Article by David Clark /
Mining is an essential function of most cryptocurrencies. It is the miners that process transactions between the users of a cryptocurrency as well as creating new blocks on the blockchain.
The actual process of mining uses computing power to solve complex mathematical problems on a competitive basis. This process of expending processing power to solve a problem is called a ‘Proof-of-Work’ or POW system.
The system is competitive because the miner who solves the problem first creates the next digital block of the blockchain and receives the ‘Block Reward’. This reward includes a set amount of coins and the fees for all transactions encoded in that block.
The block reward incentive means that mining can be a very profitable business, ensuring that there are always people willing to set up a mining operation in order to both gain profit and to provide the transaction verification service for a cryptocurrency. The current reward for mining a block on the Litecoin blockchain is 25 LTC and the average time for the creation of a new block on the Litecoin blockchain is about two minutes. In US Dollar terms, this means that every two minutes a miner is rewarded with $1,360 worth of LTC.
The Process, Simplified.
Once a set of transactions are verified and ready to be encoded into a block, all miners are effectively in a race to find the solution to a mathematical problem; the next block on the blockchain must have a certain ‘header’ code in order to fit with the previous block which is known as the ‘nonce ’.
The only way to find the correct nonce is to go through random possible iterations of code until the correct one is found. This is the ‘proof-of-work’ aspect of mining and is also known as ‘hashing’. Litecoin uses a cryptographic hashing algorithm known as ‘Scrypt’ in this POW process, where Bitcoin uses SHA256. Both are intensive computing processes and because of this the more processing power that a miner has at their command, the more likely they are to find the answer first.
POW cryptocurrencies are also coded to regularly increase the difficulty of finding new blocks while also reducing the coins included in the block reward. In 2019 the Litecoin reward will reduce from 25 LTC to 12.5 in a process sometimes referred to as ‘halving’.
Who are these Miners?
There are a few categories of miners and as the difficulty of the hashing algorithm increases it has become unusual for users to make a profit from an individual operation. Most home users who do mine are part of a ‘mining pool’ where users pool their processing powers and block rewards are shared depending on how much power a user has donated.
Large-scale commercial mining operations also exist around the world with notable ones being Bitmain in China who also produce computer mining hardware, as well as MGT run by John McAfee, who recently stated that it costs his company $1000 USD per bitcoin mined. Since mining is dependent on electricity it is more cost-effective in places where electricity is cheap or readily available through renewable sources. Cloud mining services also exist where you can rent hardware power for a fee.
When cryptocurrencies first appeared it was possible for users to mine blocks on their home computers using CPU and GPU cycles. Over time there have been engineering developments and now specialised hardware exists known as an “Application Specific Integrated Chip” or “ASIC”. This is a processor that is specifically optimised for one particular application, usually Bitcoin or Litecoin mining software. This kind of hardware is a necessity for miners to be competitive and find blocks before other miners on the network. There are cryptocurrencies that are ‘ASIC-resistant’ such as Ethereum, Monero and Vertcoin which are best mined using high end graphics cards (GPU’s).
How Do I Start Mining?
Each cryptocurrency has specific mining software that anyone can download and run at home although if you wish to mine for profitability then it is important to plan appropriately. Websites like whattomine.com allow users to check what cryptocurrency is most profitable at any particular time depending on their hardware and electricity costs. If you wish to mine Litecoin then you will need to source ASIC hardware and take into account the cost of the electricity in your area. On top of this you should take into account what you believe the value of 1 Litecoin to be.
Using this information you can calculate how long it will take for you to achieve a ‘return-of-investment’ or ROI, which is the point at which the coins you have mined have reached the value of the hardware that you purchased and the electricity costs used in the mining process. If you are only using a small amount of mining hardware then it is definitely advisable to join a pool in order to get the best results.
The Future of Mining
As cryptocurrencies are becoming more popular and in turn more profitable for miners, the amount of electricity used in global mining has increased a great deal, raising concerns about the sustainable nature of these new currencies.
In July 2017 the combined networks of Bitcoin and Ethereum were on track to consume slightly more energy than the entire country of Syria: If classed as a country they would be ranked as the 71st global electricity consumer. If you compare the energy used per Bitcoin transaction to Visa you can also see an extreme difference, and due to the growing difficulty of mining processes it seems that the power consumption of cryptocurrency networks is going to increase exponentially.
Developers are working on alternative systems to POW and there already cryptocurrencies that use a protocol known as ‘Proof-of-Stake’ or POS. In this new POS system users are rewarded with new coins depending on the amount of coins that they hold or ‘stake’ on the network system while verifying transactions. The Ethereum network is moving to a hybrid POW/POS system which will integrate both and will be the largest cryptocurrency to do so.
Litecoin and Bitcoin are both continuing on the POW system for the foreseeable future and the difficulty of the algorithm will continue to increase as the block reward is regularly halved, until a certain point where the mining networks will be searching for the final coin reward.
Even after the last coin is found on these networks the incentives for miners will still exist. By this time the use of cryptocurrencies is expected to be much greater and there will be many more transactions taking place, meaning that there are more transaction fees going to the miners who verify them. The blockchain will continue to grow with the only exception being that the block reward will entirely be made up of these transaction fees.
The estimated time for the final Bitcoin to be discovered is 2140 and the last Litecoin could be around 2155 so there is plenty of time to still get involved.
Writer, educator, enthusiast