How Ethereum Mining Works

Traditionally, when you think of “mining” something it involves harvesting an element, material, or precious metal from some sort of rock, quarry, or the ground. We mine for coal, gold, diamonds, and much more. Cryptocurrency mining is completely different; while it still involves putting forth some amount of effort in the hopes of receiving a desired byproduct, we use computers instead of pickaxes.

In most cryptocurrencies, a record of every transaction is stored on the blockchain - a shared, immutable, and publicly accessible ledger that is constantly updated. Computers that process transactions for a blockchain are competing to earn their share of that block; if they’re lucky, they receive an amount of cryptocurrency as a reward for processing those transactions. This is how Bitcoin works, and it is why it is able to process more and more transactions every day.

How is Bitcoin mining and Ethereum mining similar?

Bitcoin and Ethereum share the same overall approach to cryptocurrency mining: computers on the blockchain compete against each other to earn their share of the block rewards, adding transactions to the blockchain during this process. Energy costs to compute these transactions are high, and it takes a lot of computer bandwidth to remain competitive; because both of these cryptocurrencies run on a Proof-of-Work (PoW) system, each transaction is energy-intensive. Giant networks of “mining farms” compete to earn block rewards, so it can be difficult to earn any BTC or ETH using just your home laptop

How is Bitcoin mining and Ethereum mining different?

While Bitcoin uses the SHA-256 algorithm for processing transactions, Ethereum uses the ethash mining algorithm. Additionally, while Bitcoin is completely decentralised, Ethereum is quite centralised. Whereas Bitcoin transactions are just sending signature hashes, Ethereum transactions send actual cryptocurrency tokens - this means that tokens are in an individual’s possession at all times. Additionally, because Ethereum is centralised, the core developers could, in theory, void or refund a transaction; this is in stark contrast to Bitcoin, although it would be quite energy-intensive to do this on the Ethereum network.

Bitcoin mining is done using highly complex application-specific integrated chips (ASIC) within a computer, while Ethereum mining can be done via more common graphic processing units (GPUs). Using GPUs when mining allows you to mine more types of cryptocurrencies than ASIC mining rigs would allow.

Ethereum is expected to shift away from a Proof-of-Work structure towards a Proof-of-Stake structure, which would be a radical departure from its roots and is being referred to as Etherum 2.0. After this change, Ethereum mining is expected to get radically simpler; no longer requiring complex computer hardware, block rewards can be paid out to users who simply stake their coins in the blockchain’s ecosystem.

The idea of mining cryptocurrency is enticing: simply leaving your computer running in the background can, in theory, net you cryptocurrency. However, the high energy costs, high internet speeds required, and expensive computer equipment needed to stay competitive can make this a daunting challenge for most. While mining Ethereum or any other Proof-of-Work cryptocurrency may be out of reach for the time being, earning cryptocurrency on Proof-of-Stake blockchains may be much more manageable. However, if you think mining cryptocurrency yourself is right for you, be sure to read more about this, ask questions from people who are already involved in cryptocurrency mining, and weigh your options carefully before committing to buying an expensive piece of mining hardware.