What Is Cryptocurrency Mining?

The Logic of Cryptocurrency Mining

Three Roles of Mining:

1. Transaction Verification: Ensure the authenticity and validity of each transaction and prevent double - spending.
2. Blockchain Maintenance: Connect new blocks in chronological order through a chain structure to form an immutable distributed ledger.
3. Security Assurance: The computational power competition mechanism (PoW, Proof of Work) makes tampering with the blockchain require extremely high costs, thus safeguarding network security.

Comparison of Mining Hardware: ASIC, GPU and CPU

Mining Ecosystem and Alternative Solutions

Mining Pools

• Operation Mode: Small and medium miners combine their computing power and distribute block rewards according to the proportion of contributions, reducing the risk of individual randomness. For example, AntPool accounts for about 20% of global Bitcoin computing power, and miners can obtain stable daily income.
• Income Distribution Mechanism:
  • PPS (Pay Per Share): Settle immediately according to the submitted valid shares, and the risk is borne by the pool owner.
  • PPLNS (Pay Per Last N Shares): Distribute according to the average of the recent N shares, with large income fluctuations but the long-term value approaching the theoretical value.

Yield Farming

• Operation Process: Users deposit tokens into liquidity pools (such as Uniswap, PancakeSwap), and smart contracts allocate transaction fees and governance token rewards according to the proportion of funds.
• Risk Warnings:
  • Impermanent Loss: When the token price fluctuates violently, the value of the assets in the pool may be lower than simply holding them.
  • Smart Contract Risks: Code vulnerabilities may lead to asset theft (such as the $320 million loss of the Wormhole protocol in 2022).
• Advantage Comparison:
  • No hardware investment is required, and you can participate with as little as $100.
  • High income flexibility, and the asset allocation can be adjusted at any time (such as switching from the ETH pool to the BTC pool).

Novice Entry Strategies: Mining vs. Trading

Suitable Crowd for Mining:

• Long-term Holders: Plan to hold cryptocurrencies for more than 5 years and are willing to exchange electricity costs for low-price chips.
• Technology Enthusiasts: Familiar with hardware operation and maintenance (such as cooling solutions and network optimization), and can build a small-scale mine (need to pay attention to the electricity policies of different countries, such as the restriction of cryptocurrency mining in some areas of China).

Suitable Crowd for Trading:

• Short-term Speculators: Good at analyzing market trends (such as K-line charts and MACD indicators), and profit through buying low and selling high.
• Low-risk Preference: Can choose stablecoin wealth management (such as USDT annualized income of 3% - 8%), avoiding the risk of computing power competition.

Cost Comparison (Taking Bitcoin as an Example):

Future Trends and Compliance Suggestions

1. Algorithm Changes: Ethereum has shifted from PoW to PoS (Proof of Stake), and miners need to switch to other currencies (such as ETC, RVN) or exit the mining field.
2. Green Mining: The EU's "Regulations on the Cryptocurrency Asset Market" (MiCA) requires miners to disclose energy consumption, and renewable energy (such as solar mines) will become the mainstream.
3. Compliance Paths: Countries such as the United States and Canada require miners to declare their income and pay capital gains tax. It is recommended to use professional tax tools (such as CoinTracking) to record transaction data.

Conclusion