The essence of Mining: How Crypto Assets ensure security through computation.

Key Points Overview

What is mining? Simply put, it is miners using computers to solve problems to verify transactions and issue new coins. However, the logic behind it is far more complex than it sounds—each block involves complicated cryptographic calculations, requiring massive computational power to compete. This process not only secures the blockchain network but also creates new cryptocurrency supply. Miners are rewarded in a straightforward way: whoever solves the problem first gets to package the block and earn the rewards.

Understanding Blockchain in the Essence of Mining

Imagine a global ledger that records every cryptocurrency transaction. The accuracy and security of this ledger rely entirely on the work of miners.

Three Core Functions of Miners:

1. Transaction Verification——Check if the pending transaction is legitimate.
2. Block Packaging - Organizing validated transactions into blocks
3. Password Competition - Obtaining block rights by solving cryptographic puzzles

This is not simple bookkeeping. Miners need to use specialized computing equipment to perform calculations repeatedly until they find a hash value that meets the difficulty requirements. The first successful miner receives two parts of the reward: the newly generated cryptocurrency + the transaction fees from all transactions in this block.

Take Bitcoin as an example, it operates on a Proof of Work (PoW) mechanism - the more computational power someone invests and the higher the costs incurred, the more motivation they have to mine honestly. Because of this, attacking the network becomes extremely expensive and nearly infeasible.

The Operation Mechanism of Mining: From Transactions to Blocks

Quick Understanding Process

Step 1: Trading Pool Aggregation The cryptocurrency transfers sent by users enter a waiting area (mempool) and await packaging.

Step 2: Construct the Block Miners collect these unconfirmed transactions, add their own “coinbase transaction” (where miners send rewards to themselves), forming block candidates.

Step 3: Repeat Calculation Miners continuously change a random number (nonce) and compute it with block data using a hash function. The goal is to obtain a hash value that starts with a certain number of zeros. It's like a digital lottery—you need to try repeatedly to win.

Step 4: Broadcast and Confirm After finding a valid hash, the miner broadcasts the new block to the network. Other nodes verify its validity, and once confirmed, it is added to the entire network. The miner receives a reward.

In-depth Analysis: The Technical Details of Each Step

Transaction Hashing Each transaction is converted into a fixed-length hash value (a string of characters). This hash uniquely represents all the information of the transaction - change one character, and the entire hash changes.

Construction of Merkle Tree Miners do not directly use all hashes; instead, they pair them up and hash them again to form a tree structure. The final “root” obtained represents all transactions in the block. The benefit of this approach is efficient verification—if any transaction is altered, the root changes immediately.

Block Header Calculation The block header contains three key pieces of information:

• Hash of the previous block (links the entire chain)
• Merkle Tree Root (represents all transactions)
• Nonce (the random number changed by the miner)

Miners perform hash calculations on these three pieces of information. If the result does not meet the difficulty target (for example, requiring it to start with four zeros), they change the nonce and calculate again. This process is called “proof of work” — it truly requires a significant amount of computation.

Difficulty Auto Adjustment The network checks the average block time at regular intervals (for Bitcoin, every 2 weeks). If there are too many miners and competition is fierce, the difficulty automatically increases (requiring more leading zeros). If miners leave the network, the difficulty decreases. This ensures a stable block generation speed—approximately one new block every 10 minutes for Bitcoin.

What to do when two blocks appear at the same time?

Occasionally, it happens that two miners find valid hashes in a very short time and broadcast two competing blocks. The result is:

• Different miners receive these two blocks in a different order.
• The entire network has temporarily split into two versions.
• Miners continue to mine on their respective chains.

This state continues until the next block is discovered. If a miner on Chain A finds the next block first, then Chain A wins, and all miners switch to Chain A. The blocks from the losing side are called “orphan blocks”—its miners worked in vain and received no rewards.

This “temporary split” occurs occasionally, but it does not cause long-term problems since the next block quickly determines the outcome.

Mining Difficulty: Why It Keeps Increasing

The logic of difficulty adjustment is very simple:

• New miners join → Total network hash rate increases → Finding valid hashes becomes easier → Difficulty standards need to be raised
• Miners exit → Overall network hash rate decreases → Finding valid hashes becomes more difficult → Difficulty standard needs to be lowered

The goal remains unchanged: to maintain a stable average block time. For Bitcoin, this is about one block every 10 minutes.

The difficulty is determined by the “target value” - the hash must be less than this value. The more leading zeros are required, the stricter the target value, and the greater the difficulty. Miners need more attempts to succeed.

Comparison of Main Mining Methods

CPU mining: has been eliminated

In the early days of Bitcoin, ordinary computer central processors could mine. The difficulty was low and the barriers to entry were low, so anyone could give it a try.

However, as competition intensifies and difficulty skyrockets, the computational efficiency of CPUs seems negligible. CPU mining is now completely unprofitable—professional equipment can yield more in a day than a CPU can produce in a year.

GPU mining: selection of certain cryptocurrencies

Graphics Processing Units (GPUs) are designed for parallel computing. They can not only mine but also perform other tasks (gaming, rendering, etc.).

GPUs are much stronger than CPUs, but not as good as ASICs. For certain cryptocurrencies with simpler algorithms, GPU mining can still be profitable. However, for cryptocurrencies like Bitcoin with extremely high difficulty, GPUs are already powerless.

ASIC Mining: Professional Arsenal

Application-Specific Integrated Circuits (ASICs) are chips designed for a single purpose. In the field of cryptocurrency mining, ASIC miners are monsters specifically optimized for solving particular algorithms.

