How to Mine Ethereum | First Steps | Guide

When it comes to investing in Ethereum, mining is one of the more popular ways. It is the activity of dedicating computing resources toward the verification of transactions and generating new Ethereum blocks. It also entails contributing to the governance and security of the network.

This detailed guide will learn about the unique features of mining Ethereum and how different it is from mining Bitcoin. We’ll take you through things to consider before investing in Ethereum mining, such as hardware, software, and the mining community.

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What is Ethereum?

Ethereum is a decentralized autonomous blockchain network comprised of three parties:

• Developers;
• Miners;
• Users.

The developers create the code and implement technical changes to the network. The miners help generate the new coins, confirm transactions and contribute to the governance of the blockchain. Users take advantage of the selling proposition of the network. In Ethereum’s case, it is a platform that hosts smart contracts.

Smart contracts are pieces of code that execute automatically when a specific set of conditions is met. They utilize Ethereum’s global computing network.

Ethereum also provides a decentralized digital currency called Ether (ETH) to facilitate value exchange within the network or cryptocurrency exchanges.

The three components of the Ethereum network are interdependent and have to work together in harmony all the time. If the developers stop contributing to the network, it will fail. The same case happens if miners stop mining or users abandon the community.

What is cryptocurrency mining?

Cryptocurrency mining means dispensing computing resources towards solving complex math challenges. Since there are several miners in the network, the first one to solve the challenge is to create the next block and be rewarded with new ETH coins. This type of mining is referred to as Proof of Work (PoW).

Additionally, mining in the Ethereum network also means verifying and validating transactions. Every transaction performed has to be verified before it’s included in the blockchain. For this activity, miners are compensated with transaction fees.

Both individual users and smart contracts have to pay network fees to have their transactions included in the blockchain.

As described above, we can identify three types of rewards to Ethereum miners:

• Block rewards – paid to miners for generating a new block;
• Transaction fees – paid to miners to incentivize transaction verification;
• Gas fees – same as transaction fees but paid by the smart contracts.

Ethereum mining explained

We’ve stated above that Ethereum uses the popular PoW consensus mechanism to facilitate block generation. This method has its pros and cons. However, according to the Ethereum core developers, it seems to have more cons than pros.

The biggest con is that it is not scalable in its current implementation. Ethereum is a Turing Complete blockchain that allows other decentralized applications (dApps) to run on its network. It needs to be fast to achieve this.

To solve this problem, the developers upgrade the network to Ethereum 2.0, which implements the Proof of Stake (PoS) consensus mechanism. PoS uses staking instead of the mining as a means to secure and scale the network.

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Ethereum’s Proof of Work

There are two aspects of PoW mining that are essential to understand. These are:

• Hashrate – measured in hashes per second (H/s), it is the number of calculations all the computers (miners) in the network can perform in a single second. This means that the more miners there are in the network, the higher the hash rate and vice versa.
• Network difficulty – measured in hashes per solution. It is a measure of how hard it is to solve complex mathematical problems.

The two factors are directly correlated to one another. The network difficulty trails the hash rate, as an increase (or decrease) in hash rate, causes a subsequent increase (or decrease) in the difficulty score.

Ethereum mining vs. Bitcoin mining

Bitcoin and Ethereum have many similarities. They are both public blockchains. They both have native cryptocurrencies used for value exchange, and they both use the Proof of Work consensus mechanism.

This is about the extent of similarity that the two networks share. They have a lot more differences than they do similarities. Here are some of them:

• Mining algorithm. Despite Ethereum and Bitcoin using the PoW consensus mechanism, they don’t use similar hashing algorithms. Bitcoin uses the SHA-256 encryption algorithm, while Ethereum uses Ethash.

Bitcoin’s SHA-256 allows for the use of highly specialized equipment called ASICs (Application Specific Integrated Circuit chips). Ethereum, on the other hand, can be mined using GPUs (Graphical Processing Units). ASICs are much more powerful and expensive compared to GPUs.

