With Ethereum launching phase one of its version 2.0 on December 1st 2020, it is time we looked at the domain of Ethereum mining and ascertained if it is worth it or not.
Here’s a brief snapshot of what this comprehensive guide covers.
Table of Contents
A Brief Overview of Ethereum as a Cryptocurrency
Ethereum’s primary function is to serve as a cryptocurrency platform. But it was developed with more than that in mind. The founders of Ethereum wanted it to be a truly “abstract foundational layer” where users could write and run their own “smart contracts” and “decentralised autonomous organisations.”
Today, the platform has diversified to hosting gambling applications, games like CryptoKitties, and various exchanges. It continues to retain its primary use as a cryptocurrency platform (Ether), and it is slowly catching up to Bitcoin as a much faster processor of cryptocurrency transactions. It takes around 12 seconds for any Ethereum transaction to be recorded on its Blockchain.
With these views of Ethereum in mind, it is time to dive into Ethereum mining. Just like Bitcoin, Ethereum too supports mining.
Mining is crucial to the running and “authenticity” of the Ethereum network. We’ll explain how it works. Keep reading!
An Introduction to Mining Ethereum: What Is It?
Ethereum mining has its foundations in Blockchain mining. When any “monetary” transaction is made on Ethereum, it needs to be recorded to be considered “valid” or “authentic.”
Since this cryptocurrency works like a fiat currency, everybody using it agrees that it has value, quite the same as government-regulated money. It needs external validation from other users on the Ethereum network. These other users, including yourself, form the Ethereum “nodes.”
Once a transaction is made somewhere on Ethereum, it is broadcast to every other node on the network. And that is exactly when miners get busy.
Miners are those persons who spend their time verifying the transactions made on Ethereum and adding it to the Blockchain.
Blockchain is a database which acts as a virtual ledger where every transaction ever made from the birth of Ethereum stands recorded.
Since Ethereum is decentralised, everybody needs to agree on the order of the transactions. Miners facilitate this agreement by solving some complex puzzles to produce every transaction block. And for their efforts, they get paid a cut of Ether.
But first, why do these miners exist and what is their role in the entire Ethereum mining? Let us understand their function.
Why Do Ethereum Miners Exist?
Since Ethereum is a network that depends on a community of users to keep it functioning, the miners perform the useful task of verifying every transaction that takes place.
Each transaction made on Ethereum needs to be recorded to be considered valid. These recorded transactions make up the blocks on the Blockchain.
Now, it is hard work trying to verify every transaction. The verification process requires a computational construct known as hashing and the use of encryption.
Ethereum miners invest a lot of money in creating an “Ethereum mining rig”, that is, computer hardware and software necessary to perform this verification process.
For each verification, a transaction fee is awarded to the miners.
Who can become an Ethereum miner?
Anybody can become an Ethereum miner, but you must possess the necessary hardware and software to perform the mining task. Before you decide to become an Ethereum miner, however, it is worthwhile to calculate your rate of return on the investment. The amount you will spend on hardware and software should ideally offset the money you will earn from the mining work that you do for the network.
Ethereum mining pools
Since there is a lot of money involved in setting up the required hardware for Ethereum mining, miners group their resources and form a “pool” to do the mining task collectively.
In these Ethereum mining pools, the profits awarded for the successful verification of every transaction is split depending on some agreement between the miners. Some names of mining pools are Ethermine, Nanopool, etc.
How to Start Mining Ethereum? Pre-Requisites
Before understanding how to start mining Ethereum, youfirst need to understand a couple of terms related to the mining process.
A transaction is any change to the state of the Ethereum Virtual Machine. For example, the most straightforward transaction is any transfer of Ether from a person/organisation ‘X’ to a person/organisation ‘Y’. To be considered “valid”, upto 51% of Ethereum nodes, who are nothing but miners, need to verify and acknowledge the transaction. Their acknowledgement acts as a stamp of guarantee for the transaction.
Just like you pay a transaction fee for every credit card transaction, Ethereum too requires you to pay a transaction fee. This transaction fee is termed as gas.
Why go for such a non-intuitive name?
The analogy comes from the “gas” required to power a car. To verify your transaction, the miners need to use electricity and computer hardware and software. This computational effort is the electronic “gas” that powers every Ethereum transaction. Miners can choose to ignore your transaction if the gas price is too low.
