When talking about cryptocurrencies like Bitcoin and Ethereum, the topic of crypto mining comes up a lot. While most users might have an understanding of what mining means, people who have just dipped their hands in the vast sea called cryptocurrency don't know the ins and outs of crypto mining.
This article will discuss everything related to crypto mining and how does it work. You will also learn the various dangers associated with mining cryptocurrencies.
How Do Cryptocurrencies Work?
A cryptocurrency is a virtual asset used as a mode of payment in online transactions. The blockchain database, which contains ownership records, transaction details, and coin creation information, uses mathematical cryptographic functions to secure the data.
Before talking about crypto mining, one should know how cryptocurrencies like Bitcoin and Ethereum manage transactions and issue new coins.
Centralized vs. Decentralized Systems
Unlike fiat currency, cryptocurrencies are not managed by centralized financial organizations that keep records of the transactions. A centralized system, such as a bank, records the transactions and manages them using a ledger, only accessible by a limited number of other organizations.
On the other hand, a decentralized system doesn't require an organization to manage the transactions. Instead, a "distributed" ledger known as blockchain stores the records. Any user who wishes to be a part of the system can access the ledger and view the transactions.
Where Are the Transactions Stored?
As mentioned above, blockchain is responsible for storing the transactional records associated with cryptocurrencies. Multiple transactions chain together to form blocks, which are then added to the distributed ledger. The blocks also contain additional information such as the header data and hash of the previous block.
Let's understand this using an example. David wants to buy a motorbike from Alice using Bitcoin, which is the cryptocurrency he prefers. He logs in to the cryptocurrency wallet of his choice and completes the transaction.
The transaction record chained with multiple other transactions forms a block, which needs validation before it's added to the blockchain.
What Is Crypto Mining?
Simply put, to ensure the continuous addition of new blocks to the blockchain, miners need to solve complex mathematical "puzzles" to verify a block. Every block contains a nonce value (number only used once) that miners use to generate hashes. Miners can change the value of the nonce to find the solution to the block.
A hash value:
d04b98f48e8f8bcc15c6ae5ac050801cd6dcfd428fb5f9e65c4e16e7807340fa
The end goal is to find a certain nonce whose hash starts with a specific amount of zeroes. As soon as they validate the block by finding the correct nonce, they are rewarded with a fixed amount of the cryptocurrency.
As already mentioned before, cryptocurrency transactions use encryption to secure the blocks of data. Also, these blocks are immutable, which means that once created, no one can modify or tamper with the transaction record. Therefore, it is almost impossible to hack the blockchain and change the transaction records.
Currently, whenever a miner validates a block of bitcoin transactions, they gain a reward of 6.25 bitcoins. Approximately every four years, this reward gets halved, in a process known as Bitcoin halving. The next Bitcoin halving will occur in 2024, which will decrease the reward amount to 3.125 bitcoins.
Crypto mining is responsible for the creation and distribution of a cryptocurrency. Therefore, you can conclude that cryptocurrency is a self-sufficient currency.
Dangers of Crypto Mining
Keeping aside the overall market cap of cryptocurrencies, some dangers associated with cryptocurrencies are also present, which are often neglected by people.
Excessive Power Consumption
Since mining cryptocurrencies is a complicated process, it requires a great deal of energy for running computers that consistently validate the blocks. Most crypto miners run their systems 24/7, which requires enormous amounts of electricity.
With an increase in the price of cryptocurrencies, more and more people join the network, increasing the total energy consumption. According to a University of Cambridge study, bitcoin mining requires more than 120 Terrawatt hours of energy each year, not to mention that the numbers are continuously growing.
Some countries have imposed a ban on mining cryptocurrencies, considering the heavy resources required for the process. Several environmental-friendly cryptocurrencies are also available in the market that claim to be green Bitcoin alternatives.
Cryptojacking
The ever-increasing value of cryptocurrencies has attracted not only new miners but also hackers. Multiple cryptocurrency hacks have been reported in the past decade.
Not only this, cybercriminals are now infecting personal computers to take advantage of their resources to mine cryptocurrencies, also known as cryptojacking. Many hackers install JavaScript-based scripts on computers that mine cryptocurrencies for them in the background.
These hackers don't use 100% of the infected device's resources, as that would immediately reveal their strategy. Instead, they utilize a smaller portion to mine slowly and steadily for a longer period of time.
According to the McAfee blog, 50 out of every 100,000 devices have experienced cryptojacking in one way or another.
Cryptocurrencies Are Volatile
As the price of cryptocurrencies skyrocket, many people get fascinated by the idea of this "get-rich-quick" scheme which often leads them nowhere. Not everyone takes the volatility and risks of cryptocurrencies into consideration and invests more funds than they should.
Also, miners, who spend thousands of dollars every month on electricity bills, don't know that they might be taking a shot in the dark. Since there is no guarantee on the returns, investing in cryptocurrencies can be dangerous if not given proper thought.
Price Hike of GPUs
The crypto trend also led to an increase in the price of GPUs in 2017.
The GTX 1070 Ti, released at a price of $450, was sold at $1100. Also, GTX 1060's 6GB GPU was sold at $500, the original price being $250. Not really a "danger," but the implication is still large enough to consider.
In 2020 and 2021, the demand for mining hardware and the global semiconductor chip shortage pushed prices even higher, with GPUs trading for thousands more than their MSRP.
Can Anyone Start Mining Cryptocurrencies?
Crypto mining is a flexible process that anyone can perform. You can even set up systems to mine cryptocurrencies from your home. Some countries have restrictions on mining, and it is crucial to keep track of the new regulations associated with cryptocurrencies in your country.
Crypto miners need to submit a PoW, or Proof of Work, stating that they have successfully validated the current block. Other miners on the network verify the solution to approve the addition of the block to the blockchain.