Advantages:

• Professionally extreme, the computing speed far exceeds that of GPUs and CPUs.
• Invincible on its own algorithm

Disadvantages:

• Extremely high cost (several thousand to tens of thousands of dollars per unit)
• Can only mine one type of coin or a few types.
• Rapid technological iteration leads to quick depreciation of old models.
• Requires professional venues, heat dissipation, and power management

Conclusion: ASICs are the most efficient, but they also carry the highest risk. Large capital operations are required to be profitable.

Mining Pool: Many Hands Make Light Work

The probability of a single miner finding a valid hash is extremely low. To stabilize earnings, miners form groups—this is called a mining pool.

Operation of the mining pool:

• Aggregating the computing power of numerous miners
• Once any miner in the pool finds a valid block, the reward is obtained by the mining pool.
• Mining pools distribute rewards to members based on their contribution.

Good news: Reduced risk, stable returns. Small miners can receive continuous small rewards through mining pools instead of taking a gamble.

Hidden Danger: Large mining pools can lead to mining centralization, increasing the risk of a “51% attack”—if a certain pool controls more than half of the hash rate, it could theoretically alter the chain.

Cloud Mining: The Convenience and Risks of Renting Hash Power

Don't buy mining machines, directly rent computing power from cloud mining service providers. Sounds very convenient:

• No need to buy expensive equipment yourself.
• No need to manage power and heat dissipation
• Start anytime

But the trap is deep:

• Many cloud mining companies are scams, taking money and running away.
• Even with legal operations, commissions and management fees will eat up most of the profits.
• Unable to control whether real computation is actually happening.

Before choosing cloud mining, be sure to investigate the company's background and user reviews.

The Specificity of Bitcoin Mining

Bitcoin uses Proof of Work (PoW) — a mechanism first introduced by Satoshi Nakamoto in the whitepaper in 2008. The core idea of PoW is to exchange massive computational costs for network security.

To attack the Bitcoin network, an attacker needs to control more than 50% of the total computing power and maintain it continuously. This means incurring astronomical electricity costs. As a result, the attack becomes economically unfeasible.

Bitcoin mining rewards are changing:

According to the halving mechanism, the miner reward is halved every 210,000 blocks (approximately every 4 years):

• Initial: 50 BTC/block
• Now (December 2024): 3.125 BTC/block
• The halving will continue in the future until it approaches zero.

This mechanism ensures the scarcity and long-term value of Bitcoin supply.

Is mining really profitable? The real numbers

Key Factors Determining Profit

1. Price Volatility When the price of the coin falls, miners' profits shrink directly. When the price rises, profits increase exponentially. The short-term price of the coin is uncontrollable.

2. Device Efficiency With the same electricity costs, efficient devices produce more, while inefficient devices produce less. ASIC miners have the highest efficiency, but they also have the highest cost.

3. Electricity Cost This accounts for the largest share of unit production costs. Regions with cheap electricity (Iceland, Central Asia, areas rich in hydropower) have a natural advantage. In places where electricity is expensive, the threshold for mining is extremely high.

4. Equipment Depreciation A mining machine can be used for 2-3 years after purchase. The initial cost is spread over the output, making the numbers look unappealing. Moreover, technology iterates quickly, and older models lose competitiveness rapidly.

5. Difficulty and Competition More miners participating → Difficulty increases → Unit收益下降. This is an irreversible trend.

The Truth of Profitability

Theoretically: If there is cheap electricity, efficient machines, and confidence in the coin price, it is indeed possible to make a profit.

In reality:

• Large mining farms have profits due to scale and cost control.
• It is difficult for small miners to compete unless the conditions are particularly good.
• When the coin price plummets, many miners directly shut down.
• After the halving, many inefficient mining opportunities will be eliminated.

To start a mining business, you need:

• Accurate calculation of ROI (Return on Investment)
• Understand risk management
• Prepare sufficient capital
• Continuously follow up on market and technological changes

Key Risks and Variables

1. Change at the Protocol Level

In September 2022, Ethereum completely transitioned from PoW to PoS (Proof of Stake), directly shutting down the entire mining ecosystem. Millions of mining rigs became obsolete overnight. This proves that even established projects can suddenly change their consensus mechanism.

2. The Unpredictability of Difficulty and Hashrate

New technologies and new mining machines are launched, which may lead to a surge in computing power. Difficulty will rise accordingly. Earnings will decrease. Your plans may become invalid in an instant.

3. Regulatory Uncertainty

Different countries have vastly different attitudes towards mining. Some places welcome it and subsidize electricity costs; others prohibit it and confiscate mining machines. Policy changes directly affect the feasibility of the business.

4. Long-term Electricity Costs

Electricity prices are constantly changing. If the electricity price rises more than the increase in the currency price, the profit margin will be squeezed.

5. Technological Obsolescence

The update cycle for mining machines is short. The machine you bought this year may become outdated next year. Continuous investment is needed to maintain competitiveness.

Summary

What is the essence of mining? It is exchanging real computing costs for network security and token issuance rights. This is a high-risk, high-investment business that requires expertise.

Advantages:

• Participate in network security and decentralization
• Have the opportunity to earn stable token rewards
• Technically transparent and traceable

Disadvantages:

• High initial investment
• Intense competition has squeezed profit margins.
• Facing multiple uncertainties in policy, technology, and market.
• It's easy to lose money

Suggestion: If you want to participate in mining, first conduct a thorough cost-benefit analysis, assess all risk scenarios, and be prepared to endure the worst outcomes. For ordinary investors, it may be more economical to directly purchase the cryptocurrency rather than participate in mining.