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What is Mining and how does it work?

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Not so long ago, the concept of cryptocurrency mining was a mystery to most everyday people across the planet. Only a few geeks had sufficient knowledge of its principles and complex technical terms. In 2017, the Bitcoin cryptocurrency exchange rate skyrocketed, causing a furor around mining and other methods of making money from digital currencies. If you haven’t had time to understand this topic yet, in this article I will try to help you learn the basics of mining, cryptocurrency, blockchain principles and tell you how to start earning in this field in 2021.

What is Mining?

In simple terms, Mining is the process of extracting electronic money, cryptocurrency, by means of calculations on special computers that are connected by a network, the blockchain.

What is Mining

What is Blockchain

Let’s start by looking at the network that you need to connect to in order to engage in mining. This will allow us to better understand the origin of cryptocurrency and the mechanism of its distribution to miners’ wallets. To illustrate, let’s take a look at the concept of Bitcoin. Its essence is to provide an anonymous and independent operation of a fast payment system without a central control server. The issuance is controlled by an immutable program code embedded in the network, which, moreover, is almost impossible to hack.

Emission – the release of money into circulation, leading to an increase in the money supply.

As a result, we have a Blockchain network with many miners connected to it, and the code is written in each of them. A random hacker can try to hack a transaction or change the source code in the Blockchain network, but he will be automatically blocked by the miners, because any transaction is checked and verified by several links in the network (from the name “blockchain” – segment-chain) before it is confirmed. So a transaction that an attacker would want to alter would simply be blocked as the decentralized network verifies it – a simple and ingenious mechanism.

blockchain

If you want, say, from Los Angeles to send some Bitcoins from your crypto wallet to your friend who lives in another part of the globe, the transaction will be verified by the network, by several miners on the blockchain, before the transfer is confirmed, and only then will the funds reach the recipient. For such checks a negligible fee is charged, the amount of which can grow only from the desire of the wallet user to send electronic money faster, usually the fee becomes higher at times of network congestion. The miners themselves do not see any transactions and no information about them. Their devices receive a special packet of information from the network, called Hash, which is processed using the computing power of their mining equipment. And the commission goes to the wallets of random miners who helped process the transaction hash.

Information in the blockchain network is divided into special blocks, which appear in it at regular intervals, they are “found” by miners and mainly for this they get their reward in the form of cryptocurrency, in our case it is Bitcoins. The reward is shared between all miners, respectively, the more of them connect to the blockchain, the less coins each of them will get. As the processing power of the entire Bitcoin network grows, so does the complexity of the network, which ensures that the time it takes to find a block is approximately the same. The complexity of the network is a constantly changing indicator, on which depends on the benefits of mining, as well as, in fact, on the rate of extracted cryptocurrency. It shows how difficult it is to find the right variables in the Hash to solve the mathematical equation to find a block in the blockchain.

Mining hardware

In the early years of the Bitcoin blockchain, it was operated by ordinary computers, and calculations were performed on their CPUs. Over time, as the complexity of the network increased, mining Bitcoin cryptocurrency on CPUs became unprofitable. The SHA-256 computing algorithm was the impetus behind the shift from CPU-based mining to video card-based mining, as GPUs are more efficient at processing floating point numbers. Since the original code for this algorithm allowed for mining on a variety of devices, video cards didn’t last long before being supplanted by specialized microprocessor-based devices known as “ASICs”.

Asic is a device with a board and chips soldered on it, the microarchitecture of which is designed purely for mining on a particular algorithm.

What is Mining and how does it work?

As the number of people wanting to mine Bitcoin grew, the complexity of the network increased, which stimulated the development and release of new, more efficient and energy-efficient asics by some major Chinese manufacturers. Every time a new model of asics is released, the old one starts to lose its benefits in mining, as the amount of coins mined becomes unable to cover the cost of electricity. In this regard, miners need to constantly be aware of the relevance of a particular equipment for mining on a particular algorithm.

