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What Is Cryptocurrency Mining? Definition and Meaning

Cryptocurrency Mining

Our next topic is about cryptocurrency mining for beginners. Please read our previous post on Blockchain technology before proceeding here.

What is Cryptocurrency Mining?

Mining is the procedure of producing new cryptocurrencies as well as verifying cryptocurrency transactions taking place on the Blockchain.
Only individuals or groups possessing powerful computers to carry out the complex mathematical processes participate in mining for cryptocurrencies. Their successful calculation result to new coins in the network.

Solving complicated mathematical equations is the base activity in mining. Hash rate measures the calculations performed per second. Taking part in figuring out these mathematical problems is essential in maintaining the security of Blockchain. The hash is the 64-digit hexadecimal number that Bitcoin miners also need to solve.

Once an individual miner successfully solves these equations, two things happen. First, they submit a verified transaction that, then, adds a new block to the ledger. Second, there is an incentive to the successful problem solvers in the form of new cryptocurrency coins. In the case of Bitcoin, the reward for successful bitcoin miners is 6.25 BTC.


Are All Cryptocurrencies Mined?

In the early days, the only way of creating new crypto coins was through mining. But now, no more. The mining process does not apply to all cryptocurrencies. There are two types of cryptocurrencies; mineable and non-mined.

Not all cryptocurrencies rely on mining because it has its repercussions and entails expensive operating costs.

As said before, large amounts of computing power are necessary because only powerful computers can carry out huge mining processes. Therefore, those who participate in the mining of crypto coins need large energy sources in order to solve the complex mathematical problems.

What Are the Mineable Cryptocurrencies?

The most popular one is Bitcoin. Other mineable digital currencies are Monero (XMR), RavenCoin (RVN), Digibyte (DGB), and Vertcoin (VTC). These kinds use Proof-of-Work (POW).

Blockchain Consensus Mechanisms

Consensus mechanism, otherwise known as consensus protocols or consensus algorithms authenticate transactions and uphold data security in a certain blockchain. The term comes from the approach in which users of a Blockchain network agree and trust each to be responsible and honest.

Furthermore, consensus mechanism acts as the foundation in maintaining the decentralized nature of a blockchain. Only by achieving consensus can cryptocurrencies function in a peer to peer manner with the help of distributed ledgers.

The two most popular types of consensus mechanisms are Proof of Work and Proof of Stake. There are other kinds that can be discussed later on. Familiarity with Proof of Work and Proof of Stake is a must for those who want to start investing and dealing with cryptocurrency.

The Problem with Proof of Work in Cryptocurrency Mining

Proof of work has been embedded in Blockchain technology since its conception. The POW system comes from the process itself wherein ‘work’ is being expended by solving cryptographic puzzles to qualify for receiving the block reward.

However, POW has been harshly criticized due to the enormous amounts of computing power needed in verifying the bitcoin transactions in the Blockchain ledger. Solving mathematical problems is needed before one can authenticate a transaction and then receive the reward. It takes up a lot of time and energy to achieve both. and these operations have harmful impacts on the environment.

Furthermore, Bitcoin mining required heavy equipment such as an advanced graphics processing unit and application-specific integrated circuits. Graphics card is needed by the computer to display data on the screen while an application specific integrated circuit (ASIC) allows miners to perform the repeated solving of cryptographic puzzles. This labor-intensive method entails exorbitant electricity costs.

In 2018, cryptocurrency mining peaked and reached a total value of $835 billion on January 7, 2018 only to decrease by 50% 10 days later. During this year, the Bitcoin network and Ethereum ate up a bigger amount of electrical power than the whole of Switzerland.

This is where proof of stake comes in.

Proof-of-Stake: Eco-Friendly Alternative to Proof Of Work

Proof of stake uses the core principle of a consensus mechanism. The protocols contained in a consensus mechanism provides a way of verifying records in the distributed digital ledger. The Proof of Stake system allows owners to stake their coins which gives access to checking transactions and adds new blocks to the existing Blockchain.

Staking one’s coins means pledging your coins for the purpose of verification processes. It randomly chooses participants who can validate transactions  and produce new blocks. Using POS also translates to lower transaction fees for products and services purchased on the blockchain.

