How is mining profitability calculated?
All mining calculators use same or similar formula for calculating estimated mining profitability.
The network-side variables that are used in the mining profitability formula and are affecting the mining profitability are:
- Network hashrate: Network hashrate is the amount of hashrate on the network provided by all machines that are mining that coin. The more machines are out there, the higher is hashrate and the more competitive is the market when searching for rewards. You can imagine if there is 1,000 machines chasing a block, one machine will have higher chance to find a block in comparison to 100,000 machines chasing for that same block.
- Difficulty: Difficulty is a variable that is directly connected to network hashrate. If network hashrate is higher so is the difficulty and they both have the same effect on the estimated calculated reward.
- Block time: Block time is a variable that helps identifying how many blocks will be (theoretically) found in a certain period of time. Once we know how many blocks are found in one minute, one hour, or one day, we know how blocks are distributed in regard to network hashrate and how machines on the network will divide these rewards between themselves.
- Block reward: Block reward is the amount of coins the machines will get once they find the block. Each blockchain has its own number of coins in a block, and some have dynamic mechanisms that decrease the amount of coins in the block with time. For example, Bitcoin has a halving every 4 yours, which means that the amount of coins in the block gets divided by 2 every 4 years: 50 (2008), 25 (2012), 12.5 (2016), 6.25 (2020), 3.125 (2024), 1.5625 (2028), etc.
- Transaction fess: For some coins transaction fees goes to the block reward part of the reward for miners, which makes rewards much more dynamic. Especially for ETH blockchain these transaction fees rewards were even higher than base reward in the past. The dynamic part of transaction fees is what makes sudden spikes in rewards when there is a lot of transactions on the network.
- Price: If you are checking mining profitability in a fiat value, a coin's price is also one of the variables that affect the final results. Since each exchange is trading with different exchange rate, final results can vary.
The user-side variables that are used in the mining profitability formula and are affecting the mining profitability are:
- Hashrate: The more hashrate you have, the higher is the chance that you will participate in finding a block and collect the coins in it. If you are mining solo, all of the coins in a block go to you, but keep in mind that not everyone can mine solo. You would need the same amount of hashrate as some pool to be able to compete against all other pools. If you are mining on a pool, then you share the coins in a block with other miners that helped finding the block. A side note: In reality, it is the shares that are getting rewarded, but the hashrate is a unit that is calculated from shares for a better presentation. You can have high hashrate, but if shares are getting rejected, your actual hashrate is lower.
- Power consumption and electricity costs: If you provide electricity costs and power consumption, additional costs can be deducted to get the final profit per day/week/month.
- Pool reward scheme: Different pools are paying under different reward schemes. Some pay for all valid shares you send them, some only for last N shares, some pay you base reward without fees, others have different reward methods for base fees and different for transaction fees, and some have dynamic mechanisms in place.
- Pool fees: Each pool has different fee that it takes for operating.
- Pool payout rules: Some pools charge transaction fees to miners and others are sending payouts for free (either they cover the fees or they confirm their own transactions).
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