Mining Cryptocurrency Part 1: What Is Crypto Mining?

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What Does "Mining Cryptocurrency" mean?

When you hear the term mining, you probably think of people with pickaxes and canaries working in deep, dark caves. Even without diving into the specifics of how it works, I think we can all agree that this would be a very inefficient way to gather digital currencies. In this case, crypto mining refers to how we mint new coins.

Adding transactions to the blockchain is what we refer to as “mining”, and the reward is a payout of newly minted coins. The blockchain is essentially a ledger of all transactions (or “blocks”) for that particular cryptocurrency.

Miners can use several methods to determine how we add data to the blockchain, including Proof-of-Work, Proof-of-Stake, and Proof-of-Storage. Each method has different use cases and computing requirements.

Proof-of-Work

Proof-of-Work is a method of decentralized cryptographic hashing that requires machines to perform complicated mathematical equations to find the correct hash for a block. Systems use this hash to validate that a data block has not been tampered with, as it is unique, and even the slightest change to the data will change its resulting hash. Proof-of-Work is a very resource-intensive method that requires large amounts of power and, in some cases, specialized hardware.

Proof-of-Stake

The Proof-of-Stake method is a bit different in how it handles mining cryptocurrency. Typically, Proof-of-Stake uses a network of nodes called “validators” to add and validate transactions. It does this by a lottery-style system where each validator stakes coins and the network will choose a validator to create the transaction. The more cryptocurrency staked by the validator, the higher the chance that the network will select them. Other nodes then validate the transaction before being permanently added to the blockchain.

Proof-of-Storage

Proof-of-Storage is similar to Proof-of-Stake, but instead of staking cryptocurrency, you allocate storage space preemptively to store hash solutions before the transaction is created. When it comes time to complete the block, the network chooses a validator with the correct answer to write it to the blockchain.

There has been a lot of buzz in recent years about cryptocurrency and how it’s changing the way we pay for goods and services. We’ve discussed what cryptocurrency is in previous articles and detailed specific coins like Bitcoin and Shiba Inu. This series will outline what mining cryptocurrency is and what is needed to start your crypto mining setup.

Crypto Mining Algorithms

Cryptographic hashing algorithms are the core of crypto mining blockchains. They are essentially different methods of distilling a large set of data down to a smaller, unique string. Hashing is very important because it helps to ensure the blockchain is tamper-proof, as any change to the original dataset will cause the hash to be completely different.  This article has a great in-depth explanation of how hashing algorithms work and has a great graphic showing how even changing the capitalization of a single letter can change the entire hash.

Some examples of algorithms used for mining cryptocurrency and their associated coins are:

  • SHA-256
  • Dagger-Hashimoto
    • Ethereum (ETH)
    • Ethereum Classic (ETC)
  • X11
    • Dash (DASH)
    • LiteCoinX (LTCX)

Equipment

Cryptocurrency mining requires specialized software and, in some cases, specialized hardware as well. There are three main types of mining rigs used for crypto mining, each with its strengths, weaknesses, and minable coins:

This article will briefly touch on each type of mining rig, with a much deeper dive in later parts of this series.

Application-Specific Integrated Circuit (ASIC) Miner

An ASIC miner is a specially-designed computer that mines a single coin. Since it only has to focus on doing one thing well, it can do it much faster and more efficiently than other types of mining rig. Unfortunately, this also usually comes with a premium price tag. The least expensive ASIC miner from Goldshell typically costs between $500-700, and the most costly from Bitmain is around $12,000 or more. While the cost may be high to purchase the units, some of them can make their cost back in a relatively short period, especially during a bull market.  

When we initially wrote this article, the Goldshell KD5 ASIC miner was one of the most profitable miners in the world. When it was released, it cost around $9,000 and right now is making approximately $150 per day in Kadena coin, even after factoring in power needed to run it! If you were lucky enough to get one before the boom, it would take around two months to pay itself off!

Graphics Processing Unit (GPU) Mining

GPU mining is one of the most popular ways of mining cryptocurrency. It doesn’t require specialized equipment, and you can use most off-the-shelf parts to make an effective mining rig. Even if you don’t know how to build a computer, it’s possible to use one you already have to make money! As long as it has at least one decent video card in it, such as for gaming or photo/video editing, you can probably use it for crypto mining when it’s not in use!

Right now, Ethereum mining is best done with a GPU mining rig and is one of the most profitable coins that you can mine this way. When we initially wrote this article, an older NVIDIA GeForce GTX 1070 would make approximately $1.20 of Ethereum per day. If you could get your hands on a newer high-end card like the NVIDIA GeForce RTX 3090, you could make around $6.30 of Ethereum per day.

These figures are all based on having a single video card. It’s possible to have 2, 3, or even up to 19 video cards attached to a single computer! One of the great things about GPU mining is its scalability. You can start small with just one low-end video card and add more as you are ready to do so.

Central Processing Unit (CPU) Miner

Cryptocurrency mining started with a CPU. As crypto mining grew and developers gained more experience, we moved from CPU mining to ASIC and GPU mining. Recently, we’re starting to see CPU mining making a comeback with projects like Monero and Raptoreum. One of the nice things about CPU mining is that you can do it in conjunction with GPU mining on the same computer, rather than purchasing a separate machine!
Building a dedicated CPU mining rig is almost identical to a GPU mining rig, with the exception being that you’d want a higher-end CPU and don’t need a video card at all. If you’re getting into mining on a budget, starting with a CPU mining rig and adding a GPU or two later is a great way to keep your initial costs low while still getting into mining.

Colocation

While you can perform cryptocurrency mining at home, if you want to have more than a handful of mining rigs, you’ll want to look into a colocation provider. In this context, colocation is when you have one (or more) mining rigs hosted by a 3rd party facility. Most colocation hosts have a secure facility with backup power, high-speed internet connections, and proper cooling to handle many machines all running simultaneously.
It is often more economical to pay the hosting and maintenance fees every month than building out a room or facility to handle the energy requirements and large amounts of heat given off by the equipment. Another benefit is using a colocation provider in a different geographical region to help mitigate potential issues such as natural disasters or regulation changes.

Mining Pool

A mining pool is a collective group of miners who contribute their cryptocurrency hashing power together. Mining rewards earned are divided among everybody who contributed to the pool, based on how much of the total hashrate they contributed during that period. This shared reward is a huge benefit to smaller miners who rely purely on luck mining by themselves. It also helps larger miners because a more extensive pool means more payouts, which typically results in much higher payouts than they would get by themselves.

Legitimate sites

There are many bad actors running scams and stealing millions every year. It is unfortunate, but cryptocurrency is no exception. Before giving money or personal information to a site, make sure it’s legitimate and trusted. It’s hard to find a list of verified cryptocurrency sites, so we compiled a list that includes tips on keeping yourself safe.

Conclusion

At this point, you probably have more questions than answers, and that’s a good thing. We threw a lot of information at you, and this is just the tip of the iceberg! As we continue with future entries in this series, we will dive into more specific detail about the different types of cryptocurrency mining rigs, how to get started, and where you can turn for help.

Do you have any questions you’d like to have answered? What are you most excited to learn?  

Let us know in the comments below!

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