Ethereum core developers are upgrading the network to Ethereum 2.0, which will mean the end of mining in favor of staking through the PoS consensus mechanism. In this mechanism, individuals or institutions interested in verifying Ethereum transactions will be required to stake Ether.

• Block rewards. When Ethereum launched in 2015, its block generation reward was 5ETH. It was later reduced to 3ETH in 2017 and further down to 2ETH in 2019. In contrast, Bitcoin launched with a 50BTC block reward. The reward is cut in half every four years or every 210,000 blocks (halving event).

It’s also worth noting that Bitcoin’s supply is capped at 21 million coins while Ethereum’s coin supply is virtually limitless. Although, a yearly coin issuance limit of 18 million Ethers applies.

• Block generation time. Ethereum’s miners create a new block every ~13-14 seconds, while Bitcoin’s miners do the same roughly every 10 minutes. This means that about 6,600 Ethereum blocks are created every day compared to 144 blocks on the Bitcoin network.

Additionally, an Ethereum block is significantly smaller than a Bitcoin block at roughly 45Kb and 1.0Mb, respectively.

• Repurposing equipment – the GPUs used to mine Ethereum have a broad application spectrum. If mining Ether becomes uneconomical for some reason, it is possible to repurpose the equipment towards mining other coins or gaming. This is not the case with the ASICs used to mine Bitcoin. They are specifically created to mine Bitcoin and its limited variants.

The above points are not the only differences between Ethereum and Bitcoin mining. However, these are the main.

Ways of mining Ethereum

There are three ways to mine Ethereum (and any other cryptocurrency that supports a PoW consensus). They are:

• Solo mining – involves mining alone. No partnerships, no pools of miners to join. The idea is that the miner can contribute hashing resources directly towards solving the mathematical problems and verifying transactions.

Mining Ethereum solo is highly discouraged unless you are able to set up an industrial-grade mining operation. The hash rate required to mine a block on Ethereum has grown past the hobbyist level, and anyone trying to mine solo may have to do so for a very long time to see any returns.

• Pool mining – involves joining a team of other miners and contributing one’s hashing power towards a common pool. Miners’ coming together increases their cumulative hashing rate, increasing their chances of creating the next block.

However, not all pools are recommended. Here are the factors to consider when looking for a mining pool to join:

• Geographical location. Look to join a mining pool as close to you as possible.
• Pool size. The larger the mining pool, the larger the combined hash rate meaning the higher the chances of creating more blocks.
• Minimum distribution. You want to get your earnings as soon as possible. The lower the minimum distribution amount, the sooner you can enjoy the rewards of your mining.
• Pool fees. Typically this ranges between 0.5% and 1.5%. It is the cost of joining the pool. Ideally, the lower the fees, the better, but this is not always the case. You want to consider the other factors too and make a decision that works for your specific situation.

Try to find the largest Ethereum mining pool HERE with the least fees and the least reward distribution limit with servers closest to you.

• Cloud mining – works in a similar premise to pool mining, but instead of contributing hashing power, you contribute funds. With the funds, the cloud mining provider will purchase Ethereum mining equipment and mine on your behalf. The rewards are split amongst all investors, with the company receiving a fee for the service. 

PROS: Here’s why you might opt to invest in a cloud mining company:

• Avoid purchasing, installing, and maintaining the equipment. This is a great selling point for cloud mining. Most individuals who would like to mine Ethereum are not technically minded, and having to outsource this activity could be appealing.
• Easier and cheaper to start and run. Teeing off on the previous point, through cloud mining, the investor would avoid Ethereum mining inconveniences, such as noise from the GPU cooling fans. The GPUs often overheat during operation. You also won’t have to deal with disposing of the worn-out miners.

