For the miners, it is important to receive financial compensation for their work, but not everyone receives it in the same way or for the same reason. Let’s see below what they should be.
Proof of work – PoW
The work test is a protocol prior to Bitcoin that aims to prevent cyber attacks. Satoshi Nakamoto used it in an innovative way in the Bitcoin network.
How does PoW work?
There are many cryptocurrencies that use this type of algorithm. Some examples are Ethereum, Dash and Bitcoin as we have already mentioned. The miners have to enter the blocks in the Blockchain and for this, they have to solve very difficult mathematical problems ( response or test to a specific challenge ) with high-cost computer equipment. This process is called mining. And it is known as work proof.
The “answer” is difficult to produce but easy to validate. A brief example to understand it better. Guessing the combination of a lock, is very difficult because there are many possible alternatives, we should waste a lot of time trying one by one to find yours, but if we have the combination it is very easy to verify that it is correct.
BTC uses this concept to make sure that the network can not be easily manipulated. Making the process of mining require a great power of computer calculation.
With POW, decisions on the important changes that will be implemented within the system can be made jointly. The majority of votes come from miners, developers and other important members of the community. Avoiding that there is one or several people leading.
- A lot of computing power and electricity are wasted by generating random assumptions.
- There is the possibility of a 51% attack.
- The constant appearance of new currencies can negatively influence its value.
Proof of stake – PoS
With the evidence that mining was becoming increasingly slow and expensive, the POS method was introduced. Instead of using the power of the computer, the shortage of the currency itself is used. It does not require the solution to a challenge, it focuses on the property of each one. You can solve a new block by withdrawing your own currency.
How does PoS work?
The possession of each currency is directly proportional to its mining power, which avoids the need for expensive mining platforms. It’s simple enough to prove what you own, a percentage of the total available.
The person must have coins in their wallet and keep the balance. You can place them in stake mode. The more you own and have them at stake the more you will earn. Although the amount may vary.
- It does not require advanced computer equipment and the costs are low.
- There is no pressure on the price.
- There is no known case that there has been a 51% attack on a POS system
- Keeping the coins in your possession is an advantage that at the same time makes it not commercialized with them. The coins are no longer used for their main function, that is, as a form of payment.
- Whoever owns more wins, in this way the rich continue to enrich themselves to a greater extent.
- Those who have more also have a greater power to decide on the changes that are implemented in the system. And this contradicts the principle that cryptocurrencies should not have a central authority.
Proof of importance – Poi
Reputation is something important in society and this is happening to the world of crypto. The NEM cryptocurrency has introduced the reputation to the monetary system. Its developers have incorporated in the blockchain a reputation with a decentralized algorithm called Test of Importance.
How does Poi work?
Computers that are connected monitor the chain of blocks. As soon as one perceives that a transfer of money is being made, it is communicated to all the others who will also communicate it. At the moment that everyone knows and accepts it, the Blockchain will be included. These computers can receive for it. The greater the reputation of an account the more money it can earn. This reputation is measured by the amount of money invested, the number of transactions and their amounts. Something that also influences is the reputation of the accounts with which the exchanges are made. All this makes the reputation of an account increase. So it is said that cryptocurrencies are not mined, they are harvested from what you have.
To be able to harvest, a minimum of 10,000 NEM and acquired rights must be possessed (determined time that the NEMs have to be in the account and that will depend on the quantity).
It does not enrich the richest. The amount of money that is possessed is not the only factor that is taken into account when measuring the reputation of each account and the transactions between own accounts either.
They do not know each other yet.