Cryptocurrencies are sources of fascination and trepidation in almost equal measure. Though some are left concerned by the volatility of these digital currency structures, increasing numbers of people are attracted by the investment potential. While there are numerous cryptocurrencies out there, two stand head and shoulders above the rest in terms of investment popularity and public profile. These are Bitcoin (BTC) and Ethereum (ETH) — two currencies available on the BTC Markets exchange.
Both the Bitcoin and Ethereum networks are supported by a process known as mining. This mining process harnesses the processing power of the computers owned by network users, recording transactions in the cryptocurrency's blockchain. But how does this crypto mining procedure work in practice, and how is Ethereum mined specifically?
Ethereum first appeared some six years after Bitcoin in July 2015. While Ethereum does use similar blockchain technology to Bitcoin, it differs slightly. It uses smart contracts to help developers create applications based on the Ethereum network, effectively pushing the boundaries of what is possible from crypto.
The Ethereum network can be utilised for broader purposes than Bitcoin. Developers can create applications that use the ETH currency (Ether), or create currencies of their own within the Ethereum framework. Despite this, the Ethereum network — like the networks of its competitors such as Litecoin and XRP — is still based upon an underlying blockchain, which means mining still has a role to play.
The Ethereum cryptocurrency mining process explained
What does Ethereum mining mean? Well, Ethereum is not regulated by a central bank or any other authority. Instead, the currency is traded across a decentralised node network.
In order to maintain Ethereum’s decentralised nature, blockchain’s technology is used. This means network users are required to "mine" transactions — i.e. to write these transactions into the blockchain. Mining is also how Ether is generated within the network.
Ethereum uses a proof of work model to write transactions into the blockchain and assign payments to network nodes. Let's take a look at what this means in detail as we examine how Ethereum mining works.
Proof of work mining
Proof of work crypto mining works like this:
- A transaction takes place.
- The transaction is mined by online nodes. These are the user computers that will automatically complete the mining task.
- These user computer nodes then solve a complex mathematical puzzle to add the transaction data to the blockchain. The node that completes the puzzle first adds the transaction to the blockchain and is rewarded.
- Once the transaction is added to the blockchain, the node keeps a copy of this updated blockchain.
- All other nodes on the network receive an updated copy of this blockchain, ensuring a consensus across the board.
- The proof that the specific node completed this mining task is stored too, and a portion of the transaction fee is delivered to the node owner's crypto wallet, rewarding them for completing the transaction.
This is the traditional way for crypto networks to mine transactions, and it has been used on the Bitcoin and Ethereum blockchains since the beginning. However, there are some criticisms of this model.
For instance, both Ethereum and Bitcoin are slow compared to other networks when processing transactions. This may be due to the relative age of the networks, but may also be caused by the difficulties associated with operating proof of work models at scale.
In addition, both networks are criticised due to the carbon footprint of mining transactions. The proof of work model requires huge amounts of energy, and this energy demand is placing strain on power grids around the world. As much of the power we use is non-renewable, this makes it difficult to run crypto networks in a sustainable fashion.
We can expect the proof of work model to change in the future in the face of these challenges. Also, the Ethereum network may face regulatory changes in the future as financial bodies work to bring cryptocurrency under control, which may also lead to moves away from proof of work.
Proof of stake mining
Ethereum is expected to switch from the proof of work model to a proof of stake model, in which mining priority is given to node owners who hold more of the ETH currency. Let's take a look at how proof of stake mining works.
- A transaction takes place in the same way as with proof of work.
- The user computer nodes within the network stake some of their user's ETH currency for a chance to verify — or mine — the transaction.
- The node that has staked the most ETH is given the opportunity to mine the transaction.
- This user computer node solves the complex mathematical puzzle and adds the transaction data to the blockchain. This action is rewarded.
- Once the transaction is added to the blockchain, the node keeps a copy of this updated blockchain like the proof of work model.
- As with proof of work, all nodes on the network receive the updated blockchain copy to ensure consensus.
- The hope is that proof of stake will answer some of the problems currently plaguing cryptocurrency mining. It is undoubtedly a greener option, as it avoids the problem of having multiple nodes working on the same mathematical puzzle simultaneously. In addition, it may increase the processing speed of the network.
Buying and selling ETH and BTC using Australia's largest cryptocurrency exchange
Now that you know more about the mining process for Ethereum, you can begin to trade crypto in confidence. Here at BTC Markets, we help investors do exactly that with Australia's largest crypto exchange.
What is Ethereum mining?
What does Ethereum mining mean exactly? Mining for Ethereum is the process by which transactions are written into the Ethereum blockchain. The process is carried out automatically by computers owned by the network's users and is completely decentralised.
How does Ethereum crypto mining work?
Currently, the network computers that carry out the mining process work concurrently with other computers on the network to complete the task. These computers — known as nodes — must solve a complex mathematical puzzle. The first node to complete the puzzle is permitted to write the transaction into the blockchain and is rewarded accordingly. This is how mining works on the Ethereum network
Does Ethereum use proof of work or proof of stake mining?
Ethereum uses proof of work mining to write transactions into the blockchain. However, this may change to proof of stake mining in the near future. Proof of stake is considered to be the more ecologically-sustainable option for crypto mining
How much is an Ethereum user rewarded for mining?
Ethereum operates a fixed reward system of three ETH per block mined, sometimes known as Ethereum harvesting. This will not change in the future. Ethereum miners have their income guaranteed for the future, although the value of an ETH coin is likely to change. This is different to mining rewards on networks such as Bitcoin. From February 2021, Bitcoin users receive 6.25 Bitcoins per mined block in the blockchain, half of the previous value of 12.5 BTC. This reward will be halved again after another 210,000 blocks are mined, reducing the income node owners receive from mining.