In the Proof-of-Work (PoW) consensus mechanism, miners compete against each other to solve cryptographic puzzles known as hashes. They are only able to solve these hashes using the raw computational power provided by powerful hardware. Correctly solving these puzzles is the proof of the work performed by a miner, for which they are rewarded a “block reward” (in bitcoin). Miners can then create the new block and begin confirming the transactions.

About ten years ago, the average person was able to mine several bitcoins each day using a regular gaming setup. Fast-forward to the present day, and you’ll witness multi-million dollar corporations being set up solely to mine bitcoin. For individuals, only those willing to shell out thousands of dollars on hardware and join a mining pool are in with a chance of scoring some.

And yet, bitcoin mining hardware remains relatively scarce throughout the world. That’s because people swept up in the bitcoin craze often dive into mining without considering its true profitability. While many factors influence mining profitability, hardware costs are likely to be the most painful.

Indeed, setting up a mining rig for the first time is a costly endeavor. ASIC (Application Specific Integrated Chip) mining equipment offers the best performance, though $5000 or more is typically needed to purchase the cream of the crop. GPU mining setups are much easier on the wallet, but it will be harder to compete against ASIC users. Miners are better off joining a mining pool with other miners to secure a decent return. And even then they will only receive a small fraction of the original block reward (since it’s adjusted in proportion to the contribution). Despite being the cheaper option, GPUs have still seen a 100-200% price rise in recent years due to demand from cryptocurrency miners.

The next hardware cost you’ll face will be the need to upgrade your equipment. That will occur a lot quicker than you think: the development and release of new and more powerful products stop for nobody; especially if a bitcoin bull-run fuels demand! As soon as the new hardware becomes available, other mining farms will be sure to snap them up – putting you at an instant disadvantage. Don’t forget that product warranty either (probably an extra cost)! It would be a demoralizing experience to have your $5000+ rig become a $5000 door-stop.

The costs above are merely those related to the hardware. You’ll also need to fork out cash for electricity and possibly even cooling equipment. In reality, many factors may destroy the profitability of your PoW mining venture, including difficulty spikes, price crashes, power cuts, shipping delays, and more.

As you can see, there are clear monetary costs associated with PoW mining hardware. But how about the damage to our environment? Or the costs of centralization? That’s right; some observers assert that by encouraging miners to create more efficient and specialized hardware, the PoW consensus mechanism is introducing greater centralization (an ironic development given that cryptocurrencies’ have sought to further decentralization).

Specialized ASIC makers and the miners who buy specialized hardware have guided the evolution of Bitcoin into a version of the traditional banking system, where they now hold all the keys. (OhGodAGirl)

In order to address the disadvantages described above, several other consensus methods have been introduced, such as proof-of-stake and delegated proof-of-stake. And many new consensus mechanisms are also under development, such as proof-of-signature – which aims to address both energy efficiency and security issues.

Only time will tell which method will come out on top, but right now it appears that PoW mining may be beginning to lose the battle.