Mining

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Mining is the process by which users in a distributed ledger network attempt to earn new digital tokens by lending their computing power to process transactions involving cryptocurrency between users. This is also the mechanism by which new digital tokens are released systematically into circulation.

Overview

The process may vary from token to token, but many people use similar mining methods to the original bitcoin model, which is based on a function called proof-of-work. In this model, mining cryptocurrency is the process by which users, or nodes within a blockchain network, generate new digital tokens by calculating the validity of a cryptocurrency transaction, which involves using enormous amounts of computing power to solve a cryptographic problem by trial and error. Once the problem is solved, another "block," or cluster of data, is added to the blockchain. Once it's there, it can be viewed by anyone with an Internet connection.[1] As an incentive for contributing to the overall computational power of the blockchain network by verifying transactions, users are sometimes rewarded with cryptocurrency "tokens" or "coins," such as a bitcoin, (if bitcoin's blockchain is the one the user was mining for). If they were mining for Ethereum, they would get Ethereum's token, Ether. In the case of most cryptocurrencies, there are a finite number of these coins that can exist, and as time passes they become harder to mine. This ensures that at any given time, everyone in the network knows exactly how many units of a cryptocurrency exist. It also creates scarcity, which contributes to the coin's value. The term "mining" is used because, similar to gold mining, cryptocurrency such as bitcoin must be discovered.[2]

Becoming a miner

Anyone with a sufficiently powerful computer can become a cryptocurrency miner. To do so, you need to download the mining software that pertains to the cryptocurrency you wish to mine, install it on a computer, connect to the Internet, and let it run. As it is running, your computer (or "node") will help the blockchain network verify transactions by attempting to decipher a hash relevant to a specific transaction made on the blockchain.[3][4]

Currently, it is extremely difficult to mine bitcoin with a standard desktop computer - even one with exceptional hardware. Most successful miners use specialized PCs like Avalon ASICs.[5]

Verifying transactions

Verifying transactions and recording them on the blockchain is no small task, requiring a significant amount of time and computing power. To verify a transaction for bitcoin, for example, a node must find a number that, when combined with the data in the block and passed through a hash function (a cryptographic function relating to blockchain data), produces a result that is within a certain range. This creates a sort of contest between bitcoin miners to see who can guess a correct hash first. The bitcoin network increases the difficulty of this task in proportion to how many miners there are in the network, in order to keep the time between blocks created in the blockchain constant at around 10 minutes or so.[6][7] (Certain mechanisms, such as the Lightning Network, have been developed to drastically reduce these transaction times.[8]

If your node is the first of many to "solve" this problem, you may be rewarded with bitcoins you can keep, provided you have mined at least 1 MB of data (as of January 29th, 2018, the reward rate was 12.5 bitcoins).[9] If you do not meet these conditions, you will not be rewarded with anything.[10][11] Miners are also paid in user fees. They are thus incentivized to give priority to users who pay fees for their service.[12]

Although it involves using mathematical functions to produce exact results, the variability of the functions' products is considerable. There's no way of knowing which number will work because two consecutive integers will usually give wildly varying results. This necessitates computational effort on a level that is mathematically and physically staggering; computers capable of mining cryptocurrency must have, at a bare minimum, around 145 GB of free storage space.[13] This has dramatically increased demand for high-performance personal computers, leading to a significant increase in cost as suppliers scrambled to meet it. This has led many to consider international markets for purchasing crypto-mining hardware.[14] The demand for mining-ready computers has become so significant, in fact, it has begun affecting other groups that rely on high-performance computer hardware, including PC gamers and astronomers.[15]

Bitcoin mining is dominated by the use of miners that use ASIC miners. When BTC.com, a bitcoin mining pool, reported in September 2019 that the two week bitcoin hashing rate had reached record levels, the surge was attributed to the introduction of a half-a-million new models of ASIC miners over the preceding summer months. The introduction of new models from major ASIC manufacturers including Bitmain,Canaan, InnoSilicon and MicroBT coincided with the abundance of hydroelectricity based on the summer rains in southeastern China.[16]

Cryptocurrency Mining Simplified

Four people decide to play a game: Person A picks a random number between one and twenty, and Person X, Person Y, and Person Z all try to guess what number Person A is thinking of. To win, their guesses don't have to be exact. They simply have to be the first player to guess a number less than or equal to Person A's number.

In this analogy, Person A represents someone making a cryptocurrency transaction, while Persons X, Y, and Z represent nodes attempting to verify this transaction. In order to verify, they must guess what number Person A was thinking of.

Person A chose 19.

  • 1st place - Person Y chose 12.
  • 2nd place - Person X chose 20.
  • 3rd place - Person Z chose 15.

Although Person X was closest, they do not win because they went over Person A's number.

Although person Z was the next closest without exceeding the value of Person A's number, they do not win because they guessed their number last.

Person Y wins, because they were the first to produce a number equal to or less than Person A's number. As long as they have played at least 5 of these games in their life, they are awarded a shiny gold coin, which they can trade with other players, or cash in for fiat currency.[17]

Mining Profitability

In early 2018, cryptocurrency mining experienced a boom. Later that year, the cryptocurrency market experienced a significant decrease in market cap and prices for all cryptocurrencies. This, combined with the rapidly-decreasing supply of bitcoins that had not yet been mined caused mining to lost much of its profitability. This caused many mining operations to deactivate a large number of mining rigs, close down some of their mining "farms," or even declare bankruptcy.[18] A cryptocurrency farming operation is one where the farm rents out space and, against the payment of usually fixed fees, provides both the electricity and other services for miners to operate their servers to produce cryptocurrency.

