For many cryptocurrency enthusiasts, speculative transactions are only the beginning.
It doesn't take long for cryptocurrency newcomers to show an interest in cryptocurrency mining - the mysterious mechanism cryptocurrencies use to maintain their network, create new coins, and generate value.
For many people, the first thing that comes to mind when discussing cryptocurrency mining are the large warehouses inventive entrepreneurs stack with expertly calibrated mining rigs. In the Bitcoin network system, these rigs solve increasingly complex computations in order to validate other users' transactions, which generates a fee that goes to the rig's owner.
But Bitcoin is not the only game in town. For example, the Bitcoin and Ethereum mining systems are vastly different from one another.
Read on to find out how cryptocurrency mining works on a deeper, most fundamental level by categorizing it into two distinct concepts - proof-of-stake and proof-of-work - and discover how these processes generate value in different cryptocurrency networks.
Cryptocurrency Mining Concepts Defined
All cryptocurrencies work based on the following concepts:
Blockchain: The underlying technology that makes cryptocurrency possible. A blockchain network is the peer-to-peer infrastructure that allows users to perform transactions with one another without relying on a third-party authority to verify those transactions. It acts as a universal ledger for individual users to check their transactions against overall network activity. Each individual user automatically accepts valid transactions and rejects invalid ones, creating a distributed consensus among all users.
Proof of Work: A mechanism for generating distributed consensus among users in a cryptocurrency network. In this system, a computer earns the right to validate a transaction by solving an arbitrary problem. The Bitcoin proof of work mechanism uses complex cryptography to make sure every user agrees with the state of the overall system.
Proof of Stake: Another mechanism for generating distributed consensus among cryptocurrency users. Instead of letting users solve computational puzzles to validate transactions, the network calls on individual users to do so on its own. The only thing a user need to prove is that he or she has a stake in the network itself. The Ethereum proof of stake mechanism operates similar to a savings account at a bank.
Any cryptocurrency interested in mining needs to choose between coins that use one of these two methods.
Choosing a Coin to Mine
1. Proof of Work
While Bitcoin is undoubtedly the most well-known cryptocurrency and features the highest market capitalization, it may not be the best choice for newcomers to mining. It is more than 80 percent of the way towards reaching its maximum supply of 21 million BTC, at which point a major incentive to mine bitcoin simply disappears.
In this case, the proof of work mechanism serves to discourage new miners from entering the system. The Bitcoin network has already rewarded its early adopters and pioneers - only established miners with access to significant resources can generate value in this circumstance.
The Bitcoin situation is not unlike that of mining for gold . A single gold miner panning in the Sierra Nevada mountains in 1849 had a good chance of striking it rich - and quite a few did. But within a few short years, those early gold miners cleared out all of the easily accessible surface gold in the area. Anyone who wanted to mine further had to invest in serious earthmoving equipment to do so.
One of the main reasons for this is the fact that bitcoin mining consumes an extraordinary amount of electricity. The electricity costs are today's Bitcoin miners are monumental compared to what they were years ago, and miners feel those costs eating into their profits.
The same is likely to be true with other currencies that rely on proof of work to generate value. As long as users need to work to generate value, they are indebted to the system they've invested in.
2. Proof of Stake
The proof of stake mechanism, on the other hand, rewards people who own cryptocurrencies simply for doing so. Instead of entrusting miners with the task of creating new coins, actual coin holders create new coins according to an internal system.
PIVX is one such coin. Any PIVX user can generate new value without having to invest in expensive mining rigs or consume huge amount of electricity. The system relies on stakers and masternodes, with a corrective algorithm that maintains a balance between the two. If too many of either join the network, it automatically balances in the other's favor.
Stakers: are individuals who promise to keep their money in the PIVX network and generate returns based on that - much like a savings account at a bank.
Masternodes: earn more than individual stakers, but at a higher buy-in amount. This is more like the higher interest-generating accounts banks offer their clients - the more you put in, the more you can earn.
The important difference is that instead investing in machines to do work to support the network, stakers and masternodes invest directly in the network itself.
Conclusion
There has never been a more exciting time for cryptocurrency mining. Those who choose the right method have a great chance to ensure long-term passive income. Between proof of work and proof of stake mechanisms, proof of stake is the most flexible, futureproof solution for supporting new cryptocurrencies while minimizing exposure to loss.
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