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Just like Bitcoin, Ethereum is a decentralized blockchain that is updated and verified by participants of the Ethereum network. The only way to add new blocks to the Ethereum blockchain is by mining them. The word “mining” is an analogy borrowed from the process of extracting precious metals as they need to be mined from the ground at the cost of labor and energy.
Likewise, to mine Ethereum, computers spread around the world compete to solve cryptographic puzzles at the cost of processing power (labor) and energy. Any miner who successfully solves the puzzle first gets to add the next block to the blockchain. For their work, a miner is rewarded with ether (ETH). These rewards compensate miners for securing the network, verifying transactions, and adding blocks to the blockchain.
The current mining reward is 2 ether per block plus all the priority fees contained in the block. A new block is added to the blockchain on average every 15 seconds.
Even though the Ethereum blockchain builds on Bitcoin’s innovations and ideas, its developers did not simply copy Bitcoin’s technology but made several fundamental modifications to fit Ethereum’s purpose best. This has an impact on Ethereum’s mining process.
Ethereum was purposefully designed in an ASIC– (specialized mining hardware) resistant way that only allows for efficient mining with graphics processing units (GPUs) and rejects hashes from AISCs. This stands in stark contrast to Bitcoin, which nowadays is almost exclusively mined with ASICs. The reason for embedding such a restriction into Ethereum’s codebase was to limit the centralization of hashpower as seen within the Bitcoin network.
Unlike Bitcoin, Ethereum originally was designed as an inflationary currency with the ether supply not being fixed. As a result, ether’s supply would grow every year through block rewards that were paid to miners. But a steady inflow of new ether into circulation would eventually put pressure on the ether price. Thus, some investors feared that ether one day could share the same fate as fiat currencies, which are constantly inflated and lose their purchasing power over time.
As a countermeasure, Ethereum cut its block rewards for miners in 2017 from five to three ether. Not even a year and a half later, in 2019, block rewards got cut once more by a third to two ether per block. In August of 2021, another Ethereum update (EIP 1559) was deployed, which fundamentally changed Ether’s tokenomics. Following the update, miners now receive two ether plus all the priority fees contained in a block. But the base fees paid by users are burned by the network, resulting in ether potentially becoming a deflationary currency.
A miner’s effective earnings are dependent on the provided hashrate, the price of electricity, and the cost of the hardware. To calculate your potential profit, enter your specs into a mining calculator.
When the Ethereum network first launched in 2015, ether prices were low (≈1$). Mining ether was no get-rich-quick scheme. Many of the first miners were developers or crypto enthusiasts who believed in the project and wanted to support its cause.
With the ether price steadily increasing, mining became more lucrative, attracting tech-savvy people who understood the network’s potential and were skilled enough to run their nodes. Nowadays, with ether prices being in the four digits, mining ether is a profitable business, even though fiercely competitive. But as Ethereum is switching to PoS in 2022, new investments in mining equipment are unlikely to still prove profitable.
Nevertheless, mining is certainly an interesting option for individuals with access to the unused GPU processing power that want to make some extra money. But with PoS just around the corner and ether staking already available, staking is certainly the simpler, less hardware-intensive, more future-oriented way to earn ether.
As mentioned, ether mining is soon expected to come to an end. Ethereum started the development to switch from a Proof-of-Work (PoW) to a Proof-of-Stake (PoS) consensus mechanism years ago. According to the Ethereum Foundation, the switch from PoW to PoS can be expected to happen in Q2 or Q3 of 2022. For miners, this fundamental shift makes them obsolete, as mining in the form of solving cryptographic puzzles is no longer required for PoS.
Instead of mining ether, users can now stake their ether to earn staking rewards. Investors can either stake ether by running their own Ethereum validator as described here, which requires a minimum of 32 ether. Or they can stake any amount of ether with a staking service. Many crypto exchanges like Coinbase or Binance already offer ether staking. Also, staking is offered by decentralized services such as Lido or Rocket Pool.
Miners wanting to keep using their hardware after the switch can direct their computing power to other blockchains that are still working on a PoW consensus mechanism. The easiest option is Ethereum Classic (ETC), which runs on almost the same hashing algorithm as Ethereum, so it supports the same hardware. All that miners have to do is switch from an ETH to an ETC-mining pool.
When mining ether, there are three different approaches miners can follow.
Mining Ethereum in a pool is the simplest and quickest way to get started. In pool mining, you join forces with other individuals. All the miners joining a pool agree that if one of them solves the cryptographic puzzles, rewards will be split among them according to the hashpower provided. The size of the pool, measured in hashpower, determines how many blocks the group finds on average.
However, not all pools are created equal. When choosing a pool, three key characteristics should be considered: pool size, minimum payout, and pool fee. The pool fee specifies the share the pool administrator gets for running the pool. If a pool has higher fees than 3%, you may want to consider finding another pool. Minimum payout defines the smallest amount one can withdraw from the pool. For instance, if the minimum payout is 1 ether, it can take weeks or months until you reach the required amount in reward payments and can cash out.
Mining on your own seems like an attractive alternative to pool mining, as no pool fees must be paid and rewards don’t have to be shared. To have a realistic chance to solve one of the cryptographic puzzles in a reasonable amount of time though, a miner needs dozens of GPUs. Therefore, solo mining is mostly for professional miners, who run their mining farms.
In cloud mining, you pay someone else to mine for you. Instead of owning and running mining hardware yourself, you rent someone else’s computing power and let them do the work for you. In return, you get the mining rewards. But be aware: cloud mining requires trust in the counterparty, especially when done over an online service. There is no guarantee that the money paid upfront is used to run mining equipment or that there even exists such equipment. Therefore, it is recommended to do cloud mining through long-established, trustworthy cloud-mining platforms such as HashFlare.
In case you don’t already have an Ethereum wallet, you need to create one. There are many wallets available on the market. Two popular wallets are metaMask and Trust Wallet.
Mining requires lots of computing power. To efficiently mine ether, you need at least one powerful GPU unit. Several GPUs can also be connected to so-called mining ‘rigs.’ To ensure that your GPUs work as efficiently as possible, it is important to install the latest available updates provided by your GPU manufacturer AMD or Nvidia.
There are different types of ether-mining software. Go here to download the latest version of Claymore dual miner or find the software you like. To set up Claymore dual miner, follow the step-by-step instructions provided in this Tutorial (point 3.3).
While setting up your mining software, you will have to decide, which mining pool you want to be a part of. There are many choices, e.g., 2Miners or Ethermine. Before settling for one, make sure to check the pool size, minimum payout, and the pool fee.
After having mined for some time, you can reap your earned mining rewards. Go to your pool’s webpage and copy/paste your public Ethereum wallet address into the search bar to get an overview of your mining rewards. Depending on the pool, you can either claim your rewards manually or have them automatically sent to your ether wallet when reaching the minimum payout level.
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