When you think about Bitcoin (BTC), probably the first thing that comes to mind is mining. It’s probably the most spectacular transformation of a word in result of technological progress. From “a person who digs for gold in tunnels” it transformed into “a person who uses a computer to discover blocks, which will bring rewards most of the times more valuable than gold”.
But what exactly is mining? Is it the only way to generate coins?
Let’s try to understand this together.
Every Blockchain Needs Proofs
Mining came to the Bitcoin (BTC) blockchain as a necessity. In order to avoid double spending and to maintain atomic transactions, a certain form of governance was needed.
So, the nodes that were validating transactions needed to “prove themselves” to justify their credibility. The “asset” they used for that was computational power. By providing computational power – in the form of “hashing”, or solving a problem with a variable difficulty – they “guaranteed” their good intentions and the transactions they were inscribing. For each successful round, they were also rewarded with a few tokens to keep them incentivized (it’s a bit more complex than that, but for now that suffices).
Although still the most popular form of “mining” coins, mining is not the most resistant form of governance. If at any point someone gains 51% control of the computational power, the blockchain safety may be compromised because that actor could inscribe whatever transaction he wants in the blockchain when he wants. It’s still impossible to achieve this because the mining market is very granular, but it’s not that far fetched.
Another drawback of mining came from environmentalists, who argued that the “empty” calculations miners were doing were harming the environment. From a certain point of view, this is true, but if you have concerns about that, you can also join other coins, like Gridcoin, which borrows computing power from scientific projects like Asteroids@home and Einstein@home from Berkeley.
Now, since this algorithm proved a bit shaky, it wasn’t long until other form of blockchain governance were used.
Let’s have a look at the most popular.
Proof of Stake (PoS)
In a PoS (Proof of Stake) blockchain, validators need to have some coins before becoming validators. They will use these coins by blocking them as a form of trust. If other validators are proving them wrong or they get caught cheating, then they get slashed or they lose what they had “at stake”.
There are few PoS (Proof of Stake) algorithms, the most interesting being DPoS (Delegated Proof of Stake) about which we’ll talk in a second, but before that, be aware that the world’s second largest cryptocurrency in terms of market cap, Ethereum, is moving towards a PoS (Proof of Stake) blockchain codenamed “Casper”.
Proof of Stake (PoS) is significantly faster than mining. Since a node doesn’t need to perform complicated calculations to solve mathematical problems, transactions get validated way faster. PoS (Proof of Stake) blockchains can often boast TpS (Transactions per Second) in the thousands as opposed to PoW (Proof of Work) which are inherently limited to hundreds.
DPoS (Delegated Proof of Stake) is similar with PoS (Proof of Stake), with the small difference that validators can collude, or aggregate their stake with the stake of other people, in a process called “delegation”. An actor in the blockchain agrees to “vote” some representative to validate blocks on their behalf. In DPoS (Delegated Proof of Stake), a validator is called “witness” because he “witnesses” blocks, not mines them. Some of the most popular DpoS (Delegated Proof of Stake) blockchains are BitShares (BTS), Steem (STEEM) and PeerPlays (PPY).
Proof of Capacity (PoC) (also Proof of Storage, Proof of Replication)
Following the steps of PoS (Proof of Stake), some clever people decided to dive into the massive amount of unused file storage that sits around virtually on any computer in the world.
Proof of Capacity (PoC) (and its flavors, Proof of Storage, Proof of Replication) works by offering to the network some storage capacity, in exchange of the “hashes”, or chances to discover a new block. So, basically, all you need to do is to rent your unused hard drive space.
Significant players in this area are Filecoin (FIL) (a spin-off of the Internet Protocol File System), SiaCoin (SIA), Storj (STORJ) and BurstCoin (BURST).
Proof of Burn (PoB)
Probably one of the most counter-intuitive ways of mining tokens in a blockchain, but nonetheless really exciting, is Proof of Burn, or PoB.
In a Proof of Burn (PoB) blockchain, you get chances to validate / discover a new block by actually spending the coins you already have. You send them to a specific address, where they are destroyed. In exchange, you get a chance to receive some future hashes. In a way, it’s similar with saving, only you don’t get your own money back, and you don’t have a guaranteed ROI, but you are sure to get all the coins you “burned” at some point in the future. The rationale between the 1:1 ratio is that by keeping this stable, the value of the coin will improve in the future. So if you burn 10 coins now, which are worth $1, you will get the same 10 coins back in 6 months, a time in which their value will – probably – increase to $2, or $3.
One could argue that in a PoB (Proof of Burn) governance structure you need to have some coins before you can burn them. That is correct, that’s why the only PoB (Proof of Burn) coin that I know of, Slimcoin, offers not one, or two, but three minting algorithms: PoW (Proof of Work) (you can mine with an ASIC-resistant algorithm for some coins), PoS (Proof of Stake) (you can stake some of the coins you mined or bought) and, obviously, PoB (Proof of Burn) (you “burn” some of your coins and you will get the hashing chances in the future).
The Exotic One – Proof of Run (PoR)
Nowdays it seems people will create blockchains with everything that can be proved. One of these exotic coins is called Runcoin and it uses a Proof of Run (PoR) to reward people.
In this context, a new concept had to be created, namely the Trustable Third Party Provider, or TTPP. As you can imagine, a Proof of Work (PoW) can be easily faked by individuals. Whereas in large communities, like Strava, Garmin or Runkeeper, this is less likely to happen. Runcoin uses TTPP to validate transactions, so you won’t get coins if you post a run by yourself, it has to come from one of the trusted validators (which, in the future, may include even running competitions, like Boston marathon or Spartathlon). Runcoin is an UIA (User Issued Asset) on the BitShares blockchain.
Well, MinerGate invited you in this short trip into the world of Proofs, there are some things that we didn’t yet cover here so enjoy learning some new exotic blockchain governance mechanisms.