CONS: The disadvantages of cloud mining include:

• Lack of control over the mining equipment. Cloud mining investors often have little to no say in the application of their mining equipment. GPUs can easily be repurposed to mine other coins other than Ethereum, and the investors may not be aware of the exact coins being mined by their equipment.
• Too risky for investors. The risk to reward ratio in this business model is negatively skewed towards investors, with little to none borne by the company operators.
• Scam associations – this business model is popular with scamming individuals and, for this reason, we do not recommend it.

Best Ethereum wallets ideal for mining Ether

There are so many different wallets in the market today that will help you store your Ether. However, most are not ideal for a miner’s needs. Miners often hold their mined coins for medium to longer-term periods. The safety of these assets is paramount.

In this section, we will highlight the subtypes of cold wallets that are ideal for miners. If you need a more detailed look into the different wallets, check out our guide on how to buy Ethereum Safely.

Things to consider when choosing a wallet for mining Ethereum

1. Hot or cold

A wallet is considered either hot or cold, depending on its connectivity to the internet. Hot wallets can be accessed remotely through the internet, making them less secure to store Ether for the medium to long term. Hot wallets include web, mobile and desktop wallets.

On the other hand, cold wallets are safer to use since they are inaccessible over the internet. They include hardware wallets such as Ledger Nano S and Trezor, paper and steel wallets like ColdTi, Billfodls, or SteelWallet.

2. Full or ‘Light’ node

Ethereum wallets can be either full or light nodes. Full node wallets are designed to download the entire Ethereum ledger onto the device in which they are installed. An example is Mist, the official Ethereum wallet.

Light node wallets do not store a full copy of the Ethereum ledger. Instead, they refer to other trusted full nodes. This makes them easier to download and operate. Most Ethereum wallets are light, including the Ledger Nano S and Trezor wallets we mentioned above. All mobile and web wallets are light nodes.

Ethereum mining setup (5 steps)

Step 1. Choosing the hardware

Choosing the right hardware for your Ethereum mining activities is essential. This is because the wrong hardware could mean the difference between being profitable and losing money.

When considering the perfect hardware for you, the most significant factors to consider will be price, availability, and performance. There are two major brands to choose from: AMD and Nvidia. Both of these are well known for their graphics cards which are popular with gamers.

AMD cards are generally cheaper but more versatile than Nvidia’s, meaning that they can mine several other cryptocurrencies. Nvidia cards, however, trumps AMD’s in terms of performance.

Better performance often means more energy consumption which increases mining costs and eats into your profits. To be profitable, a miner needs to strike the right balance amongst all these factors. To know which card best suits your situation, use a profitability calculator.

You can get profit estimates for almost any mining equipment online. If the specific card you are considering is relatively new with no prior metrics, you can use the calculator above from CryptoCompare. Just plug in the paper specifications from the manufacturer’s website and energy price in your region.

A profit calculator is essential in deciding which mining GPU to invest in based on your profitability targets.

Another significant consideration for mining hardware is the amount of VRAM that comes onboard the graphics card. Due to the Ethash mining algorithm used to mine Ether coins, there is a DAG (directed acyclic graph) file that has to be stored in every card. The DAG file is updated every 30,000 blocks, and its size is now just over 4Gbs. This means that every GPU under consideration has to have at least 6GBs of VRAM to mine Ether.

Step 2. Installing the hardware

Most computer hardware components need companion software to communicate effectively with a computer’s other components. The software designed to perform this task is called a driver.

Each manufacturer creates a companion driver for its hardware. Both AMD and Nvidia have repositories for all versions of their hardware as well as target operating systems.

Visit the following support pages from either manufacturer to download the latest versions of drivers for your chosen hardware: AMD | Nvidia

Make sure to download the correct driver depending on your operating system and GPU card. 

IMPORTANT: Before you jump for mining Ethereum
➡️ Make sure you have a decent place to put a mining rig because space must be well ventilated, with good sound isolation and heat resistance;
➡️ Only buy new equipment with a warranty because the rig’s components do get broken;
➡️ Try only using a direct internet connection; avoid using Wi-Fi. Especially if your mining rig will be placed remotely and not in your house;
➡️ Rigs do get stuck, so be sure you can access it conveniently 24/7;
➡️ Once you have a rig, you will have to clean it at least once every 2 weeks, so be ready.

