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The first and most popular way to issue cryptocurrencies was mining. The system rewards the user with coins for calculating hashes and adding (opening) new blocks to the blockchain. This is how bitcoin, ether, litecoin and other cryptocurrencies work on the basis of the Proof of work (Pow) consensus. 

The work in the PoW refers to the solution of mathematical problems on computer equipment by the members of the distributed network. The algorithm ensures the stability of the blockchain, the emergence of new coins and protect the system from hacking.


In the beginning, you could mine the same bitcoins on your home computer. However, PoW is designed so that the more miners extract cryptocurrency, the more difficult it is to do. In addition, the system automatically reduces the reward for the new block over time (this is called halving, because the reward is reduced by half). 

To get coins more efficiently, miners eventually began to pool, build giant farms, and create industrial conglomerates. Mining has become a separate industry. The shortcomings of the pow consensus have also proved themselves.

What's wrong with PoW mining?
A. Growing electricity consumption
Manufacturers and users of mining equipment are constantly increasing capacity due to the dynamic complexity of cryptocurrency mining. As a result, the bitcoin system consumes as much energy as a small country like Denmark or Bulgaria. At the same time, the appetites of the first cryptocurrency continue to grow.

growth of consumption growth of electricity consumption for bitcoin mining from February 2017 to April 2018. Digiconomist Data

The problem can be solved by energy-saving developments, renewable and alternative sources. But this is a theory, and in practice, mining companies grow, move to countries with affordable electricity, overload networks and contribute to the destruction of the environment. Of course, not the same as the production of money, but why emulate a bad example.

B. the Consumption of computing power “in vain”
In 2013, the total capacity of the equipment that produced bitcoins surpassed the top supercomputers by 256 times. These resources were spent only on the extraction of virtual money, although they could solve practical problems for science, industry or digital art.

C. Centralization
The largest mining pools and equipment manufacturers can become a threat to the decentralization of cryptocurrencies. If they combine their capacities, they will be able to dictate their own conditions to the system, rewrite data in the blockchain and stamp blocks – this is called “51% attack”, when more than half of the computing power is concentrated in one or more owners.

the”market” of bitcoin mining. The extraction of the first cryptocurrency is controlled by seven pools. Such a decentralization

What alternative?
The community has seen the shortcomings of the pow consensus. Therefore, over time, other methods of cryptocurrency emission began to develop. They are based on the new con+Sensus algorithms.

Proof of Stake (PoS) - proof of stake

In 2012, there was the first candidate to replace the traditional mining. The creators of the cryptocurrency PPCoin (now PeerCoin) presented an algorithm that established consensus in the system not on the basis of the decision of crypto-tasks, but on the volume of coins for a particular user.

proveravanje PoW and PoW. Transfer insider.pro

For example, the developers decided that there will be a million Perminov, and the user bought on the stock exchange thousands of coins. Share, which he owns helps him to get a new percona. Man, of course, need a computer, but no heavy duty Asimov and graphics cards do not need to buy. Production depends only on the proportion and complexity that the system changes. Simplified PoS-algorithm can be described as follows: who has more share of coins, the more chance to open the block and get more coins.  

Pluses:

a) energy saving and environmental protection-industrial mining is not needed;

b) simple defense against 51% attack – to carry it out, it is necessary to redeem 51% of coins, it deprives sense idea of attack.

Minuses:

a) stimulation of centralization – PoS pushes users to purchase an increasing number of coins. Because the more you share, the more likely it is “mined” yet. The rich are getting richer.

b) initial distribution – if the creators of PoS-cryptocurrency spend ICO and sell the stock of coins, the first investors get an undeniable advantage. 

c) the problem hardforce – in PoS system, you can create two chains of the blockchain, as the mining of crypto-currencies is not limited to physical conditions. Because of this, also increase the chances for attack “double spending”, where the attacker is able to translate the same asset again and again.

The proof-of-stake system is used in more than 20 cryptocurrencies, among which are the Lisk and Waves projects.

Cryptocurrency NEM uses a modified PoS algorithm called Proof of Importance (PoI) is a “proof of importance”. In it the chance to open a new block increases not only ownership interests, but also on the user activity and time spent in the network.

Delegated Proof of Stake (DPoS) is a delegated proof of stake
The issue of cryptocurrencies based on ownership of the share did not let developers go. Dan Larimer came up with another version of PoS. In DPoS-blockchain there are so – called delegates-participants of the system, who monitor the creation of blocks and can punish scammers.

To receive a reward, a user must sign a block from more than one delegate. The algorithm selects delegates automatically based on internal principles.

Dan Larimer has implemented DPoS in the project BitShares.

Dpossravnenie DPoS BitShares and bitcoin PoW

Some DPoS system be given the title of delegate in exchange for a temporary lock. If he violates the rules as a delegate, the system will confiscate his coins. This approach is also called Deposit-based Proof of Stake – proof of the share based on the Deposit.

Proof of Activity (PoA) is proof of activity
In 2014, a group of programmers led by IDO Bentov presented a concept that combines pow and PoS – Proof of Activity algorithms. In such system blocks are opened by two parties of miners: the first mines part of the block on the equipment, the second connect the shares of coins and finish work.

Aapreciate PoW and PoS block in the way of Proof of Activity

Thanks to the combined approach, PoA minimizes the disadvantages of previous systems. If the user buys 51% of the coins, he will still not be able to dictate his terms to the system. For punching new blocks, he will need the power of miners. The latter also will not be able to organize a single pool and manage the economy of blockchain without users who own coins.

The idea of PoA-consensus formed the basis of the cryptocurrency Decred.

Other " proof”
The fact is that PoW mining has no real competitors yet. It is used for the production of the major cryptocurrency, is working on its shortcomings and develops. Only the consensus of proof of stake (PoS) was able to be implemented in a sufficient number of projects and became the progenitor of new systems. Nevertheless, the developers continue to create various, sometimes strange, blockchain algorithms for the production of digital money. For example.

Proof of Burn (PoB) – proof of burning is based on the idea that the protection of the system does not provide computing power or ownership, and spending on mining or hacking (this approach worked in part and in the PoS-consensus).

To open a new block and get coins in the PoB system, the user must burn some coins, thus simulating spending on equipment or parts of coins. Burning is only an image. The user sends the funds to the address from which they can not be spent. In response, the system increases its chances of mining new coins. Of course, the algorithm is built so that the user gets more coins than burned.

Evidence of burning can be compared to virtual mining. The system simply removes the extra step in the form of buying equipment. This type of emission saves energy and protects nature.

Proof of space (PoSpace) or Proof of capacity (PoC) – proof of place or capacity. Refers to the size of the data warehouse. To get the PoC in cryptocurrency-the blockchain, the person needs to allocate space on your computer. Usually we are talking about several terabytes of information. It protects the system against botnets, which could capture a small file.

The algorithm repeatedly hashes random numbers that are associated with the user's wallet. The more space is allocated for the system, the more chance to open a new block and get coins.