Miners and mining rewards
The minable coins are created by (and are rewarded to) the miner, for successfully verifying transactions on the network and adding it to the newly created block on the blockchain. The reward for each created block of the blockchain is called “block reward“.
This model of solving a computational mathematical puzzle, in order to keep the blockchain network secure and decentralized, and being rewarded for your work, is called Proof of Work (PoW) model.
What is the purpose of mining
This ongoing process serves two purposes to the cryptocurrency network. 1. Verifying transactions on the blockchain network and 2. Creating new coins into circulation which a miner receives for successfully validating each new block of transactions. Since a lots of computers engage in mining, the network gets more decentralized and it becomes very difficult to attack.
The non-minable coin and two different types
Non-mineable coins are the digital coins that users cannot mine using their computer power.
This actually means that most of these coins are already in circulation. So the users can only acquire these coins either by purchasing them from exchanges or through other means like participating in an ICO (Initial Coin Offering). Some non-minable coins are for example XRP, EOS, Stellar and NEM.
In these type of cryptocurrencies, we have two categories :
a) Non mineable coins that their max supply has been reached and no more coins can be created
These are cryptocurrency Projects where a developer has completely premined the coins at the start of the project and then later distributed them to the public. So in this scenario all the coins are premined upfront and are usually sold in ICO.
b) Non mineable coins where the total amount of coins has not yet been released completely:
These are coins that for example uses Proof of Stake model and the new coins can be acquired only through wallet staking, through running masternodes or just by periodically adding extra coins in the circulation (like with XRP for example).
The Proof of Stake model
In the Proof of Stake model, the users are required to buy and hold coins in their wallet. There are no miners using their equipment for validating transactions. Instead, users who hold coins in their wallets involve in the process of verifying transactions. The more coins and the longer they hold them in their wallets, the more likely they will be rewarded by a new block reward.
These rewards are in the form of newly created coins (creating new coins into circulation) or in some cases where the max supply has been already attained, the participants only receive transaction fees as reward. These fees may not be as high as the block rewards which they would receive from mining, but the costs of validation are much lower in this Proof of Stake than in the Proof of Work model.
Differences and similarities between minable and non-minable coins
Whether we are speaking for a mineable or a non mineable coin, their main purpose as a cryptocurrency is the validation of transactions. Since the core idea behind most cryptocurrencies is decentralization, somehow the transaction that occurs on the network needs to be validated by someone.
This validation is necessary to ensure that the coins are not being spend twice. When it comes to validating transactions or handling block production, both mineable and non mineable cryptocurrencies have one similarity : their target is to achieve network consensus. Only the method differs : the mineable coins use the Proof of Work consensus algorithm whereas non mineable coins mostly use the Proof of Stake consensus algorithm.
Nevertheless, not all non-mineable coins use the Proof of stake model. In cryptocurrencies, there are lots of consensus algorithms. Each algorithm verifies transactions and validates blocks in a different way. There are some non mineable coins that use different consensus algorithms such as: Delegated Proof of Stake (DPoS), Byzantine Fault Tolerance (BFT) or others while there are many minable coins which have implemented a hybrid Proof of Work and Proof of Stake approach, with masternodes for extra safety and features.
Pros and cons of minable coins
- a)Proof of Work coins are generally considered more secure and less centralized.
- b) This model creates achieves better coin distribution assuming that the coin has proper block reward structure and no premine.
- c) The PoW model is the one which in reality has succeded and passed the hard test of surviving the pressure of the world’s governments and banking system. This is achieved because the PoW model is maximizing the participation of more people in a new, free system of transactions with no need of trusted third parties.
- d) It is much more easy for the mineable coins to evolve in the future, adopting a model that would minimize its weaknesses like the energy consumption. At the same time keeping all their inherent aforementioned advantages. For example a hybrid PoW-PoS model is a first step for some projects.
- The biggest downside of mineable cryptocurrencies (PoW coins) is that it is very costly to secure the network. It consumes massive energy and it usually requires specialized mining equipment.
- Non mineable coins are more energy efficient as they don’t require massive energy to secure the network. This leads to substantially low costs to validate transactions compared to PoW coins.
- a) A lots of non mineable coins are heavily premined. They also have inferior initial coin distribution which makes a coin centralized.
- b) Non-mineable cryptocurrencies have generally much bigger security issues to solve because they are much more centralized in every level comparing them with the mineable coins.
- c) Unfortunately the model of the non-mineable coins is the ideal model for building the most “effective” scam projects in the world of cryptocurrencies. The concept of allocating the total supply to certain developers’ addresses from the very first moment is a top choice for the fraudulent developers. This way they can easily sell their coins with heavy promotion before they exit their bubble project for their next scam.
- d) Non-mineable coins cannot achieve the motivation for the World Community to participate in a system of transactions with freedom and no need of trusted third parties, like the Proof of Work model did. This is a great difference between the two models. The PoW model with the mineable coins , motivate simple people to join their network with hardware that in many cases already have, contributing this way to a revolutionary transaction system. The non-mineable coins from the other hand, require to be bought. They are usually sold by companies which in the most cases dream to be the next “World Bank”. With the only difference with the current banking system being that this future bank is going to use some elements from the blockchain technology.
- e) The potential of the non-mineable coins for evolvement in the future and improvements of the aforementioned weaknesses is low. Because their fundamental characteristics like the inferior distribution , the centralized character and their usually shady launching cannot be reverted by any means.