Just like the use of the word wallet to describe the place we hide our private keys rather than our cryptocurrency itself, I find myself struggling with the word ‘mining’ in relation to the generation of cryptocurrencies.
I can see how it came about because understanding and adoption of something so innovative depends on connecting it to concepts which people already understand. As such, the earliest initiators of cryptocurrency needed something to convey the way new blocks are created. It needed to implicitly reference that this process was hard work, requiring the application of processing power and continual investment, and also a degree of randomness of reward. Whilst trying to establish Bitcoin as the first example of a new asset class, it also made sense to link it to other stores of value defined by their scarcity and difficulty of extraction, like gold or gems.
So as a result we ‘mine’ cryptocurrency, to generate new blocks and secure transactions. Miners — who are the lifeblood of the crypto ecosystem — use their electricity and processing power to run complex hashing calculations which secure each new block in turn, creating the indelible blockchain-based ledger on which each transaction resides.
Whilst it might not require tunnelling deep under the earth, crypto mining is hard work. This is by design — the issuance of new bitcoins is regulated by difficulty, through a self-adjusting algorithm which automatically adjusts in accordance with how many blocks are solved within a 2-week timeframe, in order to ensure that roughly the same number of coins are mined regardless of the number of active miners on the network. The block reward itself also halves every 4 years, to ensure a fixed number of coins can ever possibly be generated, and also to take account of Moore’s law and the rising power of the hardware on the network.
This ‘proof of work’ is vital for the consensus algorithm to function, and make it impossible to successfully attack or break the blockchain — to alter a transaction record (eg to double-spend a crypto coin) the attacker would need to both control 51% of the mining network, and replicate the proof of work in the entire blockchain to date — an impossibly high monetary cost, for an exercise which would surely crash the value of the asset itself in such a way as to be self-defeating.
So it’s strange when people criticise the idea of cryptocurrency itself as being intrinsically “bad” because the amount of electricity it requires. Yes, it is a vast amount — but it is paid for and invested by individual miners or mining pools, and it accomplishes everything required to secure and manage the blockchain, enabling a monetary network worth billions of dollars.
The last time I had an account at a bank with proper offline branches, their ‘proof of work’ was evident in their swish London retail premises, with teams of staff in elegant foyers (I think that branch is now an All Bar One bistro actually). They burned electricity at every outlet, used vast amounts of processing power via the SWIFT or Visa processing networks, and each employee’s commute to work in their air-conditioned office generated carbon emissions of their own. They spent their profits on comfortable chairs, free pens to fill in the paper forms which had to be printed and distributed and yet more people and power employed to securely shred them afterwards.
Waste? That’s all a matter of perspective.
But I do think the lack of easy and popular understanding is contributing factor, and the use of terms like ‘mining’ to describe solving complex cryptographic hashes doesn’t really help. Never mind, it’s not going to change any time soon!
Crypto has no bank vaults or branch offices. anyone can, in theory, mine cryptocurrency, by downloading some software and running the algorithms. To mine Bitcoin nowadays though you need complex rigs of powerful hardware and specialist purpose-built chips, combined with an affordable source of electricity such as geothermal. Due to the difficulty and power demands involved, many miners band together in mining pools to tackle the calculations — working rather like a lottery syndicate, they all hash away individually, and divide rewards across the pool according to input.
But there are more than a thousand other currencies you can mine using basic domestic hardware, even in your browser, and you can also rent processors on cloud-based mining servers. What you’re doing in each case is speculating on the future value of the coin you choose, in relation to the outlay for the set-up, in terms of how soon you might get a positive return. Some websites have explored monetisation via mining, to provide ad-free access to their content whilst they mine using your device as you read… All you notice in practice is the fan on your laptop speeding up a bit.
The actual mathematics behind bitcoin mining is complex. You don’t have to understand the maths to be a miner or to use cryptocurrency, but this video is a nice little explainer about what miners are actually doing with their processing power, and how this works to secure the network cryptographically — in 3 minutes:
So there you have it: no dwarves, gems, gold nuggets or precious ores. Just a load of code… But it’s what you do with it that matters.