Cryptocurrency is unique in a lot of ways, but the two factors that really set cryptocurrencies apart is the way in which cryptocurrency is created and the way in which cryptocurrency transactions are executed. Indeed it is the decentralised nature of cryptocurrency which makes cryptocurrency so different from regular (fiat) money. Nobody controls cryptocurrency from a central point and new cryptocurrency coins are created using a process called mining.
Mining is where someone donates computing power to the cryptocurrency network in order to help the network verify cryptocurrency transactions. There is a reward paid for this mining. However, certain cryptocurrencies cannot be mined. Yes, you get cryptocurrency which uses mining to drive the network, and other cryptocurrency which does not make use of mining. Which are the most common non-mineable cryptocurrencies?
Well, non-mineable cryptocurrency is more popular than you’d think – if you look at CoinMarketCap you will observe that out of the ten top cryptocurrency five are not mineable. In fact, more than half the coins on CoinMarketCap are not mineable. So non-mineable coins are clearly very common, but what are the differences between mineable and non-mineable coins and why would you choose one or the other?
Furthermore, when thinking about coins to mine, how are new coins created on a crypto network that does not make use of mining and how are transactions validated? This article will cover everything you need to know about non-mineable coins.
- Understanding cryptocurrency mining
- Mineable coins compared to non-mineable cryptocurrency
- Mineable cryptocurrency
- Non-mineable cryptocurrency
- How mineable and non-mineable cryptocurrencies differ
- Pros and cons
- Mined VS non-mined
Understanding cryptocurrency mining
First, let’s explain what mining is. Mining is where one person or a group of people make use of very powerful hardware to be able to find answers to complex mathematical (cryptography) problems. Finding the answers to these puzzles is essential and is called proof of work. In turn, proof of work is key to keeping a crypto network decentralised and secure.
In effect, proof of work is about encryption – encryption to make sure that transaction on the blockchain network is correct and secondly to add new coins into circulation – this is what a miner receives in return for the computing power consumed through the process of validating blocks of transactions.
Another benefit of the mining model is that it makes it very difficult to attack a cryptocurrency network – there are simply too many computers involved in the mining process to make an attack effective. Even where cloud mining is prevalent it still ensure coin safety.
Note that all of the mineable coins such as Bitcoin (which was really the pioneer) make use of the proof of work method. Currently you can literally come up with thousands of coins that all make use of proof of work. Think Litecoin, Ethereum, Dogecoin, Zcash and Monero.
However, there are lots of examples of coins which can’t be mined. Consider Stellar, Ripple, QTUM, NEM and Wechain. None of these are tokens – they are actual coins, but coins which cannot be mined. So the question is then: how do non-mineable coins work in comparison to mineable coins?
Mineable coins compared to non-mineable cryptocurrency
First things first: cryptocurrency always fall into one of two categories. Mineable coins, and coins which cannot be mined. Whether a coin is mineable or not depends on the way it was set up by the person who created that coin alongside the overall aim and scope of the platform.
What is a mineable cryptocurrency then?
Well, just like mineable implies, it means that the cryptocurrency can be mined – in other words, you can get more coins by mining the cryptocurrency in question. As you verify transactions on the network using the computing power you own or rent you get rewarded for every new block that you create on the blockchain.
What is a non-mineable cryptocurrency?
Clearly a non-mineable coin is a coin that can’t be mined, it’s not amongst the coins to mine. You can’t make new coins on the network by using computer power. The only way to get a hold of these coins is to buy the cryptocurrency on the open market – or to exchange it for another cryptocurrency. In some cases additional coins can be created, but not by mining. Often there is simply a fixed number of coins in circulation.
Creating new coins on non-mineable cryptocurrencies
Where non-mineable coins do not have a fixed circulation there is still the possibility of creating new coins, but the process works differently when it comes to non-mineable coins. Of course, remember the distinction: some non-mineable coins have a fixed supply and there is no way to add new coins to the network. Others allow for some mechanism for supply growth yet it is not possible to mine these coins. However, there are methods to add coins – wallet staking is one method.
Where coins have reached a maximum supply
In this case the developer of the coin has released all of the coins when the cryptocurrency was released by effectively pre-mining all the coins. All the coins are later distributed to the public: coins are pre-mined right away and often these coins are sold using an initial coin offering (ICO).
