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Ethereum (ETH) mining
Read the simple explainer of how Ethereum (ETH) mining works.
What is Ethereum mining?
Ethereum mining is the process of validating and securing all transactions that take place on the Ethereum blockchain.
Like Bitcoin, the Ethereum blockchain runs on a proof-of-work (PoW) mechanism. It is how the network remains secure and operational. At the heart of a proof-of-work mechanism lies a network of volunteers, more commonly referred to as "miners". These miners verify transactions and subsequently add new blocks to the blockchain.
To earn the right to verify transactions miners must race to solve a complex mathematical problem. The miner that finds a solution first, and therefore proves they have used a certain level of computational power, is rewarded with the opportunity to validate transactions. After validating all new transactions and adding a block to the blockchain, the miner is rewarded with the native cryptocurrency Ether, or ETH.
How to mine Ethereum in 5 steps
- Create an Ethereum wallet. Before starting the process of Ethereum mining, you must find a safe place to store the private keys of your cryptocurrency assets. The private keys of a cryptocurrency give a user the authorisation to transfer, sell or exchange. As they are so important, private keys are usually stored for security within a personal cryptocurrency wallet. Therefore, the first step is to create a safe and secure cryptocurrency wallet for storing your future ETH holdings.
- Choose a graphics card. To begin mining ETH, your computer will need to be fitted with an acceptable GPU (Graphics Processing Unit). These are sometimes referred to as a graphics card. It is the GPU that determines the hash rate (power output) of your computer and the likelihood of being chosen to mine ETH. You will need to compare and choose a range of GPUs to find a suitable one. To increase the odds of being chosen to produce a block and get rewarded with ETH you may want to consider setting up your own mining rig. A mining rig consists of several GPU units to increase your mining power.
- Install the software. After installing the drivers for your graphics card(s), you'll then need to install the correct mining software. Mining software connects your computer to the Ethereum blockchain. It is how your computer can validate transactions and add a new block to the chain. It is also how you are rewarded with ETH. If you're comfortable using the command line you can install a program called Geth. However, for those less familiar with code there are a wide range of other software options (such as MinerGate and Ethminer).
- Joining a mining pool. As Ethereum mining has become more popular, it has become increasingly difficult to compete with the power output of well-funded organisations. As a result, mining pools were established which allow individuals to "pool" mining resources. If you do not have a significant power output, you may need to join one of these pools. Examples include SparkPool and Ethermine.
- Start mining. Once the hardware and software have been configured, and you have joined a mining pool if necessary, you can now follow prompts within your chosen mining client to start mining ETH. Make sure to fill in the details of your ETH wallet address to receive rewards.
How much can an Ethereum miner earn?
It is impossible to say how much can be earned from Ethereum mining. However, there are some important aspects to consider to understand whether it might be a profitable venture.
To make a profit from Ethereum mining, returns need to outweigh costs. The most successful Ethereum miners keep their computing output high, which improves their chance of earning more ETH, while keeping the cost of hardware and electricity low.
Any returns that are earned may then need to be taxed. Although returns may vary and are not guaranteed, the local government may require earnings to be documented. This will vary depending on the location of the miner.
Ultimately, it is the price of ETH that will determine how much a miner earns. All rewards are gifted in the native cryptocurrency ETH, and so any price fluctuations affect what a miner will make. As electricity and hardware are often purchased using a fiat currency, such as USD, the fluctuation of ETH:USD will likely determine profitability.
The costs of mining Ethereum
While not requiring the same expensive hardware requirements as Bitcoin, Ethereum miners still need to consider several costs that may affect the profitability of the venture.
Ethereum mining can be completed from home using a graphics card (GPU) provided by a hardware supplier such as Nvidia or AMD. The cost of GPUs can vary depending on their power output but often range between $900 and $2,000.
Once Ethereum mining hardware has been acquired, it must then be powered by electricity. Miners try to keep electricity costs as low as possible as this will ultimately decide how much profit a miner makes on any given day. Over a longer period, electricity costs can soon start to add up and eat into profits. Searching for the best location for establishing a mining rig can be a big decision.
Outside of hardware and electricity, the only other prominent fee involved in the process is the cost of joining a mining pool. As mentioned previously, a mining pool allows for a collection of individuals to pool computing power to stand a greater chance of competing with larger organisations with unlimited resources. Access to a mining pool will incur a charge, which will be taken from any rewards earned. This usually varies between 2-4%.
The final cost to consider is that once ETH has been earned, there will be a fee involved when converting ETH to either another cryptocurrency or back into fiat. Trading fees will vary depending on the cryptocurrency exchange or broker used.
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