Cryptocurrency mining is the process of finding new ‘blocks’ in the blockchain by using crypto mining hardware. When a new block is found, transactions made on the blockchain get recorded in that block. That is how a ledger of all previous transactions is created, and why blockchain is also called an immutable ledger.
Cryptocurrencies are decentralized. No central bank, no central database, and no single authority manage the network. Therefore, the miners are responsible for the verification of the transactions and adding them to the blockchain public ledger. This is known as Proof of Work.
In the rest of this article, we’ll discuss how crypto miners earn money (crypto), as well as how the mining industry has changed over time.
How Crypto Miners Make Money
The mining process awards miners with a transaction fee. When a person sends cryptocurrency, they pay a small transaction fee to have the transaction added to the new block. For every mined block, the miners get a block reward.
Now, you probably have heard of the bitcoin halving that occurred recently. This halving event happens roughly every 4 years. The halving cut the block mining reward of Bitcoin in half—from 12.5 BTC to 6.25 BTC. This block reward split makes sure that the maximum supply of bitcoins ever created will be 21 Million.
Below is an example of a block reward calculation:
The total reward a miner can earn is the combination of the transaction fee and the block reward. As we can see with Bitcoin in block 630,535, the total block reward is 6.87912313 BTC. The block static reward equals 6.25 BTC and the transaction fees make up for the remaining 0.62912313 BTC.
Note: Different cryptocurrencies use different blockchains and therefore have different block rewards (and transaction fees).
To earn block rewards and receive transaction fees, miners perform several actions:
- Verifying and validating new transactions.
- Collecting those transactions and ordering them into a new block.
- Adding the block to the ledger’s chain of blocks (the blockchain).
- Broadcasting the new block to the cryptocurrency node network.
- Prohibiting bad actors and verifying previous blocks.
To have a chance at the mining reward, crypto miners must set up their mining hardware and run the mining software associated with the cryptocurrency. The allocation of the actual block reward, or which miner actually ‘finds the block’, depends on the hashpower of the miner compared to the hashpower of the network. A comparative increase in hashpower from a miner can increase the chances of finding a block.
The Crypto Mining Landscape Today
When Bitcoin first started, anyone with a simple desktop computer was able to mine. As competition grew, faster and more powerful computers were built and used for mining.
Eventually, specialized processing chips called Application Specific Integrated Circuits (ASICs) were developed. An ASIC is a computer chip designed for a specific purpose. ASICs have been designed to be highly efficient at the types of computation required for cryptocurrency mining. An ASIC chip can be 1,000 times more efficient at Bitcoin mining than a chip in a traditional PC.
So, the crypto mining space has become very competitive. To stay profitable, you need to stay ahead of the curve.
Written and researched by Erald Cipi from the EMI R&D department.