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What is cryptocurrency mining

What is cryptocurrency mining

Mining is a crucial part of cryptocurrencies. The mining, known also as a proof-of-work concept, was one of the innovations that cryptocurrencies have brought. To some extent, due to its innovative nature, it is still a reason why there are many myths and unclarity about the ecological impacts of mining as such.

Thus, let us introduce mining and its connection to Bitcoin or blockchain. Moreover, let us debunk some of the Bitcoin mining myths, which are still prevalent in the media, however, are getting ever-more irrelevant in the real world.

What is cryptocurrency mining?

To put it very simply, cryptocurrency mining is a way how the users of cryptocurrency networks pay to the miners for getting their transactions processed and sent. The miners as such are entities that have spent resources on introducing specialized machines into the network. Currently these are mainly ASIC miners (application-specific integrated circuit).

Thanks to these machines, electricity, and connection to the internet, anyone can mine cryptocurrencies such as Bitcoin. While it is still profitable for miners to join the network and earn passive income through transaction fees, the initial crypto investment is usually quite significant due to the few large mining pools and mining farms basically buying all the ASICs for themselves. Thus, it might be more challenging to start with mining than through pools or cloud solutions on the individual level. Nevertheless, anyone can start with mining, which is also one of the reasons why Bitcoin is decentralized.

The profitability of Bitcoin mining, or mining of other cryptocurrencies also depends on which cryptocurrency you are mining or would like to mine. If you want to see which cryptocurrencies are most profitable for mining, here is a crypto mining calculator that can help you with your beginnings in the mining arena.

How does cryptocurrency mining work?

The whole process of mining can be divided into several steps. First, the users of the entire network give a payment order for a transaction. Then they pay a small transaction fee as an incentive for miners to process their transactions. Transactions are grouped together to the blocks and miners, who are paid from transactions fees as well as mining rewards (for instance, 6.25 BTC per mined block for Bitcoin as of now), verify the transaction.

After the transactions are grouped into blocks and verified, miners will solve a “puzzle,” with the winner adding the block into the history of transactions, thus creating a chain of blocks, hence, blockchain. On average a new block is added to the chain every 10 minutes. The blockchain, therefore, consists of all the transactions that have taken place in the history on the given network and are updated almost constantly.

What is halving, and what role does it play in mining?

Mining rewards also, however, show why anyone would want to mine cryptocurrencies. The clear incentive, rather than just pure philanthropy of helping the network, can be seen through the mining rewards. With Bitcoin, the mining reward started at 50 BTC per block. However, approximately every four years, the reward gets halved in the process known as halving.

Bitcoin has seen three halvings so far, which means that the current reward for a mined block is 6.25 BTC (1. Halving 25 BTC, 2. Halving 12.5 BTC, 3. Halving 6.25 BTC). Halving is one of the most fundamental events in the cryptocurrency world. Due to its very predictable schedule, it is also very transparent. Thanks to the transparent schedule, miners know when approximately their mining rewards will be halved and can thus prepare for such an event.

Did you know?

The total circulating supply of Bitcoin is almost 19 million BTC. With 21 million BTC in total, this means that over 90% of all the bitcoins have already been mined.

However, the role of the miners in the network is not to get rich. Yes, the incentive of a reward is bringing people into mining, however, the role of miners is to secure the network and its transactions. They need to prove their work and investment through the mining power that they bring into the network. This metric is known as a hash rate, and it measures the overall “power” of the whole network.

Interestingly enough, the fact that miners have to prove their work is one of the reasons why the consensus algorithm based around mining is called Proof-of-Work. Due to the PoW, the network of many cryptocurrencies is not only safe and decentralized but also provides a great incentive to join. Therefore, miners have one of the most critical roles in the whole ecosystem of cryptocurrencies.

Debunking one of the biggest mining myths – environmental impact

Bitcoin is by far the biggest PoW cryptocurrency that uses the highest amount of any resource for mining. Therefore, when talking about the emissions or electricity consumption connected to mining we will be talking about the emissions or electricity consumption connected to the mining of Bitcoin.

Extremely low CO2 emissions

As we have explained, electricity is needed for mining since machines such as ASICs need to solve difficult “puzzles.” However, with more and more miners joining the network, the mining power of the whole network, also known as a hashrate, is increasing. This means that the overall network is not only more secure, but also that it consumes more electricity.

With this in mind, many critics go after Bitcoin and say that it not only consumes a lot of energy but that it also produces CO2 emissions, which are harmful to the environment. However, the critics rarely cite any relevant statistics or resources that would back this claim. And it is not surprising why.

According to CoinShares, a pioneering digital asset investing group, Bitcoin mining is responsible for about 41 Mt of CO2 emissions in 2021. This was an increase from 36 Mt of CO2 from the previous year. While these numbers might seem high, the contrary is true. With 41 Mt of CO2 emissions a year, Bitcoin mining is responsible for about 0.08% of global annualized carbon emissions.

Negligible electricity consumption

However, there are still critics that would highlight the energy consumption of Bitcoin as such. Well, these critics could not be further from the truth as well. According to Blockcap and their annualized comparative energy consumption, Bitcoin mining consumes around 120 TWh of energy. The overall energy generated in the world is, however, more than 160 000 TWh. Bitcoin mining thus uses less than 0.1% of the whole energy produced.

What is, however, more staggering is the fact that more than 50 000 TWh of energy produced is lost due to inefficiencies connected to the storage or transportation. This means that Bitcoin consumes around 0.25% of the energy that is being wasted each year due to inefficiencies. Thus, if anyone tries to persuade you that Bitcoin mining is not effective, ecological, or wastes way too much energy, you can point out to these research and statistics that prove otherwise.

Energy consumption of Bitcoin.

Energy consumption of Bitcoin. Source: EndTheFud.org

Conclusion

Cryptocurrency mining is a crucial part and innovation that has come from this sector. Thanks to the blockchain and PoW mechanism, miners can earn rewards for their investment into mining equipment which helps with the verification and approval of transactions. This builds a safe and decentralized network.

If this sounds too complicated, do not worry, we have you covered. You do not have to be mining cryptocurrencies to have exposure to this sector. Anyone can buy cryptocurrencies for themselves; however, if you do not know where to start, we are here to help.

Published: 20. April 2022
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