What is Mining (Cryptocurrency) All About?
I don't want to get too deep for the novelist and certainly don't plan to insult the intelligence of our more advanced miners. So in this post I will do this, define mining as a process that generates crypto coins (like bitcoin or ether) using servers or personal computer power. This is the miners’ perspective. The miner will buy powerful hardware (ex. Antminer or SHA256), connect to a network that manages a specific cryptocurrency and run specialized software to perform a lot of computations (which normally requires a lot of electricity). By doing this, the miner processes and validates (PoW) transactions for the network and maintain its integrity (the more computing power for the network, the more difficult it is to corrupt it for a potential attacker). In return, the crypto network pays miners for their services in its own cryptocurrency. Simply put, it’s like you're getting paid to use your computer power to run someone's accounting software. And they also pay your neighbor, and the girl in the next city for their computer power so its spread out among computers to keep it safe. But it means there are a lot of computers running all the time.
Only crypto networks based on a Proof of Work algorithm require mining. For instance Bitcoin uses PoW to reward (or keep the integrity of the network) good actors that solve the calculations in the Bitcoin Blockchain. The easiest way this is accomplished is by using a "nonce" protocol to ensure there are no duplicate transactions to be added to the block. The first to accomplish this is rewarded. In the initial days of bitcoin blockchain, "good actors" were rewarded with 50 bitcoins to solve the math problem. Yet, every 4 years the reward is "halfed" until the 21 million BTC are mined.
The 2 biggest cryptocurrencies by market cap are Bitcoin and Ethereum. As I mentioned, some use a proof of work and others use what's call Proof of Stake (PoS) to operate. PoS does not require mining as described here, so no raw computing power and high electricity consumption is needed. Just like any new technology, the first mover has a distinct advantage in the market yet, someone will find the shortcomings and make a "better mouse trap." Thus, Ethereum was developed and uses the amazing concept of smart contracts to support their market growth. More about that on another post.
Originally, the bitcoin network started from an idea of creating a decentralized payment system, run on thousands or millions of personal computers doing the mining. However, the bitcoin rewards for mining are only paid to miners who solve the calculations the fastest. This resulted in 1) a constant race between miners who want the most powerful hardware to finish computations first and 2) miners joining forces in mining pools, to average out the chances of receiving the mining reward (just like lottery pools).
Thus, ‘casual’ mining on a laptop is no longer profitable and professional mining became a highly specialized business. With the blocks being added every 10 minutes (miners must solve in order to get the reward) you can see how this could be the most profitable endeavor every known. Step aside gold rush, in comes the true digital wealth faucet.
So with all the competition to earn bitcoin wealth, what happens to the miner that can't quite keep up with the massive server farms that put out huge GW of power to capture the most bitcoin rewards per distribution? Mining pools. More specifically, cloud mining. Some people are natural problem solvers. In this case, it was inevitable that the difficulty rate for mining and winning the reward would be very challenging. Therefore, why not allow individuals to pay a fee, invest their own money and share in the reward. There is a large expense to run the servers and pay the fee for mining. So if you offer a cloud mining contract so others can share in the benefit you can win the race, earn 12+ bitcoins and share a 1-2% profit share with a pool of investors. What a deal! That's true passive income. You have to educate yourself on if it is really profitable for you. Find out what is your ROI (return on investment) before you deposit funds.
The miner has come up with a novel way to manage risks and that is cloud mining. In this way the miner insulates himself from loss because a portion of expenses are being paid by the group/pool and this reduces the amount that is taken from his gains. This is how and why cloud mining works. Cloud mining is a service that professional miners offer to the public. Anyone can rent some of their computing capacity for a specific period of time to mine crypto(normally 1-2 year contracts). Omnia-Tech offers unlimited or lifetime mining contracts. The clients pay an agreed fee for the hardware rent and cover the operating costs and can keep whatever coins the hardware was able to generate. This way the miners can pass some or all the risks to the clients and have stable cash flow, to cover their own capital and operating costs.
That is a primer on how the mining process works for mining cryptocurrency. For more information you can visit www.cryptocompare.com or email me at blockchainpro@zoho.com