In fact, asics and the ability to use them on certain algorithms harms the economy of each individual cryptocurrency. Developers of new blockchains and cryptocurrencies prescribe protection against asics in the code of the mining algorithm. The best example is the Ethereum network, whose cryptocurrency can be mined only on videocards.

What is Mining and how does it work?

Mining on GPU has several advantages over mining cryptocurrency on ASIC devices. First, many GPU models remain profitable for a long time, they can be switched from one algorithm to another (except for those already occupied by ASICs, it makes no sense), which increases flexibility in choosing cryptocurrency for mining. In addition, graphics cards can always be easily sold on the secondary market to other miners or gamers, thus providing additional liquidity. In contrast, the liquidity of ASIC devices is always questionable: towards the end of their lifecycle (when they become obsolete), selling obsolete models becomes increasingly difficult. Given that mining is an investment business for many, investing in ASIC devices requires more caution and attention.

Mining Profit

Profit in the context of cryptocurrency mining means achieving the maximum benefit that allows you to cover your energy costs and, at the same time, stay in profit to recoup your investment in equipment (hardware).

What the profitability of mining depends on:

  • Energy efficient equipment,
  • Mining algorithm,
  • The exchange rate of the mined cryptocurrency,
  • Complexity of the blockchain network,
  • Electricity charges.

Mining farms

Cryptocurrency can be mined with a single device or with several, in the second case the profit will be significantly higher. The aggregate of such devices is called a farm, it can be a single computer with several video cards connected to the motherboard (also called “Rig”), or many such installations.

What is Mining and how does it work?

GPU подключаются к портам PCI-e через специальные удлинители — райзеры.

What is Mining and how does it work?

This helps to compactly and conveniently place all the components on a special case, which, many make their own from metal profile pipe, or aluminum “corners”, well, or from wooden slats, which is not particularly fireproof. For the stability of the rig, the motherboard connect 4 to 8 video cards with the same graphics chips. It is better to use server power supplies, but ordinary ATX solutions will do, the main thing is to use a synchronizer.

What is Mining and how does it work?

Mining Methods

Cloud mining

You can mine cryptocurrency on your own hardware or rent it, cloud mining services will help, and this is the easiest way, where you don’t need to understand hardware and programs, you just register and invest in capacity according to the tariffs. Then withdraw the extracted cryptocurrency in your wallet (on the exchange or on your computer). The advantages of cloud mining are obvious: you don’t need to find a ventilated room with good wiring. The equipment will be monitored by a team of specialists for maintenance. You only have to manage everything from your personal cabinet. Cloud mining has the advantage and low threshold of entry for earning on cryptocurrency – simplicity, convenience and speed without fuss.

Mining on graphics cards and asics

In addition to the hardware, you will have to choose how you will mine cryptocurrency alone or by teaming up with other people.

Solo mining

Solo mining is more suitable for large farms with a high hash rate. If you find a block in the blockchain, the entire reward will go to you, but the chance of finding it may vary, and it depends on the complexity of the network. By and large, solo mining is not particularly profitable in 2021, if we take popular cryptocurrencies such as ETH and BTC.

Mining at Pool

A pool is a server that distributes a computational task among all the participants connected to it.

The most relevant and safe from risks (from the chance of finding a block in the case of solo mining) method of mining. Several hundred miners join their farms in a common subnetwork to make it easier to calculate the hash and find the block. The reward is shared proportionally to the power of each miner.

How to start mining cryptocurrency yourself

For regular Bitcoin cryptocurrency mining, you will need ANTMINER S9i or newer asics. Their power is about 13.5 Th/s, power consumption – 1150 W/h, with an average price of $450. Due to exports from China, the availability of asics is relatively low, and the price tag is constantly influenced by the Bitcoin exchange rate. With all that said, you’ll have to find a supplier who won’t cheat.

