How Cryptocurrencies are created, how cryptocurrencies are pampered

04/08/2023

How cryptocurrencies are created, cryptocurrency mining

Cryptocurrencies are created through a process called mining. Mining is the process by which transactions are verified and recorded on a blockchain , and in return, miners are rewarded with new units of cryptocurrency.

Let's take the example of Bitcoin, the best known cryptocurrency . In the case of Bitcoin, a consensus algorithm called Proof of Work (PoW) is used. In this algorithm, miners must solve a complex mathematical problem to validate and add a block of transactions to the Bitcoin blockchain.

The mining process involves competing with other miners to solve this math problem. To do this, miners use powerful specialized computing devices called "miners" that perform intensive computations. The first to find the correct solution can add the block to the chain and receive a reward in the form of newly created Bitcoin .

In addition to the reward for mining a new block, miners also receive transaction fees paid by users to include their transactions in the block. These rates vary depending on the network demand at that time.

It is important to note that not all cryptocurrencies are created through mining. Some cryptocurrencies, such as Ripple (XRP) or Stellar (XLM), use a different approach known as "consensus by permission" (PoS) or "consensus by federation" (Federated Byzantine Agreement, FBA), respectively. These mechanisms do not require mining in the traditional sense, and new cryptocurrency units are generated according to predefined rules and not by solving mathematical problems.

In short, cryptocurrencies are primarily created through the mining process , where miners validate and record transactions on the blockchain through consensus algorithms. Mining can involve solving complex math problems, and miners are rewarded with new cryptocurrency units and transaction fees. However, some projects use alternative consensus approaches to create new cryptocurrency units.

What is Proof of Stake (POS) consensus?

Proof of Stake (PoS) consensus is an algorithm used by some cryptocurrencies to validate and confirm transactions on a blockchain. Unlike the Proof of Work (PoW) used by Bitcoin, where miners solve mathematical problems to add new blocks, PoS does not require intensive calculations.

Instead of competing to solve a mathematical problem, in PoS validator nodes are selected to forge blocks based on how much cryptocurrency they hold and are willing to "stake" or "block" on the network. The higher the amount of cryptocurrency a node is willing to stake, the better their chances of being selected to forge the next block.

The PoS consensus process works as follows:

  1. Validator Selection: In each selection round, a validator is chosen to forge the next block of transactions based on the number of cryptocurrencies they have blocked.
  2. Transaction validation: The selected validator creates the new block and validates the transactions included in it. This involves verifying the digital signature and making sure that the transactions comply with the consensus rules of the network.
  3. Block signature: Once the block has been validated, the validator signs the block with its private key and adds it to the blockchain.
  4. Reward: As an incentive to participate in the PoS consensus process, selected validators receive a reward in the form of transaction fees associated with transactions included in the block, as well as new cryptocurrency units created by the protocol.

Consensus PoS has several advantages over PoW. Firstly, it significantly reduces power consumption, since intensive computational calculations are not required. Additionally, by not requiring the acquisition and maintenance of specialized hardware, consensus PoS lowers the barrier to entry to participate in the network validation process, which can lead to further decentralization.

However, PoS consensus also presents challenges. One of the main challenges is the "nothing-at-stake problem". This refers to the possibility of validators betting on multiple chains simultaneously, which could compromise the security of the network. To address this problem, different variations of PoS have been developed, such as Delegated Proof of Stake (DPoS) and Bonded Proof of Stake (BPoS), which introduce additional mechanisms to prevent malicious behavior.

In short, Proof of Stake (PoS) consensus is an algorithm used by some cryptocurrencies to validate transactions and forge new blocks on a blockchain. Instead of solving math problems, PoS selects validators based on the amount of cryptocurrency they hold and are willing to block on the network. This lowers power consumption and the barrier to entry, although it also poses security challenges.

What is the Proof of Work consensus?

Proof of Work (PoW) consensus is an algorithm used in several cryptocurrencies, Bitcoin being the best-known example . It provides a method to validate and confirm transactions on a decentralized blockchain. PoW requires participants to put in a demonstrable computational effort to solve a complex mathematical problem, thus ensuring the integrity of the network.

The following describes the PoW consensus process :

  1. Transaction validation: Users make transactions on the network and broadcast them through the nodes. These transactions are grouped into blocks that contain a set of data and a unique identifier called a hash.
  2. Mining: Miners compete against each other to solve a cryptographic math problem associated with the block. This problem consists of finding a value called a "nonce" that, when combined with the data in the block, produces a hash that meets certain predefined conditions, such as having a certain number of leading zeroes.
  3. Problem resolution: Miners use their computing power to try to find the correct nonce. This involves doing numerous calculations and trying different combinations until they find a nonce that meets the stated requirements.
  4. Solution verification: Once a miner finds the correct nonce, it reports it to the network. The other nodes verify the solution, making sure that the nonce produces the correct hash and meets the conditions set.
  5. Block aggregation: Once the solution is validated by the network, the miner who found it adds the block to the existing blockchain. The new block contains the hash of the previous block, which ensures the continuity and immutability of the chain.
  6. Reward: As an incentive for their work, the miner who adds the block to the chain receives a reward in the form of newly created cryptocurrencies. In addition, you also get the transaction fees associated with the transactions included in the block.

The PoW consensus is based on the principle that solving the mathematical problem is expensive in terms of time and computational resources. This discourages malicious attackers, as they would have to invest a huge amount of computing power to tamper with the existing blockchain. The greater the number of miners and their combined computing power on the network, the more secure the blockchain will be.

However, PoW has some limitations, such as the high power consumption associated with the intensive computations required to solve the problem. Furthermore, as the difficulty of the problem increases to maintain a constant rate of new block creation, increasing computing power is required, which can lead to further centralization in the hands of miners with large resources.

In short, Proof of Work (PoW) consensus is an algorithm used in various cryptocurrencies to validate and confirm transactions on a blockchain. Miners compete to solve a complex math problem, with those who solve it first receiving rewards and adding new blocks to the chain. PoW provides security through demonstrable computational effort and guarantees network integrity, although it has limitations such as high power consumption.