According to the data presented by Ethereum Foundation, Proof-of-Work (POW) consumes 5.13 gigawatts in its operation while POS consumes 2.62 megawatts making it 99.95% less energy consumptive than the existing POW framework.

Proof of Stake encourages investors to focus more on validating valuable transactions as a way to earn interest. Once a validator authenticates untrustworthy ones, they will face penalty charges.

Compared to POW, Proof of Stake does not require advanced computer parts like an ASIC miner. ASIC miners are responsible for mining crypto coins.

Most of the cryptocurrencies that use POS are the up-and-coming ones such as Algorand (ALGO), Tezos (XTZ), and Celo (CELO). The well-known crypto coins with POS operations are Peercoin (PPC) and Ethereum 2.0 (ETH).

Peercoin pioneered the use of Proof of Stake when it started in 2012. Just August 19 of this year, Peercoin celebrated its 10th year in the crypto space. Ethereum just recently joined the POS system by merging its Ethereum Mainnet with the Beacon chain.

Other Blockchain Consensus Mechanisms

The umbrella term that POW and POS falls under also contains other types. Some of these kinds are 8 other kinds of consensus mechanisms. They are:

  • Delegated Proof of Stake (DPoS) – DPoS doesn’t select their stakeholders based on the amount of tokens. Here, the stakeholders appoint the miners who will confirm or reject the transactions. Also, compared to the POS, DPoS has higher verification speed and better scalability. Some platforms using DPoS are EOS, BitShares, Steem, and Ark.
  • Proof of Activity (PoA)– PoA merges POW and POS. Similar to POW, it involves heavy computations like solving the hash. After mining the block, validators sign on the new hash just like how POS works. If a validator holds a bigger amount of crypto, the more likely they will be selected to confirm the brand-new blocks.
  • Proof of Authority (PoA) – Proof of Authority is a modified version of POS wherein validators stake their reputation instead of crypto. It is a cheaper alternative to POS and POW. However, it moves away from decentralization.
  • Proof of Burn (PoB) – this method performs ‘burning’ of tokens. Proof of Burn sends the tokens to an ‘eater address’ and is impossible to recover. As a result, investors that burn more coins get higher chances to be validators.

Lesser Known Blockchain Consensus Mechanisms

  • Proof of Capacity / Proof of Space (PoC / PoSpace)– As implied by the name, PoSpace gives mining rights to investors based on their hard drive. Furthermore, chosen miners ‘plot’ all possible hashes beforehand. This is why hard drive capacity is important. The greater storage a miner has, the more hashes they can generate.
  • Proof of Elapsed Time (PoET)– PoET applies time-based lottery algorithm. Participants are assigned randomly different waiting times.

Nodes are in sleep mode during the waiting time. The first one to activate or ‘wake up’ gets the mining rights. The randomization of PoET increases the fairness of its distribution.

  • Proof of History (PoH)– one of the newest consensus mechanisms. Solana developed Proof of History and provides an internal clock that will synchronize transactions. Other mechanisms depend on outside sources in order for a timestamp to be assigned to a block. The internal clock harmonizes the time for all computers.
  • Proof of Importance (PoI) – uses ‘harvesting to determine who will be miners in their network. They assess network activity, investment amount, number and size of transactions for the previous month. Investors that obtain a high score based on these criteria are chosen to harvest blocks and receive the rewards.

Types of Consensus Algorithms


Mining is at the core of cryptocurrency operations and helps maintain the security of the Blockchain. It is also one way of creating new coins. There are still other consensus mechanisms that haven’t been discussed (watch out for our next feature!)

Proof-of-work (POW) and Proof-of-stake (POS) are the two kinds of mining conducted by different crypto companies. The huge energy consumption of POW makes it seem as a bane to investors. On the other hand, POS is the more favorable and less toxic scheme that can continue the production of new coins and upkeep of the Blockchain.

It may take some time before one can fully get the hang of these terms but worry not because we will prepare a more comprehensive blog post about POW vs POS.

Stay tuned until the next posting CryptoCoin Believers!

Hi! I am Tracie, an Education major with an interest in Finance and Investing. Come and explore the crypto world with me! :)

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