It will be easier to collect farms of video cards. You need to decide on the model of the chip and the manufacturer, then buy components for the platform and power supplies.

Mining farm components:

  • A motherboard capable of supporting multiple PCI-e devices,
  • Dual-core processor with a standard box cooler,
  • 8GB RAM,
  • Storage (cheap SSD, flash drive or HDD),
  • Risers,
  • Power supplies,
  • Case.

Video cards are connected via raisers to the motherboard via PCI-e x1, PCI-e x4 and PCI-e x16 slots. On motherboards made specifically for mining, such as ASRock BTC PRO, there are multiple PCI-e x1 slots and additional power via molexes.

What is Mining and how does it work?

The power supply for the farm should be taken that power to power all the video cards and the platform, but at the same time leave a reserve of 30%, so that the transformer does not burn out. If one video card consumes an average of 100 watts, in the rig you will have six of them, plus the consumption of the platform – comes out an approximate load of 700 watts, with a reserve of all 910 watts, it turns out you need a power supply of 1000 watts. Considering the fact that many manufacturers save on components, cheaper power supplies may not be able to deliver 1000W, so you’ll have to spend on a 1200W model. Or buy two 800W power supplies. But it is better to take a more expensive server power supply with increased fault tolerance. An important factor in choosing a power supply is the energy efficiency certificate. The higher it is, the less the power supply consumes electricity from the outlet, which adds to the profitability for mining.

This is an old example with an AMD RX580 GPU

Software

To make your hardware mine cryptocurrency you need to install an operating system and mining software. You can use Windows 10, then install special drivers for mining, flash your video card (if you have AMD), and only then run miners such as: PhoenixMiner 5.3b for Ether mining, NBMiner 33.4 for Raven Coin mining. Windows has limitations in mining: Device Manager will not detect more than seven video cards, hash rate is lower than on Linux, constant problems from antivirus, and overall stability is questionable. The popular HiveOS operating system is commonly used.

The distribution can be installed on any drive, be it a flash drive or SSD, using the Balena Etcher image burning program. Hive OS has a bunch of detailed settings, a smart watchdog that will keep an eye on the rig, and in case of a glitch, freeze, video card error or high temperature will reboot the system. Drivers are loaded automatically with the OS, the video cards themselves are easy to customize by overclocking and downvoting.

What is Mining and how does it work?

Choosing a pool for mining

Pool on which you want to mine cryptocurrency should be chosen by the total hashrate, the more it is, the higher the chance of finding a block, thus you can get a little more reward, but it all depends on the policy of the pool itself.

What you need to know about a pool:

  • Having a proxy server in your country,
  • Low ping,
  • Overall hash rate,
  • Whether the security is strong,
  • Possibility of monitoring,
  • Minimum amount of commission and withdrawal.

Where to store cryptocurrency?

Choose a crypto wallet or exchange to withdraw funds from the pool. There are several time-tested options – a wallet program on your computer and some exchanges that have the same deposit amount as the minimum withdrawal amount from the pool.

For Bitcoin cryptocurrency, Electrum wallet is used, for Ethereum – MyEtherWallet.

What is Mining and how does it work?

For storing all other altcoins, exchanges are usually used.

The best exchange to withdraw cryptocurrency from the pool is Binance if you plan to trade.

Mining cryptocurrency without mining and investments

If you don’t have the money to buy farms or even invest in cloud mining capacity, there is an alternative way to get your hands on cryptocurrency – Faucets (Cranes). The principle of their work is simple: for performing simple tasks, for example, viewing ads, such services pay a little Satoshi (thousandths of Bitcoin). Especially popular sites-rotators, where several cranes are collected, thanks to which it is much more convenient to collect Satoshi.

Experienced users use special software for the automated collection of cryptocurrency from such faucets, then take them to the exchange for further trading, thus increasing their income.