According to analysts from JPMorgan Chase & Co., by Q4 of 2018, the production costs of mining a single bitcoin for Western companies were over $4000, while bitcoin market prices were floating around $3600 with relative stability. The costs of mining in China were estimated to be significantly lower, at $2400 per bitcoin, which contributed significantly to the persistence of the Chinese cryptocurrency mining industry.[19] By 2019, the process of mining bitcoin became more difficult than ever; the required computing power for mining jumped by seven percent from its previous high to a new high of about 60.77 quintillion hashes per second, or 60.77 (EH/s).[20]

Dorm Room Mining

The technology firm Cisco released a report in March 2019 saying that the second-largest sector in the cryptocurrency mining industry is independent miners on college campuses. The report said that 22 percent of all cryptocurrency mining comes from college campuses. College campuses provide free electricity to students living on campus, which greatly mitigates the cost of mining. The largest sector, according to the report, was the energy and utility sector. The third biggest was the "Other" category, followed by Healthcare.[21][22]

Environmental Impact and Energy Consumption

A study published by Christian Stoll, an energy researcher at the Technical University of Munich, found that bitcoin mining contributes a significant amount of greenhouse gases per year - approximately 22 megatons. For comparison, that's comparable to the annual emissions of Jordan, Sri Lanka, or the Kansas City metro area. The study looked at major mining pools around the world - especially in the U.S. and China - and determined the extent to which the electricity used by those pools was created by burning fossil fuels such as coal. The study mainly focused on bitcoin, but said that when the emissions caused by mining cryptocurrencies other than bitcoin are taken into account, this figure doubles.[23][24]

Iran

In 2019, Iranian citizens began using cryptocurrencies in order to bypass the sanctions placed on the country by the United States, which limited their access to fiat currency, despite Iran's central bank banning their use the previous year.

In June 2019, Iranian state media reported that bitcoin mining had led to a surge in energy consumption for the country, forcing officials to cut power to mining farms. Deputy minister for electricity and energy Homayoun Haeri said that this was partly due to miners taking advantage of the nation's subsidized power rates by mining from public buildings like mosques, which are entitled to free electricity by Iranian law. Haeri said that bitcoin miners were using the equivalent of the annual consumption of 24 buildings in Tehran. Iran's energy ministry began considering issuing tariffs on electricity to offset the costs of mining as a result.[25][26]

Siberia

CoinDesk reported in September 2019 that Soviet-era industrial facilities in Siberia were being re-purposed into mining farms. Siberia's wealth of hydro-electric power resources and its naturally cold climate translate into low power costs for miners. According to the article, while cryptocurrency mining is popular throughout Russia, the Siberian city of Bratsk has attracted several farming operations, due to its weather and access to cheap hydroelectric power.[27]

References

  1. How Bitcoin Mining Works. Coindesk.
  2. Mining 101: An Introduction To Cryptocurrency Mining. Forbes.
  3. How Bitcoin Mining Works. Coindesk.
  4. Mining 101: An Introduction To Cryptocurrency Mining. Forbes.
  5. Mining 101: An Introduction To Cryptocurrency Mining. Forbes.
  6. Explain a Bitcoin hash to Me Like I’m Five…. 99bitcoins.com.
  7. How bitcoin mining works. Coindesk.
  8. What Is Lightning Network And How It Works. Cointelegraph.
  9. How Bitcoin Mining Works. Coindesk.
  10. How Bitcoin Mining Works. Coindesk.
  11. Mining 101: An Introduction To Cryptocurrency Mining. Forbes.
  12. [http://www.econinfosec.org/archive/weis2013/papers/KrollDaveyFeltenWEIS2013.pdf The Economics of Bitcoin Mining, or Bitcoin in the Presence of Adversaries]. Princeton University.
  13. How Bitcoin Mining Works. Coindesk.
  14. Cryptocurrency Miners Flock to Asia’s Malls for Cheap Crypto-Mining Rigs. CNN.
  15. How cryptocurrency mining is hurting astronomers. The Verge.
  16. Bitcoin Mining Power Hits New High as Half a Million New ASICs Go Online. CoinDesk.
  17. Mining 101: An Introduction To Cryptocurrency Mining. Forbes.
  18. Crypto miners fight for survival as market turmoil continues. Financial Times.
  19. Bitcoin Is Worth Less Than the Cost to Mine It, JPMorgan Says. Bloomberg.
  20. It’s Now Harder to Mine Bitcoin Than Ever. Coindesk.
  21. College campuses are the second-largest mining sector, research shows. The Block.
  22. College Kids Are Using Campus Electricity to Mine Crypto. PC Mag.
  23. Bitcoin mining generates as much CO2 as a small country, but it could be remedied, study estimates. The Block.
  24. Bitcoin's Climate Impact is Global. The Cures are Local.. Wired.
  25. Bitcoin Mining Puts Pressure on Iran's Power Grids. Bloomberg.
  26. Iranian Authorities Shut Down Two Crypto Mining Farms Amid Power Spike. Coindesk.
  27. Bitcoin Mining Farms Are Flourishing on the Ruins of Soviet Industry in Siberia. CoinDesk.