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Crypto Mining

June 22, 2023

Mining has been one of the most popular crypto-related web searches for several years, and it is easy to see why. Stories have been circulating in the media about mega profits from mining Bitcoin and other cryptocurrencies, making it one of the hottest topics in the industry. As a result, many new investors are eager to start their crypto journey with mining, hoping for substantial passive income. In this article, Let's take a closer look at mining from a technical point of view, why it is essential for blockchains, what types of mining exist, its challenges, and other relevant details.

Mining Challenges

Mining, once profitable for early investors, has become less lucrative today. Previously, anyone with a decent home computer could participate in Bitcoin mining. However, as the blockchain has grown, the computational power required to maintain it has significantly increased, causing miners to purchase expensive equipment. The costs associated with said equipment and the energy needed for computations have made it increasingly disadvantageous for a single miner (especially an amateur) to make mining a profitable venture.

Another issue is that Proof-of-Work (PoW) protocols, which require mining for validation, are less prevalent now. Many projects have found them inefficient regarding scalability and cost-effectiveness and have turned to a Proof-of-Stake (PoS) mechanism instead.

Despite these challenges, there are still ways to participate in mining today. One option is to join specialized companies that enable miners to combine their resources to keep up with each blockchain's computation requests. These mining companies purchase the necessary hardware and cover the cost of electricity, giving participants a chance to mine even without owning the required equipment.

Secondly, other promising assets using PoW protocols, such as Vertcoin, Grin, Monero (XMR), ZCash, Ravencoin (RVN), Haven Protocol (XHV), Ethereum Classic, Litecoin (LTC), Monacoin (MONA), and Bitcoin Gold, can be a more profitable alternative to Bitcoin.

Proof-of-Work Blockchains 

Mining is vital in ensuring the security of cryptocurrencies that rely on the Proof-of-Work (PoW) consensus mechanism, such as Bitcoin. The PoW mechanism relies on decentralized networks of computers to record all cryptocurrency transactions in a blockchain, which allows cryptocurrencies to operate without any third-party involvement. The security and power of these blockchains increase as more miners validate the network. Due to the high amount of processing power required, no individual or group can tamper with a blockchain unless they somehow take over a large percentage of hash power. Therefore, PoW is a reliable and tested approach to maintaining a secure and decentralized blockchain.

The term "proof of work" refers to the computing power miners' computers need to guess a hash code correctly. In a network of miners, each computer competes to be the first to find a 64-digit hexadecimal number (or hash). The first computer to successfully guess the hash code updates the blockchain ledger with the newly verified transactions and receives a predetermined amount of freshly minted coins. Such guessing work requires a significant amount of computational power and, consequently, a lot of electricity. Therefore, the miner with the fastest computer naturally has a better chance of succeeding and receiving a reward.

However, the mining process is energy-intensive and often struggles to support the significant number of transactions that popular blockchains, like Ethereum, can generate. As a result, a Proof-of-Stake method has emerged as a popular alternative that does not require mining.

Difficulty Adjustment & Halvings

Crypto assets can have either an unlimited or a limited supply. One of the most popular cryptocurrencies, Bitcoin, has a fixed supply of 21 million coins that are gradually created and awarded to miners who maintain the system. The Bitcoin protocol ensures that this supply will never exceed this limit unless a consensus change is made in the future. 

Once the final Bitcoin block is mined, miners will receive payment in fees for their mining work. However, miners find it increasingly difficult to profit as the coin supply grows closer to 93% (as of June 2023). It is estimated that it will take another 100 years to reach the limit, but changes in Bitcoin mining are already noticeable.

The increasing (or, sometimes, decreasing) difficulty is a part of the adjustment process. As Bitcoin gains popularity, more computers join its peer-to-peer network, increasing its overall hash power. This growth requires periodic adjustments to maintain a total 10-minute block processing time. The mining difficulty on the Bitcoin network is adjusted automatically every 2016 blocks (or approximately every two weeks).

Another concept that every new miner should know is so-called halvings. In the case of Bitcoin, the network creates new bitcoins every 10 minutes, but the amount issued reduces by half every four years. The network created 50 Bitcoins every 10 minutes during the first four years. Subsequent halvings reduced this amount to 25 bitcoins in 2012, 12.5 bitcoins in 2016, and 6.25 bitcoins per block in 2020. The next halving event, scheduled for 2024, will decrease the reward to 3.125 bitcoins per block. 

Halvings significantly impact mining profitability, as they double the costs every four years. Other cryptocurrencies such as Litecoin (LTC), Vertcoin (VTC), or Ravencoin (RVN) also undergo halvings and difficulty adjustments, but the frequency of these events may differ.

Types of Mining

There are three main crypto-mining categories based on the coin extraction method. One of these methods is solo mining, where the miner works independently without any assistance from others. It can be a beginner mining coins on their computer or a seasoned miner with a warehouse filled with rigs (computers customized for mining).

The second method is pool mining, where several individuals can agree to work together to mine a single block, providing their collective power. Although the costs and power consumption during pool mining are reduced, so are the profits that get divided among everyone in the pool. Many different mining pools are available, but it is crucial to research them thoroughly before joining. Note that this type of mining requires you to have your mining rig.

The third method is cloud mining, which allows individuals to mine crypto without owning a mining rig or paying high electricity bills. This method enables people to rent a mining rig and receive a cut of their profit. Conversely, if you already own a mining rig, you can rent it out to save some money on energy costs.

Final Thoughts

Mining profitability depends on several factors, such as the power of your device, electricity costs, the types of mining you want to engage in, and the coins you want to mine. While Bitcoin is the most popular asset to mine, it is not wise to focus solely on it, as other assets might be more profitable.

You can swap all assets received through crypto mining through the Kinetex dApp, which currently supports eight native coins. You can trade them for other assets to keep as an investment or make extra profit using DeFi products and services. 

The Kinetex dApp offers two modes: Liquidity Aggregation and Flash Trade. The former allows you to easily trade over 5,000 tokens by aggregating liquidity from hundreds of sources, and the latter will soon enable you to swap directly with market makers with the help of zero-knowledge technology.

Kinetex Network: Website | Kinetex dApp