We also highly recommend you watch these three videos about Ethereum mining to understand how everything really works.

Recommended video #1: How to Build your First CryptoCurrency Mining Rig

Step 3. Choosing the mining software (client)

Mining clients are different from drivers. While drivers help the graphics cards communicate effectively with the computer, the mining software (also called a client or miner) allows the computer to communicate with the Ethereum blockchain.

These are some of the mining clients to consider:

• Minedollars;
• Phoenix Miner;
• CGMiner.

Claymore receives regular software updates and is one of the most optimized Ethereum miners. It is a popular option. Experiment with most of these choices and find the one that works best for your mining setup. Each software comes with detailed instructions on how to install and set up the computer for mining.

Note: Ensure that you download the correct miner from the official repository. Use the links provided above. Do not download any miner from a third-party vendor.

Step 4. Operating system settings

At the moment, mining Ethereum can be done on either Windows or Linux operating systems. Windows is the more popular option given its ease of use and appealing interface, but Linux gives users more advanced settings and greater control of their mining rigs. It’s best suited for advanced miners.

Now that you have everything in place – your wallet installed, hardware installed and configured, and the mining client installed – there is one last step to go.

Your operating system’s default settings may not be ideal for mining and therefore require some changes. These changes include:

• Control Panel settings – to optimize system performance by increasing virtual memory.
• Power Settings – to optimize system settings and prevent the computer from activating ‘Sleep mode’ while mining.
• Registry tweaks – also to optimize system performance by disabling unnecessary background services such as Windows updates.

Step 5. Join a mining pool

The final step to mining Ethereum is joining a mining pool. Earlier, we mentioned that joining a mining pool is the best way to mine Ether. It is possible to mine ETH alone, but it is not likely you will succeed.

Revisit the section above on the “Ways of mining Ethereum” for some things to consider when choosing a mining pool to join.

Each pool will have a specific setup guide and possibly a list of stratum servers you will need to connect. You can find this information on their websites.  Within these instructions, you will find other details, such as instructions for editing your miner files, changing your mining address and the mining rig name.

What you must know about Ethereum 2.0

In the ongoing upgrade to Ethereum 2.0, the popular PoW consensus mechanism will become obsolete in favor of Proof of Stake (PoS). Ethereum’s core developers argue that PoS has several advantages over PoW. These include:

• Energy efficiency – PoW has often been criticized for being very inefficient in terms of energy consumption. Ethereum’s GPU miners and Bitcoin’s ASICs consume a lot of energy. This causes several issues, including fire hazard risk if the machines are not cooled properly. Staking, on the other hand, dispenses with miners.
• Lower entry barriers – GPU miners are not cheap, which creates a massive obstacle for people who want to start mining Ether. In Ethereum 2.0, validators will only need to stake ETH coins. Staking does not require a significant investment in terms of purchasing and installing the necessary hardware.
• More decentralization – given the low entry barrier, it is expected that ETH 2.0 will attract more stakers to the network. More stakers will mean less centralization compared to the current Ethereum version.
• More scalable – the biggest reason to migrate from PoW to PoS was to increase the scalability of Ethereum. Currently, with PoW, Ethereum can process a maximum of about 30 transactions every second. However, Ethereum 2.0 promises to bump up this number to as high as 100,000 transactions every second.

Conclusion

There you have it, your detailed guide to mining Ethereum. You have learned what it means to mine ETH, the various ways to do it, and what to consider before starting.

We also covered the mining setup from choosing the perfect Ethereum mining equipment, installing it, and configuring it correctly.

Finally, we highlighted the highly anticipated network upgrade to Ethereum 2.0, which uses PoS instead of PoW for transaction verification and validation.

You are now ready to start mining and staking Ethereum.

Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk

Ethereum Mining FAQs