Cryptocurrency Mining: Where Did You Put That Pick?

I fondly remember the somewhat comical jabbing I took as I was asked what I did for a living. My answer was that I am a crypto miner.  Most people immediately and somewhat involuntarily did a great big gesture banging an “air” pick onto a giant invisible rock.  Holding aside the usual comical fodder, one thing I have learned recently is there isn’t much difference between crypto mining and traditional, manual mining of precious metals.

Gold Mining

Let’s take mining for gold.  It’s tough to understand what a gold miner is these days anyhow.  I watch Gold Rush a lot and it sure doesn’t look like they use “picks and shovels”…

Mining is pulling something of value out of something that has less value. Effective mining does this while spending less cash than the reward earns them in cash.

A mining company will hire people, buy machines, pay for fuel, crush and separate rocks, sift out the gold and do this all while living in a hostile place away from family for months at a time.  It’s tough and admirable work.  The outcome, if done right, is to sell a big pile of newly found gold for a more valuable pile of cash that leaves them with considerable profit after they pay their expenses.

Making the contrast

Mining in the crypto sense is supplying massive amounts of specifically engineered computer processing abilities to those who need it. The best of us are able to pay less to deliver these services to our clients, resulting in shared profit.  

We set our specialized computers to direct their processing power into a pool of resources.  We pay for the electricity, equipment, air conditioning, personnel, and all kinds of expenses to run our mining farms, but the outcome is not always to immediately swap that crypto to fiat. So in this respect, traditional mining and crypto mining are different.  

Crypto mining in fact is a minting process as the majority of the payout miners receive is with newly minted crypto.

But if you really think about it, “Mining” and “Minting” are the same.  Mining finds new wealth and minting creates new wealth.

Crypto Mining defined

Once configured and set up properly our specialized computers authenticate and start working right away.  When working, these machines are hungry and they only eat electricity.  They excrete heat and noise, noise, oh the noise…. Some of my miners have blown circuit breakers and I once had a power supply catch fire in my office.  The need to feed the computers leads to expensive electricity and cooling bills.

Crypto mining is all about math.  If the math works, you do it – if it doesn’t, you don’t.  Some of this math is heavily complex and specialized but fortunately that’s the math the computers are doing.  The math I am talking about is a simple yes/no.

Will it cost me more of my wealth than the amount of wealth it may potentially create for me?  If “no”, then I mine – if “yes” or “maybe yes” then I don’t mine.

So before I start mining any new coin I draft a thesis.  I then test against it.  Rinse and repeat, taking notes along the way.  Crypto mining is more of an art form than anything else.

Essentially there is a finite amount of compute power I am able to lease to a coin’s mining network and each network’s requirements are very different.  A Crypto miner has an actual cost to create that coin and eventually a price it will be sold at plus the ability to hold onto the coins and sell later.  This time displacement often confuses people and is cause for much hullabaloo.

Demystifying the mine and sell problem.

Miners have an interesting job: they must maintain a balance between the cost of power consumption and the profits that can be made by selling the newly minted cryptocurrency.  MANY coins can be mined with specialized hardware, but not many (at least at the time of this article) make pure monetary sense to mine and sell right away.

The cost is the amount of wealth used to create, maintain, and feed the computing power required.  These are usually of two flavors, specialized hardware (miner) purchases and electricity and internet services to run the miners. This is how the coin is produced.  The market and the miners’ patience dictates the price, but the math dictates the cost.

The miner payments are calculated and paid to miners at the close of the block. The payments are composed of newly minted coins and/or fees charged to the folks who have transactions inside the block just mined.

Some miners choose to “sell on the pool” and they get paid in US dollars while others choose to receive an alternative currency – say they mine ETC, but want to receive BTC.  In this case the pool will sell the ETC daily for BTC and pay out the miner in BTC.

Still other miners (like me) just want the crypto they mined, no matter what.  In that case the pool takes their fees out and pays daily the mined crypto.

Why do miners need to exist in the first place?

A blockchain needs a group of miners to coalesce and process transactions over the network.  A crypto miner is one who works in the crypto mining industry and more specifically one of the few in the world now that run machines that create cryptocurrency.

The times in which it took very little computer power to mine effectively have long passed us.  You now need access to a lot of inexpensive (or free) electricity and deep pockets to buy the miners up front before you hire an army of people to set them up, run and maintain them.  Oh and in a year the mining rigs you run will be worthless and you will need to buy new ones.  Crypto mining has largely turned into a worldwide industry all in itself.

