computing power you can afford. By joining such a guild, you have the opportunity to receive corresponding rewards.

As tempting as it may sound to join a larger group and receive rewards faster and more frequently, this is dangerous for the health of the network as it can lead to power concentration, potentially resulting in the 51% scenario mentioned above.

Gear and Cost

Using CPUs and GPUs for mining is inefficient and may result in your Bitcoin income not covering the electricity costs, let alone making a profit. Currently, investing in ASIC gear is the best option, with each device costing between $100 and $3,000 (Antminer S9), not including the costs associated with cooling equipment, dedicated power supplies, and storage. A used system can be found for around $300-500.

On the other hand, this software is open source and free. If you want to join a mining pool, they will help you install all the required programs and make the correct configuration.

Following the SaaS trend, there are now many mining-as-a-service options that take care of the initial investment, updates, and maintenance, and you only need to pay to join the mining pool, and as a regular miner you can get rewards without having to worry about the infrastructure.

Is it profitable?

All this hype about rising cryptocurrency prices has encouraged more people to join the cryptocurrency space, but anyone interested should be aware that this market remains highly volatile and, due to its regulated and decentralized nature, is not susceptible to conventional hedging strategies.

Investing in encryption technology should be considered like any other investment, with a return on investment calculation. We should consider the initial investment cost, including the necessary hardware, regular upgrades, and the daily energy costs required to run the system at maximum parameters.


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