Article By Zaneta Gudowicz, Cyberius
Ah, the blockchain. Many people have heard of it, but how many of us actually understand what it is about and how it actually works – how it functions and how it generates tokens that are needed to fuel transactions within its network?
If you didn’t raise your hand to my questions, it’s all good. I was also someone knew nothing about blockchain. In fact, I wouldn’t even say that I now know all that there is to know regarding blockchain – after all, it’s a new and always-developing technology.
However, I can tell you a bit about how tokens are generated on the blockchain, the differences of these generation methods, and their benefits, and drawbacks – all the basics that you might want to learn more about.
How Proof-of-Stake Tokens Are Generated
Proof-of-Stake (PoS) is one of the most talked-about-and-implemented ways for a blockchain to run. A lot of popular, widely known cryptocurrencies choose this consensus method as their blockchain’s mechanism: DASH, NEO, and NavCoin are just to name a few. PoS was actually developed as a solution to problems seen in the PoW consensus mechanism.
In PoS, a participant can only mine or validate block transactions based on how many coins they have in a certain blockchain, or how much “stake” they share.
In this case, tokens are previously created in the initial stage of a project, which means their number doesn’t change. These tokens can then be sold to the public in an ICO process (which could be different for every token and blockchain project out there). Then, based on their holdings, the ones with the most wealth will be chosen to create a new block.
In this method, miners take the transaction fees, which rewards them with more tokens, rather than a block reward. Some PoS projects, however, do have block rewards, such as NavCoin & POS coin, for example.
PoS is arguably safe, since it is more resistant to some threats such as the 51% attack. This is where if someone has ill intentions towards a blockchain project, they would need to firstly acquire 51% of the blockchain’s coins – in the case of PoS (PoW – it’s 51% of computational mining power, which becomes more feasible as less miners participate due to fewer and fewer rewards). This is more impractical to accomplish in PoS since not only would it be difficult and expensive to acquire 51% of the tokens, but if the attacker is successful in that and then decides to hack the system, then they would be the one suffering the biggest loss, since they are the majority stakeholder.
On the other hand, though, the PoS’ advantage can also be its biggest drawback. Once someone acquires the majority of stake, they can simply do any changes to the way a blockchain is run, without regards to the community in general, creating the problem of a monopoly – which, some may argue, is against the spirit of decentralization in cryptocurrencies and blockchain.
How Proof-of-Work tokens are generated
As alluded to above, PoW came first. In the PoW mechanism, there is a block reward for whoever can mine blocks the fastest, and in the case of mining pools, everyone can participate in “mining” a block and sharing in its reward based on how much computing power that they have – as opposed to how many coins they are holding, as in the PoS method.
New tokens are issued as rewards for these miners. Bitcoin, the father of all cryptocurrencies, currently employs this consensus algorithm. Among some others are Litecoin, Monero, and Dogecoin.
The PoW system can be more vulnerable to the 51% attack as over time mining rewards diminish, and theoretically fewer and fewer miners participate in the mining process, making it more likely for a single entity to have 51% of computational power on the network.
It does, however, provide security in that all transactions are immune to manipulations and changes. The PoW algorithm provides complete decentralization, as well as control over the distribution of major changes in a blockchain. Hacking the system – provided you own 51% of the mining power in it – would still be difficult, considering you have to be up against a lot of other miners with considerable mining power.
Here are some blockchain projects and how they’re run:
Ethereum: The Ethereum network runs on PoW, although there have been talks and attempts at implementing PoS. Ether is also generated at the rate of 0.625 – 2.625 ETH per block mined. With no overall cap, Ether is obviously inflating, although the inflation rate is planned to only reach 0.5-2% per year – or even lower.
EOS: Using a delegated PoS mechanism, EOS runs its own blockchain. They do, however, have a 5% inflation rate, and this remains a debatable subject among crypto enthusiasts.
Tezos: Despite some “not-so-nice” news, Tezos continues to grow. This smart contract platform also uses a delegated PoS protocol, which also allows it to change without the need for any forks. Tezos has a non-dilutive inflation at a rate of around 5.5%, which can be amended by stakeholders’ vote in the future.
Whether be it through PoS or PoW, the future is looking bright as various cryptocurrencies and blockchain projects continue to come on the scene, and new consensus mechanisms are created as well. If there’s a downside, it’s be the amount of computing and electricity power that it can consume to run these thousands of blockchains – particularly for PoW. It’s a good thing that green technology is becoming more of a thing though – who knows if in the near future there will be new and innovative green blockchain projects.