Cryptocurrency mining

In practise, cryptocurrency mining is the process in which transactions between users are verified and added into the blockchain public ledger. Miners build new blocks in the blockchain. The new block always contains a list of transactions in that cryptocurrency. The miners assemble these transactions together. Each block also refers to the preceding block.

As a reward of their work, miners receive a mining fee. The mining fee is a feature, which is programmed in the blockchain of cryptocurrencies. Mining fee also determines how many new cryptocurrencies are generated from each new block. In addition to the mining fee, miners also receive a share of blockchain transaction fees.

Generally, cryptocurrencies operate on the basis of either Proof of Work or Proof of Stake consensus algorithms. A consensus algorithm is a procedure through which all the peers of the blockchain network reach a common agreement about the present state of the distributed ledger. The consensus algorithm determines how the cryptocurrency is mined.

Proof of Work

Proof of Work is the first consensus algorithm used in blockchains. In a Proof of Work-based blockchain, the computing power of mining machines plays a key role in mining. For example, in the Bitcoin network, miners collect blocks of transactions, verify their integrity, and append them to the blockchain.

In the Proof of Work consensus algorithm, miners solve the puzzle, from the new block and confirm the transactions. How complex a puzzle is depends on the number of users, the current mining power and the network load. The solver of the puzzle gets the honor of producing a new block for that blockchain. Miners are rewarded for their work with a mining fee and transaction fees for transactions that take place in that block. Many of the older cryptocurrencies, such as Bitcoin and Litecoin use a Proof of Work algorithm during the mining process.

Proof of Work is a consensus method that requires mining machines. In practice, these mining machines are extremely powerful computers. For example, Bitcoin mining is done by specialized computers called ASIC miners. However these machines have some limitations and they consume a lot of electricity.

Proof of Stake

Proof of Work-based mining requires a huge amount of power, which is directly reflected in high electricity consumption. In addition, physical mining equipment causes some restrictions to the capacity of cryptocurrency networks. In some cases, the limited capacity of the network is reflected in the slowness of cryptocurrency transfers.

In recent years, a consensus algorithm called Proof of Stake has gained a lot of popularity. The Proof of Stake-based consensus algorithm was developed to meet the challenges faced by Proof of Work. In Proof of Stake systems, miners are replaced with validators. Proof of Stake is based on a randomly selected state of validators who “stake” the native network tokens by locking them into the blockchain to produce and approve new blocks. The more cryptocurrencies you stake, the higher reward you get. Proof of Stake does have some benefits over Proof of Work. The most notable benefits are the smaller carbon footprint and better scalability.

Cryptocurrency mining has changed a lot in the recent years. Today, most of the new cryptocurrencies use a Proof of Stake-based consensus algorithm. Proof of Stake consensus model has risen prevalence significantly over the last years among public blockchains looking to improve Bitcoin’s underlying performance execution. A good example of the growing popularity of the Proof of Stake is that Ethereum is currently in the process of transitioning from Proof of Work consensus to Proof of Stake to better supplement the network’s performance demands.