The economic question of mining

Ten years ago, mining was only used by developers to experiment and research blockchain technologies. Earning money from cryptocurrency mining came a little later, and was known only among the initiated. Nowadays, mining is already comparable to a business. In essence, this type of earning is passive, that is, you invest your money in farms and wait for the equipment to pay off, so that you can get to the plus side. The payback period of the equipment depends on the exchange rate and the complexity of the network. Miners resort to forecasting to accurately determine the degree of risk for their investment, because the payback period can dramatically increase several times. The rate of cryptocurrency can be sold on exchanges by large traders, or by organizing a “51% attack” on some young but popular cryptocurrency. The essence of such an attack is that one miner connects all its capacities to the mining of this one coin, and the hash rate of this solo-miner is greater than that of all other miners in the network. Thus all the blocks in the mining process will go to the attacker. On Bitcoin or Ether such an attack is almost impossible, it will require several thousand people to unite, which no one will agree to do, there is a human factor at play here. Attack 51% is usually carried out on forks of popular cryptocurrencies, when the fork turns out to be too profitable for mining, although the reasons are different, but all this can locally undermine the economy of a particular cryptocurrency.

How to secure your cryptocurrency that you have mined or just bought on an exchange? Distribute everything in different tokens: part in BTC, another part in ETH, something in XRP, BTG, Zcash and so on, and most importantly – do not forget to transfer a third to USD.

How will this asset allocation help?

Due to the fact that the prices of different cryptocurrencies are constantly changing, some can rise, others can fall down, and if you store the mined coins on a “long-term”, then this is how you can secure your assets, skimming the cream when the growth, and keeping what fell at the rate. In dollars is usually transferred to what almost immediately goes to pay for electricity, for example. Exchange of any cryptocurrency into fiat money in 100% of cases protects from all the risks associated with falling prices on the market, but it should be taken into account that in the case of rising prices, you can win nothing, at least if you transferred all the funds into fiat, and did not have time to exchange back before the growth.

Investing in mining

Bitcoin is not backed by gold, nor is it linked to the economy of any state or third party. Software and miners operate and grow due to the high prices of electronic coins. Pricing comes from the popularization of the entire system and the large influx of users and miners. The Bitcoin rate is at a stable level, so investing any amount has low risks.

In less than 10 years, the Bitcoin exchange rate has increased by 1,000 percent. Those who purchased cryptocurrency or mining equipment years earlier have become quite wealthy. Forecasters say that the price of BTC will continue to rise in the future.

The reliability of the system is at the highest level, as third parties do not have access to information about addresses, transactions and about users, only if this information is not revealed personally. There have been cases of hackers attacking the blockchain, the work of the blockchain became unstable for some time, but then the stability was restored, and the attackers were left with nothing. The main thing is to secure your working computer with anti-virus programs and choose proven services for working with cryptocurrency.

Blockchain technology and cryptocurrency has huge prospects. Many countries are already considering introducing cryptocurrency into their financial structures.

Opinion and expert opinion on mining

All over the world, people’s views on cryptocurrency are divided: some believe that cryptocurrency is the technology of the future, while others assure that it is a regular economic bubble that is constantly bursting.

But still, after the fall of the rate of popular cryptocurrencies, there is usually a process of leveling off and it is normal, the rate often returns to its highest mark and passes over it.

Bitcoin in 2016 was worth $500, in 2017 jumped to $20000, then fell to $6500, and now at the end of 2020 returned to the mark of $20000, and at the time of writing has already passed $47000.

The exchange rate can be unstable, but continuous mining leads to wear and tear of the equipment, which in any case leads to certain risks. It is better to invest in mining and cryptocurrency with free money, which you are ready to lose in any case. Minimize the risks can be distributed funds, something to spend on farms, something to invest in cloud mining (and do not be afraid that your hardware will fail), and of course it is simply necessary to hold a part of cryptocurrency for a long period, waiting for a jump in the rate, for a profitable exchange.

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