Understanding Crypto - Mining
Cryptocurrency mining is an essential part of most blockchains. The basic idea behind blockchains is that everyone can check every transition to ensure that they are correct and that no evil actors try to cheat. The ones who check these transactions are then rewarded with the blockchain’s cryptocurrency. There are many systems designed for this, each has their strong and weak sides. Yet we will not dwell too deeply into the technical parts of mining, how it works and what solutions are out there. Instead we will just look at some various aspects of mining and how this approach to security has impacted the world.
When mining, it is a game of processing power and luck. When bitcoin just started, you could mine it with your laptop. That computing power was enough to give you decent rewards. Alas, when the price of bitcoin climbed and more people started to pay attention to it, everyone started looking for better solutions than just your personal computer’s processing power.
It was soon discovered that the best tool for mining is the graphics card. Because of that, the prices of graphics cards with 4GB of ram or more suddenly saw a sharp increase in price. From being something used by gaming enthusiasts it turned in an investment tool. It got so bad that people could not really buy a graphics card anymore. The second they were made, cryptominers bought them all.
Many companies are doing their best not to let down their oldest customer, the gamer, with some companies actually selling graphics cards that have been specifically tailored to be bad for cryptomining. How efficient that will be is yet to be seen. One is clear - video game creators are now worried about improving the graphics of their games, as no one will have a good enough video card to play them.
That being said, as more and more processing power is required, the more sophisticated the mining rigs have become. What started as a job for a simple laptop has now grown into an industry with artificially cooled rooms full of servers. Many graphics cards lined up, all calculating the required keys and transactions, eating up an enormous amount of electricity.
A tool used by the University of Cambridge states that all the mining rigs together use 121.36 terawatt-hours (TWh) a year. Now, no one would blame you if you said that you have no idea what that means. It is a huge number not often seen by ordinary folk. So, to put it in context - the whole country of Argentina uses 121 TWh a year. The Netherlands? 108.8. Yes, that is correct. Cryptomining uses more TWh a year than some countries of a serious size.
So what would a miner do in this situation? He would calculate which country has the cheapest electricity and move his whole system there. That is why some countries are more preferred by miners than others. While China is the most favorite place, because of uncertain regulations many choose countries like Georgia, Venezuela and Russia. One thing is clear - as long as the price of bitcoin keeps rising, more electricity will be used just for this one network.
It wouldn’t be such a problem if all this electricity were to come from renewable sources. The thing is, all the bitcoin mining rigs move to countries where electricity is cheap, usually not because of it being renewable or because of the countries subsidizing electricity costs for their citizens. It mostly is just a country with a very low cost of living and electricity gained from polluting resources. Two-thirds of Chinese electricity still comes from coal and that is a country most populated by miners.
This has given ammo to people who dislike the cryptocurrency, as they claim that the harm done by the network is too big to be worth it. They have also blasted Musk for investing in it, as he tries to have an environmentally friendly image with Teslas, yet invests in such an energy hungry beast. But the supporters rightfully answer that they are not in this for the environment, but for a new financial system. Are they to be blamed that countries are polluting the world, as they are just buying the services provided by the countries themselves? Let governments deal with that and give miners free reign.
This has been a long back and forth with no signs of stopping. 0.34% of the whole world's energy is now used by Bitcoin miners and the only way one would see this number to drop would be if the price of Bitcoin drops and makes the whole endeavor cost more than can be gained.
As it is a number’s game and basically a huge lottery, long gone are the times when it pays to mine yourself. Many people found out that it is much more lucrative to gather together with all of their equipment. Two people say that they will share profits, making it a bit less a game of luck and more a business with a steady income. And then the third one joins, the fourth one… So everyone can now join a huge mining pool, work towards the same goal and then share the profits.
The bigger the mining pool, the higher the chances are that it will be the one to get the cryptocurrency reward that can be then given to all people included. And while it is great news for the average miner, it actually is very dangerous for the project as a whole.
Blockchains are secure because they are decentralized. Everyone does their own thing, no one holds more power than anyone else. All the transactions are checked. If 51% of the auditors decide that the transaction is valid, it is permitted. And this is exactly where the problem lies.
As we already mentioned, a huge amount of miners are located in China. Recently a coal mine in the Chinese province of Xinjiang was flooded, causing it to suspend work. At that exact moment you could observe that Bitcoin lost a lot of its computing power. While it stresses the network’s dependency on coal, the shocking part of the discovery was the amount of lost power. Because of a single shortage in a single Chinese province, Bitcoin lost one third of its computing power. That shows an alarming rate of concentration in a single place.
This fact just highlights something that has been well known - five of the biggest mining pools are all located in China. They together mine about 58% of all blocks. If these mining pools were to all come together, they could easily overtake the whole network. They could win each vote as they have more than 51% of nodes and basically give themselves unlimited coins.
While doing this would crumble the whole network and the value of the coin would plummet, the danger is there. A decentralized system, combined with tough competition, has created centralized places of power that endanger the whole network. While it is not clear how easy or noticeable such an attack would be, depending on how it would be carried out, it is blatantly obvious that this is something to be careful about.
Thank you for reading our blog. If you have any questions about the topic or want to suggest a new one, please write an email to [email protected].