- Traditional mining – Proof of Work
- Modern crypto mining — Proof of Stake
- Other mining algorithms
- What influences the profitability of mining
Before we answer the question of what influences the profitability of mining, let’s recall what types of mining exist.
Proof of Work (PoW) is one of the most common mining algorithms. It is used to mine Bitcoin. When this algorithm is used, miners solve complex mathematical problems to validate transactions and add new blocks to the chain. Since these tasks require significant amounts of computational power and electricity, PoW mining can be an expensive and resource-demanding process.
Proof of Stake (PoS) is an alternative mining algorithm that is used in blockchains such as Ethereum, Cardano, and Tezos. Instead of using computational power to solve math problems, PoS miners use their coins to create new blocks and validate transactions. The more coins a miner has, the higher the chances of being selected for creating a new block. This algorithm is more energy-efficient and environmentally friendly as it does not require a lot of processing power.
Apart from PoW and PoS, there are other mining algorithms that are used for various cryptocurrencies. These include Proof of Capacity (PoC), Proof of Authority (PoA), and Delegated Proof of Stake (DPoS).
Proof of Capacity (PoC) is an algorithm that requires miners to prove their computational power by reserving space on their hard drives for storing pre-computed hashes. The more space is reserved, the higher the chances that a miner will create a new block.
Proof of Authority (PoA) is an algorithm where miners are chosen based on trust and authority. In this case, network members who already have a positive reputation are given the right to validate transactions and create new blocks.
Delegated Proof of Stake (DPoS) is an algorithm where miners are chosen by a vote of other network participants. Coin holders can delegate their coins to other participants who will act on their behalf and create new blocks.
Most importantly, the profitability depends on the complexity of cryptocurrency mining. Traditional mining (PoW) is based on solving a mathematical problem. The complexity determines how difficult it is to solve the math problems required to add new blocks to the chain. If the complexity is high, miners need more time and processing power to solve the problems and get rewarded. Therefore, the higher the complexity of cryptocurrency mining, the more competitive the mining process becomes..
In this case, the miner with the most powerful equipment wins.
The second factor is energy consumption and the cost of electricity. For example, Bitcoin mining requires a significant amount of energy and can be quite expensive. Miners must ensure that their equipment is constantly powered and cooled, which is associated with significant energy costs. Moreover, the cost of electricity can vary greatly across countries and their regions, which can have a significant impact on the profitability of the entire process. Low electricity costs and energy-efficient equipment can significantly improve the results of mining.
Choosing the appropriate equipment also plays an important role in PoW. Cryptocurrencies use different mining algorithms, and each algorithm may require specific hardware. Miners should choose equipment that meets the requirements of the algorithm and provides enough processing power to fulfill the tasks. In addition, the cost and availability of equipment can also affect the profitability of mining.
Compared to PoW, the PoS algorithm has several advantages:
- there is no need to buy, set up and maintain equipment;
- electricity costs are significantly lower;
- the assets are used in an optimized manner;
- the fees are fixed and do not depend on the transaction amount.
When this algorithm is used, a miner needs to purchase a sufficient amount of cryptocurrency and lock it in the blockchain. The returns can reach 20% or even 50% per year, depending on the results of the chosen blockchain.
In PoS consensus crypto mining, it is important to have a powerful server that can stay in the network 24/7. Accordingly, a stable high-speed internet connection is also required.
Due to the cost of Bitcoin, it is still the most profitable cryptocurrency for mining. However, it also requires significant investments. This is why not every Bitcoin mining farm always pays off.