Way before we knew about crypto, we knew about mining. The undeniable buzz surrounding the mining business has been pretty overwhelming. If you ask your next door neighbor to explain what miners do your might hear something along these lines — mining is something that earns you a lot of cash, you just have to solve some puzzles, it burns a lot of electricity, so on and so forth. Sounds intriguing, does not it? It certainly does, however, and sadly so, this description can be pretty misleading. The following blog aims to decrypt all the myths associated with crypto mining and investigate who miners are, how do they get involved and what their business strategies and operations look like.

Miners

Mining plays a significant role behind seamless digital asset transaction: it validates the transfers, generates and stores blocks and reaches consensus upon which blocks to be included in the blockchain string. But what exactly do miners do?

The biggest misconception there exists is that miners are individuals who sit at their computers and solve complicated mathematical puzzles around the clock. The truth is that not miners but the computers with the special embedded software automatically run and solve the puzzles by pairing transaction hash with the matching hash. There is no need for a human to be sitting at the computer, as the software does everything autonomously. What humans do is that they engage in mining for pure economic interest and simply contribute their computational power to mining by purchasing/renting the special machines and incurring the electricity and cooling costs.

The special mining hardware is an advanced high-level equipment used to make speedy complicated computations on the blockchain. For a high-quality hardware, price tag ranges between $636-$3,000, depending on performance and energy-consumption properties. In addition to the upfront costs of equipment installation, recurring big energy bills also add up to miners’ expenses, as mining consumes a lot of power. What is more, the hardware has short lifetime value — as the mining difficulty constantly increases, once superior technology might quickly become obsolete and idle.

As of today, professional mining companies dominate the industry. They produce special equipment and either sell or rent them to the interested parties. Some of them also have large mining farms — data centers equipped with superior technology that continuously mine different cryptocurrencies. These farms are usually located in favorable settings and enjoy a low cost of electricity to decrease monthly electric bills, high network speed to make speedy operations and cool climate to keep cooling costs minimal.

Individuals who want to get involved in mining usually purchase or rent hardware from professional companies and join mining pools. Mining pools use the computational power provided by individual miners and create a big pool. With many miners, a pool has a greater chance of finding a coin, but the reward tends to be distributed among the members. The pool operator, a blockchain network administrator, manages mining activities and in accordance with the reward distribution strategy splits up the payments among the members.

Solo mining is also an option, however, as the field is becoming more advanced, technical and costly so is the process of starting up. Thus, individuals tend not to take on this journey single-handedly. Solo mining has its perks as whoever finds a coin claims all the rewards. But on the flip side, getting rewarded might be a challenge. If we examine the number of blocks that a miner can generate in the first year of her/his entrance in the industry, the variance is rather high, while the generated blocks pretty low.

Mining

Let’s move to the actual mining procedure. Broadly speaking, the mining process comprises of two distinct parts:

1. The one where transactions and blocks are validated

2. And the one where miners race to find the block and generate profit.

In order for the blockchain to function you only need the former fulfilled; somehow the second part is key in incentivizing miners to be part of the system and complete the above. This way both of the tasks are critical for the network to function as a cryptocurrency.

To dig deeper, let’s go over the six essential steps that need to be accomplished, after joining the Bitcoin network and connecting up with other nodes of the system:

1. Watch out for transactions — Miner should listen to transactions happening on the network and check for double-spending as well as for the valid signatures on the transfers.

2. Retrieve an up-to-date blockchain and listen for the new blocks that are broadcasted — Get the existing blockchain ledger from other nodes on the network and work on maintaining it.

3. Generate a candidate block — With a valid historical blockchain now miners can start assembling their own block by validating transactions and gathering them in one block that is an extension of the last block on the blockchain. To break it down a little bit more, first, they have to validate the transactions from the pool of pending transactions and then compile them in one block the header of which will contain a hash of the previous block and will point back at it. Thus, during this process mines are generating a Markle Tree of singular transactions and a block that contains all this data, which will eventually be placed on the blockchain ledger if approved by other miners.

4. Validate the generated block by finding an accurate nonce — The next step is validating the generated block, which is done by finding a correct nonce. The nonce resides in the header of the block and has 32 bits. Miners need to try different possible nonce values that could produce a valid hash for the block. Once they land the right combination the block will be fully prepared to be broadcast in the network to other nodes.

5. Be hopeful that the block gets accepted by other miners — Once the block is validated, it is advised to immediately announce the achievement. However, broadcasting the block does not always mean that it will be accepted by the network during the consensus process. Other miners might accept a block generated by another node and start building a new block on top of it. This might make you wonder how can another miner’s block be accepted over mine? Are all miners solving the same puzzle? The answer is no — not everyone’s block is identical. They might be sharing some transactions, however, it is highly unlikely all miners to include thr same transactions in their blocks. However, if we allow of such case, the puzzles will still not be identical because generated blocks contain public key of a miner, which will stand as a differentiator between the blocks.

6. Generate the cash flow! — If the nodes accept your block you will make a profit and earn 25 Bitcoins, which using the current exchange rate, is around 160,00 USD. In addition to this reward, the miner will also be receive another modest prize which is transaction fees contained inside the block.

Mining difficulty tends to increase as more blocks are added to the blockchain. For example, the difficulty of mining a bitcoin rises in every 2,016 blocks or in two weeks. This ensures that each block mining will take on average 10 minutes. As more miners enter the platform, the hash power increases and the time required to mine drops, thus increasing the level of difficulty in every 2 weeks ensures that this standard time that elapses between two consecutive blocks on the blockchain is adjusted and maintained.

Conclusion

Cryptocurrency mining is embedded with misconceptions and stereotypes that need to be addressed. Mining has often been compared to the valuable metal mining, where amateurs get hyped with prospects of quickly accumulating wealth and, without much thought, rush to enter the market just to be sent back off empty-handed. It is up to your personal judgment to decide which path to take, however, It is crucial to understand all the drawbacks and benefits associated with the mining business in order to make an effective decision.

The next blog post will explore and discuss some other aspects of the mining, stay tuned!

Work Cited

[1] Narayanan, Arvind, Joseph Bonneau, Edward Felten, Andrew Miller, and Steven Goldfeder. Bitcoin and Cryptocurrency Technologies: A Comprehensive Introduction. Princeton and Oxford: Princeton University Press, 2016.