Ethereum uses the database concept of Blockchain. Transactions are grouped into blocks and attached in a “chain” to the previous blocks already existing on the server. These blocks need to be verified by any miner to be considered valid. Once a miner has verified the block, all nodes on the Ethereum accept it as an authentic part of the Blockchain.
Proof of Work Consensus
Every block that a miner proposes to add to the network needs proof of legitimacy or a common consensus among 51% of nodes agreeing that the block is valid. To create this proof of legitimacy, miners utilise the proof-of-work protocol. The protocol has origins before Ethereum and, simply put, requires miners to solve a “puzzle.”
This puzzle is a very complicated task that requires a lot of computational power in terms of hardware and software. Nobody but computers can solve the problem.
Once the “puzzle” has been solved, it is sent over to other nodes to “verify”. And finally, solving the puzzle is considered proof of work.
Costs associated with mining
The two chief costs associated with Ethereum mining are electricity and hardware. It takes around Rs 1,50,000 ($2040.14) to set up a mining rig in India. Now, add to this the electricity cost to power the whole rig, which is of the order of Rs, 120 a day ($1.63). It roughly evaluates to Rs. 43,000 a year ($584.84).
If you are only using one mining rig, you probably will need to join a pool of miners. Doing so will cause you to cough up a mining fee. So, by all means, venture into Ethereum mining if you have substantial money to invest. Only then Ethereum mining profitability can interest you.
Ethereum mining hardware and software
The chief hardware components that you will need are GPUs. GPUs are Graphics Processing Units, used in gaming computers but also find use in the Ethereum mining rig. You will need this hardware to make guesses to solve the puzzle in the proof-of-work consensus protocol. There are no Ethereum mining ASIC because the algorithm and design philosophy vetoes it. Even if ASICs are developed for Ethereum, the ease of doing work is not significantly increased.
You will also need Ethereum mining software. One of the best-known software for Windows is ETHminer. You can also use Claymore Ethereum miner, CGMiner, and WinETH, among other software. Install any of these software and get started with the mining process.
How Are Ethereum Transactions Mined?
Any user with an account has to write and sign a transaction request with the private key.
Once done, the information is broadcast over the Ethereum network.
The nodes get to know that there is a new transaction that needs to be added to the Blockchain.
Now, any miner on Ethereum gathers several transactions into a block and adds the block to the Blockchain. To do this, they have to verify if the request is valid, and then they begin to calculate the proof-of-work.
Other nodes also get to know about this new block. They also verify the certificate and update their EVM.
Once the block has been verified, it is removed from the pool of transactions.
Now that mining is done and you get paid a cut from the transaction, you need to store that money or Ether somewhere. You can keep it on the Wallet, which is another software application for your convenience.
Introduction to Wallets
The computer application that helps you access and manage your Ethereum account is the Ethereum Wallet. All your funds will be sent to the Wallet and any deduction will also be made from here.
Smart Contract Wallets
Smart Contracts Wallets are those wallets that are governed by “smart contracts” instead of being an application that resides on your computer. They are comparatively safer than traditional electronic wallets.
Exchanges are places where you can buy and sell ETH. They hold the custody for the ETH until you send it to a Wallet. Some of the names of exchanges are Unocoin, Belfrics, Bitxoxo.
Ethereum Mining vs. Ethereum Staking
Ethereum mining is successful when blocks are created and stored in the existing Blockchain. Usually, the person who mines it faster is the one who has the superior hardware and software and can conduct the mining on a higher scale. They receive compensation for their work by taking a transaction fee. This method has been revised in Ethereum 2.0, and it has changed from a proof-of-work to a proof-of-stake.
Ethereum Staking is the process by which you can activate Ethereum validator software by staking 32 ETH on the network. This method is much better than the old proof-of-work method where those with greater computing power held a monopoly. In this scheme, the validators do not compete with other validators but are randomly assigned their blocks to either validate or verify it. Like the previous method, they too get paid for this.
Therefore, after considering these basics of Ethereum mining, it can be viewed as profitable investment only if you have enough money to set up an efficient mining rig. And once that is done, there is still no guarantee that mining will come easy. You need to be patient enough to wait out the years to see the results. Somewhere along the road, you can expect to start “minting the money!”
KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing.