1. Cryptocurrency Mining (PoW) Guide

What is Cryptocurrency Mining? (Proof Of Work Explained)

New Cryptocurrency (Example, Bitcoin) that uses Proof-of-Work (PoW) consensus protocol for transactions on a Blockchain, are validated by miners that compete with each other to solve a difficult cryptographic mathematical puzzle, also called a “Proof of Work”. Miners will need to guess all possible 64 digit hexadecimal numbers, termed a “hash”, with their mining computers until they locate the solution. It is similar to gambling, the first winning miner that solves it can place the next block and earn a newly born cryptocurrency coin.

Cryptocurrency Mining Pic Image 1: Cryptocurrency Mining.

Before a miner can earn cryptocurrency coin, he will need to verify an amount of transactions the size of the maximum block size limit of the cryptocurrency type that he is mining. Let’s take bitcoin mining for example, Bitcoin has a maximum limit of 1 MB block size. Hence, the miner has to verify 1 megabyte (MB) of transactions which can be less than 10 transactions or several thousand transactions in a block, depending on each transaction contains how much data. Bitcoin Cash (BCH) has maximum block size of 8 MB as of Jan 2019, so miner will have to verify 8 Mb of transactions to earn a bitcoin cash coin.

Cryptocurrency Mining Pic Image 2: Blockchain List of Blocks with Block numbers and number of transactions in a Block.

Once the puzzle is solved, the new transaction will be confirmed, recorded and the cryptocurrency involved can be spend. On top of the new coin earned, the winning miner will also earn transaction fees for his efforts. This process is named Proof of Work (PoW), referring to the miners proving to the blockchain that they did indeed spend a lot of time and resources to create the new block.

Cryptocurrency Mining Pic Image 3: Individual Block details on a Blockchain.

A block is mined every 10 minutes on average, meaning if you initiate a transaction, the transaction will take 10 minutes on average to confirm on the blockchain as well. Once a cryptocurrency transaction is confirmed, it cannot be reversed or cancelled, this is unlike electronic fiat transactions.

Limited Supply

Decentralized Cryptocurrencies are typically designed and defined during birth to gradually increase the difficulty of mining which will result in production decrease of coins slowly as time passes, production will stop completely when the cryptocurrency hit the coin supply cap.

Let’s take Bitcoin for example again, Bitcoin has a 21 million coin supply cap and experts estimate that it will hit the supply cap by around year 2140. When that happens, miners will only receive transaction fees as rewards for mining new blocks, they will no longer receive any new coins. Some predicts that with no new coins to meet new demands, coin price will rise and there will be higher transaction fees earnings for miners to cover the lost income of acquiring new coins.

Mining Banner Picture Image 4: The Components of Mining.

It is important for cryptocurrency and blockchain users to remember that the main objective of mining is not to create new cryptocurrency coins, but to ensure the blockchain operates as a decentralized system securely, transparently and without the need of a central authority. It is a critical process because without mining, no transaction can happen in a Proof Of Work (PoW) blockchain. No one else can confirm transaction onto new blocks except miners.

Should I and can I make a living with Cryptocurrency Mining?

Mining consumes tremendous amount of electricity, it was reported that bitcoin mining in the entire world consumes more electricity than a nation itself for example Mongolia or Cambodia. Critics denounced cryptocurrency mining as an environmental hazard.

Cryptocurrency mining will more likely fetch you good profits if it is done in a country with low electricity costs. It will be much harder to make a profit by mining in a country for example Italy with higher electricity price and may not be wise to start one.

Mining difficulty gets harder after more coins are mined and after more miners join in the competition.

Mining income can be inconsistent, you can make $100 a day but in the near future make only $5 a day, especially when the price of the cryptocurrency you are mining goes down.

Mining will be more efficient being done in a proper Data Center with cooling and ventilation system. Since creating such a Data Center isn’t cheap, hence large companies have a much higher chance of making good profits with mass mining vs any individual that cannot afford one.

Always remember that your mining profits are not just the value of the new coins you have mined, you need to deduct your expenses as well for example. electricity bills, hardware cost, maintenance, wear and tear cost.

NEXT: Read Proof of Stake (PoS) Consensus Protocol Guide