Shortly after Bitcoin was invented, everyone with the regular computer could mine Bitcoin. However, the rise in the prices of different cryptocurrencies and the increased adoption of these assets as investment instruments produced greater competition in the crypto mining area.
Cryptocurrency mining is the process whereby miners generate new cryptocurrency assets. Understanding how mining works will help you understand the underlying blockchain technology used to build these coins. Most cryptocurrencies are mined with special mining gear used to solve complex hash functions to verify transactions on the blockchain and create new coins.
One of the key concepts connected to crypto mining is hashing power. The greater the hashing power of the mining hardware, the greater the chances of solving the problem. This crucial measure will be explored in our article today, together with the mining process itself, its efficiency, and profitability. So, let’s get started!
What Is Blockchain?
As implied by the name, a blockchain is a chain of blocks that contains information. The technology was initially developed in 1991 as a computational solution for time-stamping digital documents while protecting them from being backdated or tampered with. Back then, blockchain was irrelevant to cryptocurrency. The technology didn’t catch on until Satoshi Nakamoto adopted it in 2009 to create the first digital cryptocurrency, Bitcoin (BTC).
In cryptocurrency terms, blockchain is a distributed ledger or log that keeps the information of all of the transactions within the network. It is entirely open to anyone; however, it is virtually impossible to alter it once some data has been recorded on it as the nodes safeguard the encrypted data by continuously comparing their copies.
There are different types of blockchain consensus mechanisms that keep the network secure, such as Proof of Work (PoW), Proof of Stake (PoS), Proof of Capacity (PoC), etc. Depending on the type of consensus mechanism, the blocks that make up the blockchain carry different information. For instance, the blocks of a PoW-based coin contain the hash of the current block, the hash of the previous block, and the encrypted output of the transactions validated during the creation of that specific block.
What Is a Hash?
In general terms, a hash is a mathematical function that takes an input and spits an output. The output is called the hash value or the digest. There are three significant properties of hash functions that make them very useful in cryptocurrency mining.
The first one requires hash functions to produce an output with a constant length independent of the size of the input you feed it with. We feed the hash function with enormous numbers in the mining process and get a fixed-sized small number in return. This is the way the information becomes encrypted.
Secondly, even the slightest change in the input produces an entirely different output. You can think of a hash as a fingerprint. The blockchain blocks and their contents have specific hashes that allow nodes, or miners, to easily detect a slight change in the blockchain, protecting the information in the blockchain ledger from being altered.
Thirdly, the hash function works only one way. You can get the output from the input, but you can’t get the input from the output. This is called asymmetric encryption, and it’s a crucial part of the mining process.
Is Cryptocurrency Mining Profitable?
When Nakamoto mined the Genesis block in 2009, miners could mine cryptocurrency with a general-purpose device. In fact, most of the mining was done on CPUs back then. Because the first one to come up with a valid hash gets to collect a small block price, getting a faster device puts you in an advantageous position. But like in any free-market economy, the opportunity for profit fuels the competition over. In Bitcoin’s case, to have processing power is to be able to generate more and more profit.
Nakamoto foresaw this problem coming. In December 2009, less than a year after the invention of Bitcoin, he posted the following message on bitcointalk.com:
The average total coins generated across the network per day stays the same. Faster machines just get a larger share than slower machines. If everyone bought faster machines, they wouldn’t get more coins than before. We should have a gentleman’s agreement to postpone the GPU arms race as long as we can for the network. It’s much easier to get new users up to speed if they don’t have to worry about GPU drivers and compatibility.
As Nakamoto anticipated, the mining industry became dominated by advanced mining rigs as time went by. Investing in expensive mining gears has been and still is profitable, thanks to the increasing prices on the crypto market. However, unlike any other industry, the competition in cryptocurrency mining doesn’t create more value. On the contrary, it only makes mining cryptocurrencies harder.
The Case for Advanced Mining Technology
When Bitcoin prices skyrocketed, Bitcoin mining became a profitable business model, and big players entered the game with high-capacity mining rigs. The first significant innovation in the mining industry was GPU and FPGA mining in 2010. GPU devices are graphics cards that were initially designed to process high-intensity video graphics parallelly. It is also possible to reprogram them to compute other intense mathematical problems.
After repurposed GPUs entered the game in 2013, Canaan Creative raised the bar even higher by releasing the first set of Application-Specific Integrated Circuits (ASICs), hardware designed specifically for mining cryptocurrency. An ASIC miner comes predesigned and optimised to compute specifically cryptographic hash functions and is extremely more efficient than its predecessor mining rigs.
As a result of the advancement of ASIC mining and the centralisation in the field, cryptocurrency mining has become time-consuming, expensive, and only seldom profitable. With a general-purpose device, you might barely afford the power costs for mining if you don’t turn a loss. Apart from the power consumption, you should consider the depreciation of your hardware, as mining is a very cumbersome task.
Still, mining continues to be alluring for many cryptocurrency investors since miners are paid with crypto tokens for their efforts, just like mining precious materials from the earth. And with the help of mining pools and multi-currency mining, there is still a chance to make some profit in mining cryptocurrencies.
What Are Mining Pools?
Mining pools are collaborative mining services where small miners combine their hashing power and share the prizes according to the effort they put in the process. Today, it is virtually impossible to mine cryptocurrencies as a solo miner without the help of mining pools.
What Is Multi-Currency Mining?
Multi-currency mining is a method to increase the efficiency of mining cryptocurrencies. Because the cryptocurrency market is subject to high volatility, the profitability of a given coin may differ drastically from month to month. For this reason, being flexible in terms of the coin you are mining can be extremely beneficial. To compare coins and decide what to mine, you can check out whattomine, which also informs you about the hash power you need in order to mine the coin of your choice.
What Is Hash Power?
The hash power measures the miner’s performance on hash functions. Since the first miner to solve the puzzle is the one to get the block reward, speed is the most critical part of the mining process.
There are different hash functions that different coins use. For this reason, we can talk about the hashing power of a device on a specific algorithm. For example, Bitcoin (BTC) uses an algorithm called SHA256, whereas Ethereum (ETH) uses KECCAK-256, and Litecoin (LTC) uses scrypt. As the algorithm changes, the hash rate of a device changes as well.
The hashing power is the number of attempts it takes per second to solve the puzzle and get the block reward, which is why we measure it in hashes per second. Here is a list of the units that are used:
1 kH/s: Kilo hashes, one thousand hashes per second
1 MH/s: Mega hashes, one million hashes per second
1 GH/s: Giga hashes, one billion hashes per second
1 TH/s: Tera hashes, one trillion hashes per second
1 PH/s: Peta hashes, one quadrillion hashes per second
1 EH/s: Exa hashes, one quintillion hashes per second
1 ZH/s: Zett hashes, one sextillion hashes per second
How to Calculate Your Hashing Power?
The best way to figure out the hashing power of your mining equipment is to experiment with it. However, if you want to know your hashing power before you start setting up a miner, you can check your processor’s power on special hash power comparison charts. This could give you a general idea of your comparative advantage in the mining business. However, your device’s stability, your internet connection, the server’s stability, and the fine-tuning of your mining software are all factors that affect your hashing power.
Another practical way to calculate your hashing power is to use Nicehash’s profitability calculator. Nicehash is a hash power broker that allows you to rent your hash power and make some extra income or rent other people’s hash power to increase your chances at successful cryptocurrency mining.
A Few Words Before You Go…
Overall, the hash power is a unit used to measure the number of hashes a device can produce per second. It is a very important metric for calculating the profitability of your mining gear and understanding where your machine stands in the competitive mining industry.