In 2009, when bitcoin first appeared, anyone could easily become a miner. It was enough to run a special program on a regular computer or laptop to receive up to 50 bitcoins a day.
As the popularity of bitcoin grew, mining became more difficult and expensive, and the profit — less and less. Can we say that mining as a phenomenon has disappeared? To answer this question, we have to look back a bit and buy bitcoins.
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The beginning
In January 2009, a developer (or group of developers) under the pseudonym Satoshi Nakamoto created the Bitcoin blockchain network and the cryptocurrency of the same name (BTC ticker).
To ensure the reliability and security of transactions, he used the SHA-256 algorithm, a cryptographic hash function
A hash is the result of processing the original data using a hash function that converts this information into a unique fixed-length string. Hash is used to verify the integrity and authenticity of data: if the content of the information changes, its hash will also change, which allows you to detect any changes. The advantage of hashing is that hashes do not reveal the information itself, ensuring security and confidentiality.. This function works as a way to verify the operation, i.e. to confirm transactions on the network.
Mining is based on complex mathematical calculations. On blockchain networks (including Bitcoin) that use the Proof-of-Work (PoW) protocol, miners compete in solving cryptographic problems. The first one to solve it gets the right to add a new block to the blockchain and is rewarded with newly created crypto coins.
In other words, the hash function serves as a tool that converts any information into a random set of letters and numbers. The miner’s task is to find a number that, when added to the transaction information, will give a special result after applying the hash function. This result must start with a certain number of zeros. Miners constantly «guess» different numbers until someone finds the right one. The correct number = reward + new block.
The evolution of mining
As long as bitcoin was worth almost nothing — there was minimal interest in it, the network capacity was — low, and BTC was being given away left and right on «faucets», that is, it was given out as a reward for performing simple tasks on the Internet. This included viewing online ads or completing surveys.
Over time, BTC began to attract more and more attention, as did blockchain technology. Mining methods also evolved rapidly. This process began to require significant computing resources and electricity, as graphics accelerators (GPUs or video cards) were best suited for this task. GPUs are capable of performing many similar calculations simultaneously, which is not possible with conventional processors (CPUs) At the initial stages of mining, the use of video cards was a cheap and affordable option for individual miners.
On May 22, 2010, programmer and first bitcoin miner Laszlo Ganets paid 10,000 BTC for two pizzas from Papa John’s, which at the time was — about $25.
In October of the same year, the first specialized mining device using GPUs was developed. This made the production of bitcoin blocks and the receipt of rewards on average six times more efficient. At the same time, the average cost of a GPU was twice as high as that of an average CPU.
In 2011, specialized FPGAsField-Programmable Gate Array — one of the subtypes of programmable integrated circuits. for bitcoin mining appeared. They could perform mining math twice as fast as the best GPUs.
Bitcoin halvings have begun, which halve miners’ rewards (they happen about once every four years). There have already been four such events. In addition, the protocol itself is designed in such a way that mining becomes more and more difficult over time, which reduces miners’ profits.
Over time, the cost of mining (the rise in price of video cards and other equipment, electricity, increasing complexity and decreasing rewards) began to exceed revenues.
In 2022, the value of bitcoin halved, which triggered a drop in the price of other crypto assets. Mining became even more unprofitable.
Maintaining performance and increasing overall power in parallel has steadily increased power consumption. This is was a cause for concern environmentalists and some governments. The authorities began to impose taxes and other restrictions on mining.
Due to criticism and high computational costs, some blockchain networks began to use the Proof-of-Stake (PoS) consensus mechanism, and the existing ones — switched to it from Proof-of-Work (PoW). There is no need for mining anymore since when using Proof-of-Stake. The probability of a participant (validator) forming the next block in the blockchain is proportional to the share of cryptocurrency that he or she owns and is ready to «pledge» as a guarantee. The most significant for the industry was Ethereum’s transition to PoS (The Merge) in September 2022.
So, has mining disappeared?
Mining (especially individual mining) is going through a difficult time due to high electricity and hardware costs, high competition, and rapid technological development. It is no longer as popular as it used to be, but it is still a key process for networks such as Bitcoin.
Mining can also still be profitable for those who have access to cheap electricity and can keep large farms running. But that’s not all.
Mining pools have appearedminer groups that pool their resources to mine cryptocurrency more efficiently. When one of the participants mines a block, the reward is distributed among all the miners.
When choosing a pool, it is important to consider its size, reputation, payment system, and possible fees. There are two main ways to receive rewards in pools:
- Proportional mining. The participant receives as much as he mined. This method is beneficial when the price of bitcoin is growing.
- Payment per share. The participant receives a fixed amount regardless of how much he mined. This is more profitable when the price of bitcoin is falling.
Another option — virtual or cloud mining. This is a way of earning cryptocurrency by renting computing power that does not require own mining equipment. The participant only pays the amount specified in the contract and receives his or her share of the mining profit.
In addition, individual miners can still benefit from some projects. Here are some of the most popular ones:
- Litecoin (LTC)
- Zcash (ZEC)
- Ethereum Classic (ETC)
- Dogecoin (DOGE)
- Filecoin (FIL)
- Ravencoin (RVN)
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