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With the dawn of cryptocurrencies and the creation of Bitcoin, crypto mining became the new gold rush. Crypto miners compete to validate transactions and maintain the blockchain and earn rewards in the native coin.
Over the last few years, however, crypto mining has faced heavy criticism – with millions of computers working non-stop, mining activity on a single blockchain can consume as much energy as a whole country.
And now, with new energy-efficient consensus mechanisms being implemented, the overall bear market, rewards being halved, and increasing energy costs, the incentives for crypto mining are less motivating.
But Bitcoin, the most popular cryptocurrency will likely continue to be mined for the next century so is crypto mining still profitable?
In the rest of this piece, we discuss how crypto mining works, its challenges, how the Proof of Stake consensus is replacing mining, and what the future holds for the crypto gold rush, especially in the new year!
Crypto mining is the way transactions are verified and added to a blockchain, and also how new coins are added into circulation. To do this, crypto miners (essentially geeks with powerful computers) compete to be the first to solve a complex math problem generated by the blockchain algorithm.
The first miner to get the answer is then given access to the core of the blockchain and works as an auditor to verify new transactions and then add them to the block. Once they are done, they receive a reward in the native cryptocurrency for their work.
That leads us to the concept of…
The consensus mechanism of a blockchain is simply the set of protocols and conditions necessary for the nodes (fancy name for participants) in a network to come to an agreement on the validity and order of transactions to be added to that network.
There are two main consensus mechanisms – Proof of Work (PoW) and Proof of Stake (PoS).
The Proof of Work consensus mechanism works through the process of… you guessed it… “mining!”
The Proof of Stake consensus mechanism, on the other hand, was created to solve some of the issues facing Proof of Work, by eliminating the need to solve the math problem and the heavy computing power.
Crypto mining through Proof of Work, has been the fundamental infrastructure behind most cryptocurrencies but also has its challenges. Here are some pros and cons of crypto mining:
Many miners with even more computers compete to be the ones to validate transactions on the blockchain. This makes crypto mining incredibly secure because it’s extremely difficult to tamper with the block data, and there’s no incentive for doing so as the other nodes will reject a shady transaction. It’s better to just do right and earn rewards than try to cheat the system when it very likely won’t work and you’ll lose anyway.
With so many mining hubs distributed worldwide, the Proof of Work mechanism makes a blockchain truly decentralized. Winning miners are more likely to be at random and a bias toward a particular node(s) is less.
The most powerful incentive for crypto mining is the rewards in the native cryptocurrency. Winning Bitcoin miners, for example, are paid 6.25 BTC (worth ~$104,188 at the time of this writing) for their work.
Mining crypto consumes a lot of energy. According to studies, mining just 1 Bitcoin uses the same amount of energy that will power an average U.S household for 50 days, and the whole Bitcoin network consumes as much power as all of Thailand!
The main culprit is the huge number of mining computers working non-stop to validate the transactions on the blockchain.
Just a decade ago, your average PC could compete fairly in a mining pool but as more pocket-heavy enterprises became involved, the difficulty levels have soared.
Today, to even stand a chance as a miner, you’d need specialised equipment like Graphic Processing Units or Application-Specific Integrated Circuit (ASIC) miners, which are very expensive.
There is also no guarantee of profit or you ever winning the hash contest, and the odds are worse especially if you are a solo miner. You are competing against other mining companies with hundreds of thousands of computers running on the latest technology.
That’s why most solo miners join mining pools, where they combine their mining power to increase their chances of winning the rights to validate blocks and then share the rewards.
Proof of Stake (PoS) is a relatively old consensus mechanism concept but was only successfully implemented into cryptocurrencies in 2012.
Now, many new blockchain projects are being built using the Proof of Stake mechanism while older projects are switching to PoS from Proof of Work. The main purpose of Proof of Stake is to solve the issues facing Proof of Work, mainly, energy consumption.
Proof of Stake eliminates the need to solve a math problem like in crypto mining. Instead, validators just stake a specified amount in the native cryptocurrency, and then an algorithm picks a validator at random. Validators with more experience are more likely to be picked.
The most talked about PoW to PoS switch was the Ethereum Merge that happened in September 2022. The Ethereum network, arguably the most popular just after Bitcoin, merged its original PoW Ethereum mainnet blockchain with its new PoS Beacon Chain.
Ethereum claims that the merge has reduced the blockchain’s energy consumption by 99.9% and this has reinforced PoS as the answer to the concerns surrounding the sustainability of blockchain and crypto raised by mining.
With the challenges and scrutiny facing crypto mining, more blockchain projects are leaving the genesis PoW consensus mechanism for the more efficient PoS mechanism.
However, crypto mining still has its place as the most popular cryptocurrency, Bitcoin, and some other popular coins, will still continue to be mined. As a solo miner, your best shot at being profitable is to join a mining pool – you’ll have more power but of course, a smaller cut of the rewards.
And even though mining equipment is still expensive, the average price of a mining rig has fallen significantly in recent years. More crypto enthusiasts are becoming miners but that also means more competition.
In the end, mining pools that consistently win block validation rights can provide consistent profit for participating miners, and even more money when the crypto market is strongly bullish.
Only 21 million Bitcoins in total will be issued into circulation. At the time of this writing, almost 20 million BTC have been mined.
Every four years, the mining rewards are cut in half to reduce inflation and drive the price of the cryptocurrency up.
Considering the average mining rate and halving, all 21 million Bitcoins will be mined in the year 2140 and mining rewards will end.
In a nutshell, mining cryptocurrency is a great way to earn but it’s also very expensive and technical.
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