Cryptocurrency mining is the process of harnessing computing power to validate user-initiated transactions. Miners participating in this validation process are rewarded in the native cryptocurrency
that the respective blockchain
The earliest blockchains, such as that of Bitcoin and Ethereum 1.0
, used the proof-of-work mechanism, a system that required brute-force power of computers to solve complex mathematical equations to decrypt the data. This required heavy investments in hardware and electrical power to sustain operations.
To optimise the mining process, miners began outsourcing the transaction authentication process to ease the heavy financial burden. Here’s where cloud computing comes in. Remember cloud mining only applies to proof-of-work systems as it is the only framework involving heavy computational power.
However, newer blockchains such as Ethereum 2.0
, etc. have now shifted to a more energy-efficient mode of mining called the proof-of-stake mechanism. In this, a miner (also referred to as the validator) needs to pledge cryptocurrency to support the blockchain network rather than devoting computing power.
How is cloud mining different?
As discussed above, proof-of-work mining requires a huge amount of computing power which may not be economical for many miners. In cloud mining, miners do not need to personally invest heavily in powerful computing equipment. They can simply lease the hardware from a third party with access to capable supporting infrastructure.
The mining service provider remains the sole owner of the equipment as well as the premises where it is housed and only allows people to use the facilities.
Such mining rigs are usually located in areas where cheap electricity can be availed, and the climate is cooler. This diminishes the overhead costs associated with mining and ensures the process is sustainable over time.
What are the types of Cloud Mining?
Depending upon the purchasing power, individuals can choose between two models of cloud mining:
Host Mining: In this case, miners either buy or rent the entire mining rig. This means that the cost of setup and maintenance must be borne by the miner. This puts miners in control of the leased resources. It allows them to restructure the use of hardware to maximise their chances of mining new cryptocurrency. This also allows them to claim 100 percent of the mining rewards without having to share them with a third party.
Leasing Hash Power: Hashing power is the capacity of the hardware to handle intense and continuous operations. Should miners choose to borrow hashing power, they do not get complete access to all the hardware on the premises. They cannot tweak it either to achieve higher efficiency. The owner of the leased mining farm will also become entitled to the rewards, i.e., the new cryptocurrency minted by the miner. However, this model frees the miners of the maintenance and setup costs that come with the previous model. The rewards shared are directly proportional to the amount of hashing power leased out of the mining farm’s capacity.
Pros and Cons of Cloud Mining:
Cloud mining is beneficial for miners who do not wish to dabble in the technicalities of mining yet reap the crypto harvest. Cloud mining, as mentioned earlier, makes it much cheaper to mine the new currency with reduced liability.
However, the benefits are only monetary. A major cause for concern is the legitimacy of the claims laid by mining farm owners from whom the equipment is leased. Lately, the crypto industry has become the playground for scammers who defraud innocent investors of their hard-earned money.
Many mining farm owners are also known runners of pyramid schemes wherein investor-paid deposits are paid to other investors, and the money goes in circles.
What to check before experimenting with cloud mining:
The costs must get covered with mining rewards over time.
The hash rate being offered must justify the funds you are paying for the equipment.
Steer clear of mining platforms that exercise control over your earnings; some degree of transparency is necessary. Nonetheless, it is equally imperative that you ensure the privacy of your crypto wallet.
Miners are advised to perform due diligence before becoming hand-in-glove with mining farm owners or third parties. Access to information gives you greater control of your operations and reduces the likelihood of being defrauded.