Where coins are non-mineable but not all coins are released
These coins work differently – additional coins can be created but not through mining (proof of work) but via different methods such as masternodes or wallet staking. This method is also called proof of stake.
There is one major difference between proof of work and proof of stake: with proof of work mining happens using powerful computers, but that’s not the case for proof of stake coins. Instead, with proof of stake, users are rewarded for holding coins in their wallet – and in doing so these users verify transactions on the network.
Furthermore, the more coins you hold the more rewards you will get in the proof of stake process – simply because holding more coins makes it more likely that you’ll be able to verify a full block of transactions. By holding coins and in turn verifying transactions users are rewarded by cryptocurrency that is newly minted – and this leads to growth in the supply of the cryptocurrency.
Of course, not all of the non-minable coins use proof of stake – and furthermore, not all proof of stake networks will reward their users by the issuing of new coins. Some exceptions exist, with some coins with a fixed supply paying users by means of transaction fees – and these fees could be less than the reward paid for mining. However proof of stake is not as computationally expensive so the “cost” of proof of stake is lower than the cost of proof of work.
How mineable and non-mineable cryptocurrencies differ
There are some common points across both mineable and non-mineable cryptocurrencies, including the fact that the main aim of a cryptocurrency is to ensure that transactions can get validated, while cryptocurrency also focuses on decentralisation. Nonetheless, validation is key to the working of a cryptocurrency because it ensures that someone cannot spend their cryptocurrency a second time – called double spending.
This leads to another similarity between mineable and non-mineable coins – both groups require transaction validation in order to make sure there is consensus in the network. The real difference then lies in that mineable coins use proof of work to obtain consensus while non-mineable coins use proof of stake to establish this consensus.
Do note however that not every non-mineable coin makes use of proof of stake – there is a whole other range of consensus algorithms that the developer of a cryptocurrency can consider using. Regardless, the aim of the algorithm is to verify a transaction and to validate a block – even if it happens in a different way. Yes, proof of stake and proof of work are the most popular methods but there are other options. Consider delegated proof of stake, directed acyclic graphics and even BFT – or byzantine fault tolerance.
So what are the pros and cons?
As always in life there are both advantages and disadvantages to mineable coins – and likewise for coins that cannot be mined. It doesn’t matter whether you consider cloud mining important or not. Let’s look at coins that can be mined first.
Pros and cons of mineable coins
First, many people consider proof of work, the algorithm which drives mining of coins, to be more secure when it comes to keeping the network validated. At the same time it prevents any distortions caused by pre-mining and ensure better distribution of coins.
However, mined coins come at a cost: the extra security from proof of work requires a lot of computer power, which also means that proof of work consumes a lot of electricity. Effective proof of work also requires expensive, special mining equipment that can sometimes have a very limited useful life.
Pros and cons of non-mineable coins
Proof of stake is not that computationally intensive so as a result non-mineable coins do not consume as much computing power and electricity as mineable coins. The cost of validation is a lot lower.
However these non-mineable coins are usually pre-mined to a very large degree which means that coins are usually not smoothly distributed. This means that non-mined coins are not as decentralised as their mineable counterparts.
So which is better? Mined or non-mined cryptocurrency?
We’ve outlined the pros and cons – consider the user of energy, which is lower with non-minable coins, but also the fact that mineable coins are distributed more evenly. Nonetheless some of the non-mineable coins have a lot of potential because they come with unique characteristics. Mining is not the only sensible way of distributing coins, and proof of work is not the only way to effectively secure cryptocurrency networks or to ensure smooth distribution. In a way it hinges on what the developer of a cryptocurrency planned to achieve with their cryptocurrency.
The result is that the two groups of cryptocurrency will attract different people depending on what they want to get out of a cryptocurrency. We don’t think it’s worth placing a value on a coin simply because of the nature of its validation method. Value really depends on supply and demand and it just high demand that can really make a coin grow in value.
This demand in turn depends on the use cases for the coin and whether anyone places “value” on a coin, or has some use for it. So, both mined and non-mined cryptocurrency will be around for the foreseeable future – but some individual coins might disappear, no matter which group they are in. It depends on whether the cryptocurrency community and investors in the broad place a value on the coin in question: not on whether it is mineable or non-mineable.