Relatively recently, we marveled at the world’s first cryptocurrency — Bitcoin. It was something innovative and unique, so much so that it caused alarm.
The first enthusiasts who set out to mine this crypt later realized that they had discovered a real gold vein. Only instead of mines, picks and shovels, they used thousands of computers.
These computers form mining rigs that work around the clock to generate new tokens and put them into circulation. Mining is also responsible for confirming transactions, as well as the security and development of blockchain, the technology behind crypto.
For this, computers perform millions of mathematical calculations, which become more and more complex every day, as more and more enthusiasts want to snatch this tidbit – the reward in the crypt.
In 2009, when Bitcoin first started to be mined, miners were able to get 50 BTC for each mined block in the blockchain system. However, with the growth of the price of bitcoin, its mining became more difficult.
Over time, some countries began to oppose mining. Why? To begin with, let’s consider how mining works, as well as why they are trying to ban mining using the Proof of Work (PoW) mechanism.
What is PoW and how does it work?
Cryptocurrency is decentralized and does not depend on intermediaries. That is why it needs methods that would allow you to verify all transactions and data that are added to the blockchain.
Blockchain, in turn, is a distributed database that stores records of all transfers. This information is organized into consecutive blocks and is publicly available, and a distributed network of participants verifies all transactions and data, making counterfeiting or other financial fraud impossible.
The distributed network of participants is the miners who use special methods of verifying information on the blockchain. These procedures allow them to ensure the transparency of transfers, mine crypto, and maintain the proper functioning of the blockchain.
PoW (Proof of Work) is a software algorithm, also known as a consensus mechanism. He is responsible for the selection of participants who will verify new data.
How does it work? The system challenges miners to solve mathematical puzzles in order to prevent abuse and various violations on the blockchain. Whoever completes the task faster can create a new block of verified data in the chain and, as a result, receive their reward in cryptocurrency.
The world’s first cryptocurrency, Bitcoin, demonstrated the viability of the PoW mechanism. As a result, this method is now used by a large number of altcoins, including Ethereum, Dogecoin, Litecoin, and Monero.
But 14 years have passed since the launch of Bitcoin. During this time, the cryptocurrency industry has undergone significant changes. Other consensus mechanisms have emerged that, as an alternative to PoW, may supplant this method altogether. Ethereum is planning a multi-stage upgrade that also involves changing the consensus mechanism.
What is wrong with PoW
Although PoW is an effective method of verifying transactions and data on the blockchain, its disadvantages will soon outweigh its advantages.
The first and most critical problem is that proof of work consumes an excessive amount of electricity.
According to the New York Times, in 2009 it was easy to mine one bitcoin using a regular PC and a minimal amount of electricity. Now you need a bunch of specialized computers and as much electricity as a typical American house would use in 9 years.
Another problem is the regulation of mining farms. It is logical that such activity should be monitored given the intensive computational and energy requirements. However, this can lead to the centralization of the crypto, which negates its main function — complete independence from intermediaries and regulators.
What is happening with PoW mining in some countries
Governments in many countries are becoming increasingly concerned about the energy-consuming process of PoW mining. China has banned crypto mining altogether. After that, the owners of mining farms were forced to seek refuge in other countries. Some resorted to ecological methods of crypt mining, using alternative sources of electricity in the Scandinavian countries.
Someone simply used gas and coal to the full, such as in Kazakhstan or Iran, or in the territories of Kosovo and Abkhazia. However, the depletion of natural resources and problems with the redistribution of energy already later led to considerable indignation of the governments of the countries. As a result, Kazakhstan tightened controls on miners after parts of the country experienced power outages. The same thing happened in Kosovo.
Alternatives to PoW: PoS, PoB and PoC
Fortunately, the crypto industry did not stand still and found other, more effective methods of verifying data and transactions on the blockchain. Let’s talk about some of them:
PoS (Proof of Stake)
This method does not require following a detailed mining procedure as in PoW. PoS also does not involve mining cryptocurrencies as they are built from the ground up. To verify transactions in the blockchain, miners first invest in a stake of digital currency. The more coins a miner has, the higher the chances of getting approval for verification and, as a result, a reward.
PoB (Proof of Burn)
This is a relatively new PoW alternative that only works for Peercoin and Slimcoin so far. Instead of investing in specialized mining equipment, miners invest in coins… and then burn them. The more tokens burned, the higher the chances of getting permission to verify transactions on the blockchain.
PoC (Proof of Capacity)
This consensus mechanism selects participants to verify the data on the blockchain, based on the available space on the miner’s hard drive. That is, the more space on the hard disk, the higher the chances of getting the right to create a new block in the chain.
In addition to the aforementioned consensus mechanisms, there are many other alternatives. The new methods offer lower energy consumption and are easier for miners to implement.
But, perhaps, the most serious competitor of PoW is the proof-of-stake consensus algorithm. For example, Ethereum, the second most popular cryptocurrency in the world after Bitcoin, plans to switch to the PoS model because it sees the future in it.