What is Mining and Why Mining Exists
Mining is earning cryptocurrency as a reward for solving cryptographic equations through the use of computers. Mining exists for the security and confirmation of cryptocurrency transactions. Garrick Hilemen, a Bitcoin expert says, “The more computing power that’s actually mining bitcoins, the more secure the network is from [a] cyber attack … [Miners] actually verify that [the] transaction was legitimate before it is added to the blockchain” (BBC Newsnight).
How Ethereum Mining Works
A user writes and agrees on a transaction. Then the user announces the transaction call to the entire Ethereum network (Ethereum Website). After the announcement, each node in Ethereum network adds the request to the mempool where all the transactions that are not signed to a blockchain are waiting. Then the mining nodes pile up multiple transactions into a block. There, each transaction is verified, and the code of request is implemented by a mining node which changes the status of the local copy of the EVM (Ethereum Virtual Machine, blockchain based Ethereum platform).
Once all transaction requests in the block have been verified and executed on the local EVM copy, the mining nodes continue Proof-of-Work accreditation for a potential block. A miner notifies the network about the completed block along with the accreditation and the new EVM status. After that other nodes verify the accreditation and run all the transactions in the block. In addition, other nodes verify the checksum of the new EVM status compared to the checksum of the status claimed by the miner’s block.
Once everything is verified these nodes add this block to their blockchain. The incomplete transactions are removed from the local mempool by each node. When new nodes join the network, the network downloads all the blocks. They initialize a local EVM copy and verify all the transactions in all the blocks before their local EVM copy.
How to Mine Ethereum
In order to mine Ethereum, special computer hardware Graphical Processing Unit (GPU) is needed. It is important to consider the cost of the actual hardware, power consumption, and hash rate when mining (Coin Rivet). The hash rate is the speed a mining device operates at. The higher the hash rate, the greater the chance of finding the answer to the cryptographic questions and receiving a reward.
Individuals could mine solo but due to the considerable equipment and electricity cost most mining is done by mining companies (Investopedia). According to a study by a Citigroup’s analyst Christopher Chapman, Bitcoin mining will be profitable at a price ranging from USD 300,000 to USD 1,500,000 per 1 BTC by the year of 2022 (Totalcoin).
If an individual joins a mining pool, work to each pool member is assigned by two ways (Investopedia). A first method is through assigning a work unit comprised of a range of nonce (the number that blockchain miners are computing for). A second method is that pool members are allowed to choose as much work as they like without the assignment from the pool.
After purchasing hardware, you need to download the required software for your graphics card (Coin Rivet). Then you need to download Ethereum blockchain and connect your node to the network. Once the node is setup, the node is connected to all the other nodes in Ethereum network.
Before starting to mine, you can test your mining capabilities on your private network. You can install Geth or similar implementation of the Ethereum protocol and validate transactions (Coin Rivet).
Once you have tested you can join a mining pool which is more profitable than mining on your own. All the miners share the profit from mining according to their contribution to the mining.
In a pool there are two kinds of shares: accepted and rejected. Accepted shares mean that the member in the pool contributed to solving the cryptographic questions and this is rewarded. On the other hand, rejected shares mean that the work done by a member did not contribute to find the answer. These shares are not rewarded (Investopedia).
For the accepted shares, a miner in the pool can be rewarded by the following: Pay-per-share (PPS), Proportional (PROP), Shared Maximum Pay Per Share (SMPPS), and Equalized Shared Maximum Pay Per Share (ESMPPS).
- Pay Per Share (PPS) is reward being paid out instantly based on accepted shares from the pool member’s contribution. The pool member is allowed to take out the reward from the pool’s existing balance.
- Proportional (PROP) is reward being paid based on the proportion of the member’s shares compared to total shares in the pool at the end of each mining session.
- Shared Maximum Pay Per Share (SMPPS) is reward being paid out similar to PPS but the maximum amount for reward is within what the pool has earned.
- Equalized Shared Maximum Pay Per Share (ESMPPS) is reward being paid out similar to SMPPS but the reward is distributed equally among all miners in the mining pool.
Prior to joining a mining pool, a miner should consider how reward is being paid to the miners and if there is a fee to join the pool (usually 1-3%) (Investopedia).
After the node is connected, you need to install a mining software called Ethminer. Ethminer acts in between your hardware and mining pool (Coin Rivet). Ethminer is an Ethash GPU mining worker so you can mine the coin that relies on an Ethash proof of work including Ethereum, Ethereum classic, Metaverse, Musicoin, Ellaism, Pearl, Expanse and others.
