Getting involved in cryptocurrency means making choices, no matter how you take part.
Want to wet your feet by crypto investing? There are over 7,000 coins to place your bets on with a total market cap of hundreds of billions, tens of thousands of markets, and hundreds of exchanges to facilitate trades. If, on the other hand, you’re more advanced and want to try DeFi, yield farming strategies expand daily with high stakes.
On another level, token founders face a major choice: deciding on the fundamental nature of their cryptocurrency. Parallel to the coin’s founding philosophy, one of the essential decisions they must make is whether the crypto they issue will be mineable, non-mineable, or pre-mined. This choice will significantly affect the token’s blockchain network architecture, how that network is maintained and secured, and how new cryptocurrencies are minted into circulation.
Choosing between mineable and non-mineable will also, by default, indicate the consensus mechanism by which the token will be validated. While there are several consensus mechanisms in use, the most prevalent by far are Proof of Work (PoW) and Proof of Stake (PoS).
PoW – transactions are validated by mining, which requires validators (miners) to solve an extremely complex computer puzzle. In this energy intensive competition, a block reward is won by the first miner who manages to solve that block’s problem.
PoS – a new block’s creator is selected in a deterministic way, depending on the validator’s token wealth or “stake” in the network. Miners are paid in transaction fees instead of block rewards. While PoS is significantly more cost effective and uses less energy, it has been criticized as being less reliable and trustworthy than PoW, as well as a rich-get-richer system due to the way that ownership of capital is rewarded within the network. (Cointelegraph compares in greater depth here.)
Which PoW Coin Should I Mine?
People’s tactical choice between PoW and PoS can be influenced by a wide range of factors. In addition to energy consumption and security preferences, allegiances can reflect someone’s philosophies on cryptocurrency and decentralization.
For those who are attracted to rolling up their sleeves and earning revenue through equal parts engineering, physics, finance, and obsessive efficiency, mining can be an extremely satisfying—if challenging—venture. Going into business as a crypto miner means making a commitment to the PoW consensus mechanism, and from there comes another daunting choice with big implications: Which PoW coin is the best to mine?
It’s a complicated calculation that goes beyond simply choosing whether to mine the two best-known PoW cryptos, Bitcoin (BTC) and Ethereum (ETH). CryptoSlate currently names 506 PoW coins in its coin listings:in all, PoW coins make up 75% of the total crypto market with a $264 billion market cap at the time of this writing.
Which PoW crypto to dedicate scarce sources to is a question which gets exponentially more difficult as more coins are considered, such as GRIN, ZCash, RavenCoin, Monero, and Ethereum Classic. For a microcosm of that selection process, it’s helpful to examine factors influencing those who mine Bitcoin vs. those who mine Ethereum.
One key comparison they make is that of mining difficulty. A miner might evaluate how much revenue they could earn monthly/yearly by calculating the cost of a BTC or ETH mining rig (including shipping). Next, consider the hashing power, power consumption, and cost per KW/h. Calculate the profit ratio per day/week/month/year and see which token excels.
Miners must also look ahead. How will each token’s difficulty rate increase? Could the difficulty climb so high as to be unprofitable?
Speaking of the future, consider the token’s commitment to its consensus mechanism. That’s exactly what Ethereum is doing as it moves from PoW to PoS with its upcoming Casper hard fork. Pick a PoW that switches allegiance, and your mining rig could be made obsolete. If it goes PoS, will you have a sufficient stake to earn relatively high rewards?
Another consideration might be how the miner sees the relative value of two cryptos increasing in the short, medium, and long terms. Which protocol’s coins will be worth more over time, and what is your own timeline? (See BTC vs ETH compete in this CryptocurrencyFare article.)
Capex, Opex, and Intangibles
All of the above informs the miner’s decision. On the infrastructure side, different protocols and miner-specific factors cause miners to incur varied Capital Expenditure (Capex) and Operational expenses (Opex). The more efficient operators get an edge, with the most economical and renewable electrical energy sources increasingly shown to drive the Opex costs down.
Beyond the technical, a miner finding their PoW might seek protocols aligned with their own personal or business objectives. A committed community can be a powerful draw, adding true value to the network over time.