TradingKey - In essence, cryptocurrency mining is using computer computing power to verify and process cryptocurrency transactions and obtain cryptocurrency rewards by solving intricate mathematical problems. This concept traces its roots back to Bitcoin. As the pioneering cryptocurrency, Bitcoin's mining mechanism has set the groundwork for the entire cryptocurrency realm.

Take the Proof of Work (PoW) mechanism adopted by Bitcoin as an example. The mechanism requires miners to use their computer computational power to solve complex mathematical puzzles. The first miner who succeeds will be granted the right to add a new block to the blockchain, receive a certain amount of Bitcoin as a reward, and also obtain the transaction fees included in that block.

During this process, miners continuously try different nonces, combining the nonce with information such as the transaction data in the block, the timestamp, and the hash value of the previous block. They then calculate the hash value using the SHA-256 algorithm. A miner is considered successful only if the resulting hash value is lower than the target difficulty set by the network. Upon meeting this condition, the miner earns the right to create a new block and add it to the blockchain.

What types of mining hardware are there?

Central Processing Unit (CPU): CPUs are widely used but offer relatively low computing power for mining. However, some less well-known cryptocurrencies can still be mined using CPUs.

Graphics Processing Unit (GPU): GPUs provide higher computing power and greater versatility, making them suitable for mining various cryptocurrencies. However, they consume significant amounts of power and come with a high cost.

Field-programmable gate Array (FPGA): FPGAs are programmable hardware that can be optimized for specific mining algorithms. In 2011, the first FPGA Bitcoin mining machine was introduced, marking the transition of mining from general-purpose hardware to dedicated mining hardware. While FPGAs offer strong performance in computing power and energy efficiency, their complexity and high development limit their widespread application.

Application-Specific Integrated Circuit (ASIC): ASICs are designed specifically for mining certain cryptocurrencies. They offer exceptional computing power and high energy efficiency but are highly specialized and lack versatility

Collaborative Mining and Profit Distribution

As mining difficulty continues to rise, the chances of an individual miner successfully mining a block with their own computing power are decreasing. To improve their success rate and ensure more stable profits, miners increasingly choose to join mining pools for collaborative mining.

A mining pool is an organized structure that combines the computing power of multiple miners. By aggregating these distributed resources, mining pools significantly increase the probability of successfully mining a block.

Numerous miners work together within a mining pool, raising the question of how profits should be distributed. Various distribution methods exist, such as PPS and FPPS, each with its own advantages and disadvantages. The choice of distribution method depends on the miner's risk tolerance and expected returns.

Pay Per Share (PPS)

Miners are compensated based on their contribution shares, the value of which is estimated at a predetermined rate before a block is found. In the PPS system, miners receive payments even if the mining pool fails to mine a block, ensuring stable earnings. However, this shifts greater financial risk onto the mining pool operators, as they must pay rewards regardless of mining success. To offset this risk, operators typically charge a relatively high fee, often around 7.5%.

Full Pay Per Share (FPPS)

FPPS, also known as Pay Per Share Plus (PPS+), operates similarly to the standard PPS reward system. The key difference is that when the mining pool successfully mines

 a block, in addition to paying the basic share reward, the FPPS system not only pays the basic share reward but also distributes the block’s transaction fees among miners, increasing their overall earnings. This further elevates the financial risk for the mining pool operators.

Pay Per Last N Shares (PPLNS)

Miners are compensated only when the mining pool successfully discovers a new block. Once a winning block is found, the mining pool verifies the previously submitted valid shares, and those within a specific "time window" are included in the reward distribution. Miners' earnings are depend on the mining pool's luck in finding blocks. If no block is mined for an extended period, miners may receive no earnings. However, when a block is successfully mined, the reward can be substantial. Due to this variability, the mining pool's handling fee is relatively low, typically around 3%.

The enormous energy consumption associated with cryptocurrency mining is a presenting issue that cannot be ignored.

According to data from the International Monetary Fund (IMF), under the baseline scenario, the share of cryptocurrency mining and data centers in global electricity consumption is projected to increase from 2% in 2022 to 3.5% by 2027—equivalent to Japan’s current electricity consumption, the world's fifth-largest electricity consumer.

The growing demand for mining has led to a significant rise in energy consumption, raising concerns about the sustainability of mining practices. This high energy demand not only exacerbates energy shortages but also has severe environmental impacts, contributing to high carbon emissions. As a result, some countries and regions have implemented restrictive measures against cryptocurrency mining, further increasing the uncertainty and risks associated with the industry.

Purchasing cryptocurrency is significantly simpler than mining. Investors can buy cryptocurrencies through various trading platforms, which operate similarly to stock exchanges by providing a marketplace for buying and selling. Popular platforms include Coinbase, Binance, and Kraken. On these exchanges, investors only need to complete registration and identity verification to start purchasing their desired cryptocurrencies using either fiat currency or other cryptocurrencies they already hold.

Compared to the costs associated with mining, buying cryptocurrency is a more accessible option for most average investors. However, it is essential to exercise caution regarding market volatility and platform selection.