The Ledger or Blockchain

Miners are needed to record transactions in the big excel sheet in the sky.  This ginormous special excel sheet is called the Ledger or the Blockchain and each crypto has its own.  This is a block by block listing of ALL transactions that have ever happened down to usually 12 decimal places.

This means that crypto can be accounted for with a preciseness that no other currency can match.  And once those transactions are entered into the blockchain – that block that contains the transactions is securely signed to the block before and the block after.  It can’t ever be altered, period.  Add up all the transactions and you’ll always have a proper accounting of the underlying asset.

Here’s how it works.

Sally sends Susan six hundred Satoshis.

0.00000600 BTC needs to be deducted from Sally’s wallet and credited to Susan’s wallet.

We can’t just write it on paper because no one would be able to see it later and we can’t trust one person or entity to properly take note of this move, what if they forget, make a mistake or decide to change it later.  What if the person in charge of archiving this transaction didn’t like Susan and decided to put the money in their own wallet? What if someone later in the process comes back to the record and changes it?

In accounting speak, we need to record the transaction in the journal or “ledger” and it needs permanence to protect both parties from outside parties acting against their goals (Sally wanting to send Susan six hundred Satoshis and Susan wanting to accept them.)  The blockchain is a list of ALL the transactions that have ever happened in sequential order.  When unpacked, each of the smallest units of cryptocurrencies can be tracked from their point of creation all the way to where they are now.  This ledger is secure as it exists on many machines and any machine seen to have an alternative version is immediately exiled from the network and prevented from interacting at all.

I am a Cryptocurrency Miner

I use specialized computers that I call “miners” to calculate, confirm, approve, and record transactions in a coin’s ledger in exchange for a reward payable in the coin I mine.  Mining rigs are measured in funny words like “hashes” or “sols” but this measure is basically a full cycle through the mining process.

Each coin has its own process. Each process involves solving complex mathematical equations and encrypting certain details in a certain order to produce a precise and timely cryptographic answer.  The first correct answer in the pool of miners gets the point and records the transaction.  At the end of each block they add up all the points and calculate a percentage each miner represents.  Typically the reward is split based on this percentage.

It’s important to understand that a hash or sol contains no less than 3 steps – of which just one of those steps would take a human more than 100 years to manually calculate.  Even the crappy mining rigs typically do several thousand hashes per second, but some of the more advanced rigs are in the trillions of hashes per second because they have far more ASIC chips…  (Application Specific Compute Chips) but I am getting ahead of myself.

CPU Mining was first.

Every computer has a CPU (or Central Processing Unit) and typically it’s not used much. But the CPU is the “thinking” part of any computer. Anything that needs ‘doing’ the CPU does.

When Bitcoin was first mined in 2009 it was done with CPUs on regular computers that at the time were far less powerful than an ipod is today.  The computer’s CPU is used for complex computations so in CPU mining it is responsible for capturing, validating, and encrypting transactions on the network as well as performing the crazy cryptographic work needed.

It was really easy to mine Bitcoin back then, but Bitcoin wasn’t what it is now.    Even a CPU is able to perform this routine far quicker than a human. CPUs are able to perform thousands of hashes per second and they do this every second of every day non-stop… 

The technical nature of CPU mining is cyclical and every CPU has a limit on the amount of transactions per second it can handle.  Both of these factors limit a CPU’s mining efficiency.  This is because, in part, a CPU MUST finish the last job before it starts the next, even if it knows that the last job will result in no points being rewarded.  This leads to a lot of wasted CPU cycles and decreases the efficiency.  Also it seems building larger CPUs might not be technically feasible on a mass scale yet.  

But the real killer of CPU mining is when everyone started mining and the difficulty level rose, so each mining rig’s cut of the rewards shrank.  The natural reaction was to put more miners online.  At some point the rewards for CPU mining diminished so much the miners turned to the next most powerful tool.

GPU mining!

The first re-invention of mining was when miners realized that graphical processor units (GPUs) had much more computing power.  Though the GPUs needed taming first because those things are wild and massively powerful self-contained mini-machines. For those who don’t know, a GPU (Graphical Processing Unit) are the extra processors that one purchases if they have multiple monitors or are into gaming or home video.  You most probably have one in any older “desktop” or “tower” computer and you don’t even know it!  They are also used in the AI, VR, and DNA analysis sectors as large-scale heavy computing environments are needed.

When miners turned to GPUs, it instigated the gaming community as all the graphics cards became scarce and VERY expensive.  I believe graphics cards have yet to recover in terms of price, but there is a decent second hand market that makes up for the new overpriced GPUs.

Why GPUs?

The easiest way to understand this is to envision building a garden and all the steps needed to grow a single plant in the garden. One must plant the seed, water the seed, weed, harvest, rinse and repeat…. 

Mining on a CPU was like planting one seed at a time, waiting for the seed to grow, then watering it, and weed it, then harvest, clear the dead plant, and replant a new seed….  

The next level up to GPU mining adds a lot of simultaneous processes which allows the plant, water, harvest, and clear process to happen many times at the same time – this allows for more opportunity for the miner to receive rewards. GPUs are able to process tens of thousands of transactions per second.

The CPU and GPU process is highly un-specific which creates a lot of waste in the process as it relates to the hardware. For example, coming back to the garden, say the seed for one particular type of plant ONLY needs 1 cubic inch of dirt and at the end of the process all the dirt gets removed and re-setup. Now let’s say the storage area for processing on a GPU only allows for 1/3 a cubic inch of dirt to be stored – this forces the process to use 3 storage spaces, worse say it uses 1.1 cubic inches of dirt – that would mean that it needs 4 storage spaces and one of them would only be 2/3 used.

This creates a situation where excess resources are underutilized and/or excess processing power gets converted into heat. Either way, an expensive piece of equipment like a GPU is more of a universal tool allowing versatility. Afterall, there are no restrictions to what a monitor can display in terms of pixel color and that is the proper use of a GPU card… to process graphics.

As far as the mining economics, unless you have proper funding and a plan to control electricity costs, in most cases CPU and GPU mining will cost more to run than the coins that it generates are worth in today’s market.

So, what does the mining industry use nowadays?

When it comes to Bitcoin and many of the main mineable coins that have been around for a while GPUs were rendered obsolete as were CPUs some time ago. This shift is a direct result of core mineable cryptocurrency principles and a mathematical relationship between the quantity of computing power needing to be supplied to earn a reward and the difficulty of mining.  This is called the “difficulty” and it’s automatically adjusted frequently depending upon the mining rules of the coin being mined.  That’s right, built into each cryptocurrency is a method to automatically make mining fair, the difficulty level.  The adjustment in difficulty directly impacts how much longer or shorter a mining rig must work to be rewarded and depending on the amount of hash available on the network this variable is automatically adjusted by the network to make sure everyone gets a fair shot.

There is a delicate balance between several dynamically adjusted variables within each cryptocurrency that keeps it solvent and stable over time (so long as there are miners to mine the coin).

Each coin chooses from a vast array of mining algorithms to adapt into their mining process.  Each coin’s version of each mining algorithm has something acting as a “difficulty variable” that is adjusted dynamically over time. The goal of the difficulty variable is to rebalance the field so that with each and every block mined all miners get an equal opportunity of getting rewards regardless of when they began their mining journey.  Meaning if I have one miner and you have 5 – you will get 5 times the reward that I get since you provided 5 times the computing power to the network.

So if I begin mining now, I will get as fair of a shot to be rewarded as someone who has been mining for years.  It’s all proportional to the computing power provided to record the payments in the ledger. 

The rise of the beast!

What grew out of GPU mining is a whole new industry called ASIC mining. ASIC stands for Application Specific Computing Unit and is really just a fancy way of saying it’s a “special computer chip” built specifically to mine a certain coin and/or algorithm.  You can’t do anything else with that computer chip.  Some of these ASIC servers are really loud, ugly, difficult to use, and clearly built to deploy in datacenters – but other ASIC mining rigs are a thing of beauty with flashing lights and slick looking interfaces

In all cases of an ASIC server, there are many “compute chips” and each of these chips are designed specifically to perform the needed operations in one specific algorithm.  Prior to this, general computing resources like a GPU or a CPU weren’t specialized. As a result, there was a lot of wasted computing power that resulted in higher electricity costs.  Other inefficiencies, like bus speed, were improved with the introduction of servers that are specifically designed to run 24/7/365 and only mine – and in all cases ASICs only mine a specific coin or algorithm.

Crypto mining has exploded and is a HUGE industry. With increasing amounts of big money coming in, you can bet that crypto mining is on the path to becoming massive, especially when solar and crypto mining officially marry technologies.  This shift will allow anyone with access to the sun to make money solely by converting the sun into crypto.  Just think of what this could do for impoverished nations worldwide