How Long Does It Take to Mine 1 Ethereum
As I am writing this article (April 30th, 2021, 23:00 EST), it would take 83.7 days to mine 1 Ethereum (Ethereum mining calculator). This is based on Ethereum mining hashrate of 500.00 MH/s consuming 950.00 watts of power at $0.10 per kWh, a block reward of 2 ETH, and Ethereum difficulty of 7,229,459,198,067,599.00. The days to mine 1 Ethereum is calculated without taking into consideration for difficulty increases or decreases and block reward increases or decreases (halvening).
Based on the aforementioned data, 0.01195110 Ethereum can be mined per day. After deducting mining power costs and mining fees, the final Ethereum mining profit is $USD 31.56. Although mining Ethereum is profitable at the present time, mining profitability can change quickly (Ethereum mining calculator). Another thing to consider is that Ethereum network is planning to move to Proof-of-stake (PoS), away from Proof-of-work (PoW) by the end of 2022 (BeInCrypto). Due to this implementation mining will not be required, but until then mining will remain profitable.
Mining and Proof of Stake
For Proof of Work, miners need to solve cryptographic problems to receive rewards. The downside for Proof of Work is that the transaction takes a long time. When a transaction has been announced to the network, miners need to confirm before it being included in a block. One confirmation means a transaction has been included in a mined block. For Ethereum, the estimated time for a transaction to be included is 5 minutes and 20 confirmations are needed.
Unlike Proof of Work, the miner who is going to create a next block is based on how much they have or staked for Proof of Stake. While the miners who contribute to verify the transactions are rewarded for the Proof of Work system for each transaction of Ethereum, the miners who contribute to Proof of Stake are rewarded with transaction fee.
When a miner puts cryptocurrency into a specific wallet, and the wallet locks up the coins. These coins are used to stake the network. You need minimum coins to start staking. Once you have the minimum coins to start staking, the chances of you winning the coin depends on the percentage of coins you hold.
For instance, imaging that there are 1,000 coins in the network in a Proof of Stake system and you staked 100 coins. This means that you have 10% of the total coins in the network. You have a 10% chance of winning every reward.
Proof of Work has a risk of the governance being more centralized when there is a constant arms race. For example, Chinese Bitcoin mining pools control large chunks of hash rate that power Bitcoin. According to a study in 2019 there was about 65% of the hash rate within China itself (Coin Shares Research). This is due to low hydroelectricity costs (mainly Sichuan areas) and due to connections between hardware manufacturers and mining pools based in China. This centralization is against cryptocurrency as a means for decentralized finance. Nevertheless, Proof of Stake prevents organizations or individuals to dominate the cryptocurrency network. The miners who contribute to the network are rewarded proportionately based on how much they have in the locked wallet.
Due to the fact the miners need to solve complex cryptographic questions to be rewarded, Proof of Work requires large amount of electricity. Proof of Work slows down the speed of transaction verification. However, Proof of Stake does not require the miners to solve complex problems so significantly less electricity is needed. This also expedites the transaction verification.
51% attack means a network can be thrashed by a group of miners who control more than 50% of the mining hash rate or computing power. If an attacker has at least 51% of the hash power of the network, they can commit double spending. If an attacker has this much power, they could reverse a transaction and create a separate, private blockchain.
In a Proof of Work system, hashing power that is obtained from hardware such as GPU is used to secure the network. The attacker does not need to own the hashing power as it can be rented for a short time. Crypto51 shows the hash rate of popular cryptocurrency, one hour attack cost, and renting that hash power through a service (Crypto51). As of May 3rd, 2021, 14:00 EST an hour attack cost for Ethereum is $USD 418,438. An hour is enough to have a successful attack as elongated hashing power is not needed (Qtum).
In Proof of Stake system, native tokens of the blockchain are needed to secure the network. You need to have 51% of the network’s total tokens and this is more difficult to achieve than renting the hashing power for a short span of time (Qtum). As attacker starts to purchase all the coins in the network to achieve 51%, the price for existing coins will start to rise. This makes the cost of the attack astronomical.
In a Proof of Work system, if 51% attack happens the blockchain will retract and make the attack “erasable” (Qtum). This does not prevent the attackers from reattacking with the hashing power. On the other hand, in a Proof of Stake system the attacker’s address would be blacklisted and those coins would be “cancelled” after retraction. The attackers need to purchase the coins again to attempt an attack.
The downside of Proof of Stake is that the stakeholders may have malicious intentions. Without the validation process, the stakeholder who holds most of the coins may have bad intentions and vote for both forks of the blockchain. The individuals who have less coins have voted for a fork, which must be an ideal case (Karachain).
The founders of a blockchain may have most of the coins and control how the coin is managed in projects with commercial interests. Blockchain is made with an intention of decentralized finance (DeFi) and the control over blockchain may defeat the purpose of DeFi.
Ethereum Mining and Discussions
Cryptojacking is using someone else’s computer to mine cryptocurrency without permission. This is done through phishing-like schemes. When an individual clicks on a link that looks like a safe email, the cryptomining script is placed on the individual’s computer. The victim uses the script to mine on the user’s computer in the background.
Another way of cryptojacking is when an individual visits a tainted website or a web advertisement pops up in a website with injected script. As the script is automatically implemented, the hacker controls the individual’s computer through receiving results from the code that runs mathematical problems in the background.
According to 2021 Cyberthreat Report (Sonicwall accessed on May 5th, 2021, 11:00 EST), there is USD 81.9 million on cryptojacking attacks. In May 2020, European supercomputers programmed to search for a vaccine of COVID-19 were hijacked to mine cryptocurrency (Coindesk).
Another problem with cryptocurrency mining is regarding mining hardware. The hardware for Bitcoin mining is dominated by ASIC producers but Ethereum has been dominated by GPU-mining. Due to most press coverage being on the ASIC manufacturing industry, more will be covered on the topic. According to 3rd global cryptoasset benchmarking study (University of Cambridge), one in two (52%) ASICs produced is distributed to Chinese hashers in 2019 whereas it is only 9% that is distributed in Canada. According to business and institutional clients of cryptocurrency by region (University of Cambridge), Asia Pacific companies serve miners (41%) due to high level of mining activities in the region, especially in China. This is comparable to 25% that serve miners in North America. Miners in China used their services to liquidate their coin for national fiat currencies and cover fiat-based expenditures (University of Cambridge).
Regional breakdown of energy sources reveal that Asia Pacific hashers equally rely on coal and hydropower (both 65%). Coal-based mining is prominent in Chinese provinces such as Xinjiang and Inner Mongolia, and in Kazakhstan. Hydroelectric energy is mostly generated in South-Western regions of China (Sichuan and Yunnan). Although the Chinese government takes advantage of the rainy season to mine in an eco-friendly way by developing massive hydropower capacity, the government also encourages public investments in the construction of mega coal mines (University of Cambridge). The coal mine plants in Australia’s east coast reopened for blockchain mining in order to provide cheap power (Cnet).
Another issue is that secondary market trades may help resellers to sustain sales volume. From 2017 to 2018, the year-on-year growth of sales volumes for both manufacturers and resellers (including sale of second-hand machines) were high at 172% and 162% each. From 2018 to 2019, the year-on-year growth of sales volume for resellers was 148%, where that of manufacturers was at -26% (University of Cambridge). Why are only the resellers making profits? As aforementioned, the amount of money that you can make from mining decreases with time as the mining machines will be outdated quickly. It could be unethical if resellers sell their mining machines at a high cost to your everyday people under the slogan saying that you could make a certain amount a day for the upcoming years. “You’re literally being paid to burn resources…plus most of the miners will attempt to sell on their GPUs as close to the end of their working life as possible” (Overclockers).
About Author: Jiwon Angela Son is a writer at VirgoCX. She is a marketing professional who has sales, marketing, and advertising experience in innovation-driven industries for 12 years. Prior to working at VirgoCX, she was a marketer at global pharmaceutical companies such as Bristol Myers Squibb and Actelion Pharmaceuticals. Twitter
Disclaimer: No Investment Advice The contents of this article are for informational purposes only and are not intended as, and shall not be understood or construed as, investment advice, financial advice or trading advice. There are substantial risks associated with the trading of cryptocurrencies and you should consult with a licensed financial advisor prior to making any trading or investment decisions. Content Not Warranted The contents of this article are provided “as is” and without warranties of any kind. You bear all risks associated with the use of the content provided including without limitation, any reliance on the accuracy, completeness or usefulness of any content available within this article.
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