Types of cryptocurrency mining
It’s called crypto mining, but really the goal is to secure a decentralised network by verifying legitimate transactions and rejecting illegitimate ones. Bitcoin miners race to solve advanced mathematical equations and every 10 minutes a winner is rewarded with 12.5 new Bitcoins. This has attracted massive mining operations who use high-powered computing equipment and plenty of electricity. Our article on Bitcoin mining explained the competition amongst computers for that coveted prize.
Proof of Work consensus system
So the Proof of Work model is where hardware secures the network via a process that is costly to produce, but simple to verify. Computers try to be the first to solve advanced maths problems. PoW is used by large market cap cryptocurrencies such as Bitcoin, Bitcoin Cash, Ethereum and Litecoin.
One often mentioned criticism of the Proof of Work model is electricity usage. But the contrasting view is that the energy required actually becomes something that backs Bitcoin. Fiat currency such as the Australian dollar has no intrinsic value other than the government’s declaration of it being legal tender. Bitcoin on the other hand, has something quite tangible backing it – open source code running on sophisticated computing hardware powered by enormous amounts of electricity.
Electricity is positive or negative
So the electricity-intensive Proof of Work model can be considered a positive or a negative, depending on your point of view. The other major issue for the PoW model is the susceptibility to what is known as a 51% attack. If an individual or co-ordinated group can gain control of the majority of that network’s computing power, they can basically take it over. Bitcoin and other major cryptocurrencies are highly unlikely to be susceptible to such an attack because gaining 51% of the hash power would be so difficult and expensive. However, smaller coins with lower market caps and less decentralisation of miners are far more susceptible. Quite a few coins have already suffered 51% attacks in 2018.
Proof of Work consensus system
Proof of Stake is an alternative model to secure the network. It doesn’t require the same specialised computers and mining farms like Bitcoin. A combination of cryptocurrency ownership and random selection is used to award fees to the verifier of transactions. As a stakeholder of a digital currency you can have the the right to validate transactions. The more you own, the more likely you are to win the right to validate a block of transactions and earn fees for doing so.
A clear advantage of the Proof of Stake model is its considerably lower cost. It is also less likely to suffer from a 51% attack because hackers would need to control the majority of all outstanding coins.
The biggest disadvantage of the PoS model is the potential for lack of decentralisation. Individuals or groups with a large percentage of coins can be highly influential in the future development of that coin. The BitMEX research team produced some great analysis of the Proof of Stake consensus model if you’re interested in a more detailed look at its strengths and weaknesses.
So neither Proof of Work or Proof of Stake are perfect. Ethereum founder Vitalik Buterin has said they’re likely to move from PoW to PoS, or at least a hybrid of both. Other options are appearing as developers seek innovative solutions. EOS is a top 5 crypto by market cap and they’re using a new approach called Delegated Proof-of-Stake.
Amongst the thousands of cryptocurrencies there are many different types of mining. Bitcoin is the most reliant on expensive equipment and cheap electricity.
Want to learn more about crypto mining?
Jason Robinson wrote a good ‘lessons I’ve learned’ piece which emphasised four key questions to ask yourself regarding computing resources, coins, electricity and commitment.
Or this excitable fella can talk you through it: