Mining is a process of solving complex algorithms to release a block. When a miner releases a block, then a transaction is complete. Miners verify transactions in the blockchain. As soon as a transaction is complete, miners get a reward. If they are doing a bitcoin transaction, then they get a fraction of bitcoins as a reward.
Since mining is getting competitive by the day, mining happens in rigs. A mining rig is a group of miners who come together to mine together.
Proof of Work vs. Proof of stake
Mining uses a consensus of either proof of work or proof of stake.
Proof of work is whereby a miner can make a transaction valid by proving the work they have done. Even though it sounds like a logical mining method, it uses vast amounts of energy. In some cases, they may force miners to sell their coins to foot the bill.
Proof of stake is whereby a miner makes a transaction valid depending on the crypto coins they hold. That means that if they have a large percentage of coins, then they have more mining power. Proof of stake is an alternative to proof of work, which was the first consensus. Proof of stake is more secure as the reward system is not very helpful to the miner. This makes it less prone to hacker attacks.
Mining in China
For mining to take place, it needs sophisticated machines and a lot of energy. It is because of this reason that mining takes place in China. There is up to 65% of Bitcoin mining in China as of April 2020. China gets a competitive advantage since there is cheaper electricity. There is also better access to specialized hardware manufacturers. Mining is good since it supports the crypto ecosystem. It is also wrong as it releases carbon-intensive emissions, threatening the environment.
Xinjiang is the mining capital of China, and a minor power outage impacts the price of cryptos a big deal. Some places, such as Inner Mongolia, banned crypto mining in April 2021.
Effects of crypto mining in China
Although crypto mining has a significant positive effect, it also comes with negatives. This is why China’s government is discouraging crypto mining and ban crypto exchanges. Some of the effects include:
High electricity consumption
Mining consumes a large amount of electricity. Bitcoin mining in China consumes an average of 128.84 terawatt-hours (TWh) per year. It consumes more energy than some countries such as Argentina and Ukraine.
Adverse effects on the environment
According to Xi Jinping, crypto mining has led to a surge in the illicit coal extraction. High electricity consumption has increased the demand for coal in China. Coal-powered electricity is cheaper, and that is why it is in demand. Although miners can use renewable energy such as solar and wind, it is unstable and reliable. This is pushing them to rely on coal.
Bitcoin mining produces approximately 36.95 megatons of carbon dioxide. This is way higher than in some countries such as New Zealand. In 30 years, Bitcoin could increase the global temperature by two degrees Celsius.
Bitcoin mining in China can produce up to 130 million metric tons of carbon emissions by 2024. The Chinese president is ambitious to make China carbon neutral by 2060. Coal mining is working against it.
The crackdown of mining in China
In late May, China’s State Council started a crackdown on cryptocurrency mining. This has affected the whole industry and caused bitcoin to drop by 30%. The entire industry has lost an approximate $1 trillion total value. The efforts of the government are doing is to ensure financial stability. Individual miners and traders can still slip through the cracks. Mining hubs will decline.
So far, several crypto mining companies have stopped operations in China. A good example is Hashcow and Huobi. BIT.TOP, which accounts for 20% of Bitcoin hash power, also announced moving from China. Many companies do not want to take the regulatory risks and be on the wrong side of the law.
For a total ban on crypto in Inner Mongolia, the local government plans to raise penalties. There are also whistle-blowers in place who get a reward.
Since the law is getting tough in China, miners are seeking alternative countries to move to. Most miners, such as BIT.TOP has already mentioned moving to the United States. Some of the other countries that may also benefit are Canada and Switzerland. They are both big on hydropower and cool temperatures. This will be good for the economy as the rising demand for cryptocurrencies drives the prices up. This makes mining very profitable. It means that those countries will enjoy more income tax.
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