Before you read this article, make sure you understand the basic concepts around mining. We've written a guide on bitcoin mining and proof of work which covers most of these concepts about mining, including: proof of work, what a block is, transaction fees and block rewards. You will also learn how wasteful proof of work can be.
The Ethereum blockchain is also currently using proof of work. It uses an algorithm that allows normal computers an opportunity to mine blocks. It is a modified version of the the Dagger-Hashimoto algorithm and is called Ethash.
The mining algorithm encourages competition for the fastest time to solve a block, known as the hash rate. Specialized and very powerful computers known as application-specific integrated circuits (ASICs) were developed to specifically mine bitcoin, pushing normal CPU/GPU computers out of the mining playing field. Due to ASICs, a lot of the hashing power is centralized in big mining rigs.
They have raised the difficulty to very high levels, meaning that large amount of electricity and computational power are wasted.
To counter this, Ethereum devised the Ethash algorithm that introduces memory-hardness as the main competing angle for miners. This simply means that to mine, the important thing to have on your computer is memory, not speed. This removes the need to acquire hash-competitive mining rigs and introduces memory intensive mining. If the mining puzzle requires memory and CPU then the best hardware to use is a general computer — a normal computer with enough memory can therefore compete.
This large memory requirement implies that big mining pools don't get much benefit from using their vast number of ASICs that share the same memory. This provides little benefit to pool miners, thus encouraging more decentralization and miners.
A block takes approximately 15 seconds to be mined, as opposed to bitcoin which has set its average mining time at 10 minutes.
The availability of the token is not set in stone and may rise to even 100 million before the adoption of Proof of Stake (covered in the next article) using the Casper algorithm, and up to 120 million after that.
This is because the blockchain wants to encourage usability rather than storing value, and the effect of capping cannot be determined as of now due to the dynamism of the blockchain’s scalability, and unexpected issues that could arise with increased demand for the coin.
The block reward is 5 Ether (Eth) per block. There exist proposals to reduce this by 40% to 3 Eth, to assist in reducing the difficulty level and encourage more mainstream users with good GPU machines to start mining as the blockchain works towards Proof of Stake.
Mining difficulty for Ethereum increases every 1000 blocks, and in late 2017, it is predicted to escalate to a scale when mining becomes uneconomical, to coincide with a switch from proof of work to proof of stake.
The initial distribution of the coin was done through an Initial Coin Offering to raise money for the development of the project. Slightly above 60.1 million Eth was released to purchase about 31,529 bitcoins, which was equivalent to about $14 million.
The Ethereum Foundation awarded itself about 15% of this revenue for research and development.