- The Different Types of Blockchains and Cryptocurrencies
KOINPRO — The Different Types of Blockchains and Cryptocurrencies
Have you ever wondered, “How does a blockchain network basically operate?” and then ended up not doing the reading and left the thought to be cleared up some other time? If yes, then RIGHT NOW is the other time!
It wouldn’t be wrong if I say, “Even kids know what blockchain is nowadays.” but, that wasn’t the case a few years ago. People didn’t even know the word “Blockchain” or “Bitcoin” (since Bitcoin was the only cryptocurrency a little bit known to the public at that time), and you would literally need to explain it to anyone you might have asked, “Do you know what Bitcoin is?”
Well, times have changed, and the awareness has spread wider than expected, and anyone with access to the internet would know what Bitcoin or Blockchain basically is, but, the question is, do they know how it all works? Barely!
That wouldn’t be the case with you if you’re reading this article because this will enlighten you about the different kinds of Blockchain consensus algorithms, which basically means that how does a network behind a cryptocurrency work. So, let’s begin!
Proof of Work (PoW) Consensus:
The Proof of Work is a decentralized consensus algorithm that requires a set of members in a blockchain network to take part in solving some mathematical puzzle using computational power, to insert a new block into the public network. These blocks contain the transactions of the users of that particular blockchain network. The members with the computational powers trying to solve the puzzles are called “miners”. In a PoW consensus, a new block is mined every 10 minutes, and the miner who succeeds in solving the puzzle and mining the newest block to the network gets rewarded by the algorithm. It requires a lot of energy to be a part of the system and provide the computational power to the blockchain to earn rewards in return, and as time passes by, more miners will hope in which would eventually increase the difficulty level of mining a block and only miners with the highest computational powers would be able to get the task done before others.
Bitcoin was the first cryptocurrency with the PoW consensus algorithm used in its blockchain. Currently, a miner gets 12.5 BTC as a reward for mining a new block into the network, but this number will decrease as more coins are mined over time.
Proof of Stake (PoS) Consensus:
A completely different consensus from PoW, Proof of Stake is a consensus mechanism that allows members to take part in the mining of new blocks into the network by just holding a percentage of tokens/coins of that cryptocurrency. Miner requires to buy and stake a number of coins in staking pools to be eligible for the miner incentives which would be decided based upon the amount of coins staked by that particular miner.
The PoS was developed as an alternative to PoW which requires a lot of computational power and consumes a lot of energy, where PoS works totally within its platform and doesn’t require additional computational power by its miners.
Commonly known cryptocurrencies with PoS algorithm are: Dash (DASH), Neo (NEO), Stellar (XLM)
Proof of Capacity (PoC) Consensus:
Proof of Capacity, also known as Proof of Storage or Proof of Space is a consensus algorithm that uses the space in the miner's hard drives to store data and validate transactions based on that. The possibility of mining a new block and getting the block reward increases with the amount of empty space available on the hard drive being used for the mining purpose.
PoC was also created as an alternative for the PoW algorithm to avoid extra energy consumption and the need for high-end computational power for the network to operate normally.
It might be efficient but the fact that a hard drive could easily get infected and that could disturb the mining process might be the reason why this consensus hasn’t been used a lot.
Some known blockchains to use the consensus are: SpaceMint, Storj, Burst
Proof of Authority (PoA) Consensus:
Not so commonly used and particularly new, Proof of Authority is a consensus mechanism where only a number of selected candidates are responsible for approving or declining blocks and transactions to make the network flow as it should. These candidates can individually or mutually accept blocks that would be added to the network. This consensus is more commonly used for private blockchains since it is not totally decentralized since the control is in the hands of the few selected validators who could do anything they want with the incoming transactions.
Known coins/cryptocurrencies using this consensus: JPM Coin
Every single cryptocurrency has one (or more, in some cases) of the described consensus algorithms being used in their blockchain networks which operate(s) the whole system, and that is what goes on in the background while all we see in the foreground is coins being sent and received across the globe.
Although it is not necessary for a normal user to understand the technology behind a cryptocurrency they’re using, it is always better to know how things work.
To sum it all up:
A blockchain that uses PoW as the consensus algorithm will not have all its coins pre-mined, which means that a person who follows the rules and sets up to become a miner can mine coins that were never used and would now become a part of the total circulating coins.
While on the other hand, blockchains using any other consensus mechanism including PoS, PoC or PoA would have all their coins/tokens pre-mined and would incentivize the miners with those coins.
Note: Ethereum (ETH) developers have planned to change its consensus from PoW to PoS but it hasn’t been implemented yet, and that is why it is still a PoW coin.
Some of the information is taken from these sources:
KoinPro is a trading exchange that believes in helping traders make well-informed decisions about buying, spending, and using digital currencies. From investing in stocks to predicting the future prospects of digital currencies, KoinPro offers maximum value to community members. Whether you are a serious trader or simply interested in reading about the financial landscape, KoinPro is the place to be.
Join our Trading Strategy Channel for new trading strategies and tips daily!
- Date of publication:
- Tue, 05/04/2021 - 18:41
Click on the link - it will be copied to clipboard