What is Crypto Mining? Here’s what you should know.
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What is Crypto Mining? That’s the question being asked all over the world right now thanks to Ethereum’s (ETH-USD) Merge upgrade. It may seem like a complicated process, and in some ways it is. Here’s everything you need to know about crypto mining, as well as where the activity stands following Ethereum’s shift away from the practice.
Simply put, cryptomining is the practice of solving puzzles in exchange for the chance to win cryptocurrency. When you hear about crypto mining companies, you hear about large farms of computers tasked with solving these puzzles. These computers are known as “mining rigs” and each one is capable of completing a puzzle on its own. Millions of these rigs compete worldwide to solve the puzzles first to win crypto prizes.
Now, to get a little into the weeds regarding the details, one must first familiarize oneself with proof-of-work. Proof-of-work is a data control mechanism that was innovated in the early 1990s. It was created as a measure to prevent distributed denial-of-service (DDoS) attacks – a malicious activity in which bad actors create massive artificial spam traffic to destroy computer systems.
By introducing highly complicated mathematical puzzles, developers and administrators can be sure that these DDoS attacks are not possible, as the attacker would never be able to mount the incredible computing power needed to attack a proof-of-work network .
In 2009, Satoshi Nakamoto created Bitcoin (BTC-USD) blockchain using a proof-of-work model to verify transactions on the chain. This will prevent bad actors from creating fake blocks with bad data to manipulate the chain for their own purposes. Thus began the relationship between crypto and proof-of-work.
What is Crypto Mining? Popularization and criticism.
What is crypto mining in relation to this obscure computer science concept? Essentially, it is the activity that satisfies the blockchain network’s proof-of-work algorithms. Miners’ solutions to these puzzles are used to verify transactions and create new crypto.
However, this only applies to proof-of-work blockchains. Bitcoin is the most prominent example of proof-of-work on the blockchain, and it is the most lucrative cryptocurrency to mine. Many other blockchains use proof-of-stake or another proofing mechanism to verify data. These chains do not require crypto mining.
Due to crypto mining’s association with Bitcoin – by far the largest and most valuable crypto investment – it has exploded in popularity in recent years. While most crypto mining is concentrated among mining companies and large private operations, it is an activity that anyone can participate in as long as they can acquire a mining machine. This has made the process a favorite among those who want to earn passive income without much effort.
However, crypto mining has been under intense scrutiny, especially since early 2021. The activity is hugely energy-consuming by design. At peak mining activity, the global electricity consumption of the industry is more than many medium-sized countries. This has created plenty of fodder for criticism from crypto-skeptics and climate activists alike. In fact, these criticisms have even prompted China to ban crypto and crypto mining outright. There is also pressure Tesla (NASDAQ:TSLA) is leading Elon Musk to backtrack on his promise to offer Bitcoin transactions for cars.
The Ethereum Merge and Crypto Mining Conversation
In just days, Ethereum will abandon crypto mining in favor of proof-of-stake through its Merge upgrade. But the move does not come to appease the climate-minded, but rather to scale up the processing power.
Proof-of-stake allows for a higher throughput of transactions than proof-of-work, and it will allow Ethereum to increase its supply. The move is being praised by crypto critics and bulls alike, but what does it mean for the mining industry?
Realistically speaking, the merger could make a big dent in overall mining revenues. After all, Ethereum is the second largest mined cryptocurrency in the world. However, it will not disappear completely; Bitcoin is still easily the largest market for crypto miners and activity is as healthy as ever over there. Still, the merger could put pressure on Bitcoin and other proof-of-work cryptos to clean up their act a la ETH, as we see how significantly the network’s energy usage drops after the merger.
At the date of publication, Brenden Rearick did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author, subject to the InvestorPlace.com Publishing Guidelines.
