9 Cryptocurrency Proofs You Better Learn Right Now to Help Improve Your Portfolio (2024)

Different proofs riddle the cryptocurrency sphere. One of the biggest problems for cryptocurrency is proofs that make the systems less scalable. Furthermore, people want to participate in cryptocurrency transactions. And they need to do so with wallets and exchanges compatible with a cryptocurrency proofing system they understand and trust. However, choosing what’s suitable for novice users can be complicated.

In this article, we will explore nine cryptocurrency proofs and how they work. So you can make better decisions about your cryptocurrency investments in the future.

We’ll start with the oldest and most well-known: proof-of-work.

Proof-of-work is a requirement that miners must meet to confirm the validity of cryptocurrency transactions to receive rewards for participation. The proof-of-work consists of calculating hashes continuously until the miner finds the target hash value. The more computing power one has, the easier it is to calculate these proofs, which can reward the validator with tokens by supporting cryptocurrency’s blockchain network.

An example of proof-of-work would be for a cryptocurrency’s blockchain to use the SHA-256 hash algorithm. This algorithm produces a 32 byte (32 characters in hexadecimal) output. So, if you were to enter any data string into this cryptocurrency’s blockchain, for example: “abcdefghijklmnopqrstuvwxyz,” it would produce a result that looks like this: “fedcba987654321.” Once you enter a data string and it creates an output, that is proof-of-work. But, there is no reward unless the miner correctly resolves the hash.

Think of proof-of-work as showing your boss “the proof” you completed a task assigned to you. Once your boss has “validated” you performed the work, they are pleased, and you get the reward of keeping your job.

Let’s look at some currencies that use proof-of-work:

• Bitcoin (BTC)
• Ethereum (1.0) (ETH)
• Dogecoin (DOGE)
• Bitcoin Cash (BCH)
• Litecoin (LTC)

Some of the biggest cryptocurrencies use proof-of-work, but some are migrating to new proofs. For example, Ethereum wants to switch over to proof-of-stake because it is less energy-intensive and faster. Proof-of-stake will rely on cryptocurrency’s consensus algorithm (which differs for each cryptocurrency). Moreover, it will only require users to leave their cryptocurrency holdings in an account for brief periods while voting on transactions. This will eventually create a list of validators who have approved the transaction. Then, the cryptocurrency holders will receive profits from cryptocurrency mining and participation in the network.

Environmentally conscious investors don’t find proof-of-work healthy for the planet. Therefore, we may see a shift away from proof-of-work altogether for the future. So, why is it so energy-inefficient?

The community must acknowledge that proof-of-work is cryptocurrency’s version of “King Coal,” causing tremendous energy consumption. Many members of cryptocurrency communities think that energy consumption should be restricted. For example, computers use electricity to power them. The more computers you have mining, the more money you make, but at the expense of massive energy consumption and damage to the planet. The chart below gives a breakdown of energy use by resource for the entire world.

As you can see, proof-of-work doesn’t equal clean, renewable energy usage. But, it’s not the investor’s fault the energy sector won’t catch up with the times. However, the investor isn’t powerless. They can move to a cryptocurrency using other types of proof, and thus, our next step is to look at proof-of-stake.

Proof-of-stake is a cryptocurrency consensus algorithm that rewards cryptocurrency users for owning cryptocurrency. The cryptocurrency user will have to maintain a cryptocurrency balance in their account and keep it online to earn cryptocurrency as a reward for their contributions. Think of it as interest.

An example of how proof-of-stake works is that users will keep cryptocurrency in an online account 24 hours a day, seven days a week. Keeping cryptocurrency online will allow the holder to receive transaction fees as well as more tokens. In contrast, you only get paid if you solve hashes or blocks in a proof-of-work system, while blockchain transactions happen.

On the flip side, the disadvantages of proof-of-stake are that wealthy cryptocurrency users can dominate more crypto votes than you. Elitism can cause the cryptocurrency network to become swamped by “the haves.” This is where delegated proof-of-stake can help, and keeping the network decentralized through arbitrary delegation of transaction verification no matter how much coin you’ve bought.

Here are some coins that use proof-of-stake:

• Cardano (ADA)
• Ethereum (2.0) (ETH2)
• Tezos (XTZ)
• Algorand (ALGO)
• Celo (CELO)

As proof-of-stake becomes widely used, we will face new challenges, but the algorithm is a step in the right direction. Let’s look at some more proofs.

Think of proof-of-participation as a members-only club with many benefits. First, the system requires investors to place their coins in a wallet and lock them in to participate. Then, the node registers its members on a secure list. Registration makes it especially difficult for someone who owns a mining farm to take over the blockchain easily. It’s the node registration that acts as a security layer. Therefore, it would take someone a great deal of time and effort to break into “the club.” So, a dubious user will look for easier prey elsewhere. Second, rewarded tokens are distributed evenly throughout the node registry. The distribution leads to better decentralization and a fair reward for all participants. Finally, proof-of-participation is energy neutral and is better for the environment, which is fantastic. So, the question is: how does an investor get into the club?

You must apply to the node registry for proof-of-participation by guaranteeing to lock in a certain amount of funds determined by the algorithm consensus. Thus, the node registry’s initial backers will reap the rewards once they make transactions with generated tokens. Then, once more users join the registry (you), the effect grows, but the distribution remains spread out amongst the members.

Proof-of-participation is an innovative consensus algorithm that does not need energy-consuming mining. Instead, it relies on registration to grow and generate tokens as more users join. In addition, the only cost involved with joining the cryptocurrency club is locking up some funds determined by algorithm consensus. One downside to PoP coins like Motocoin (MOTO) is a slower generation rate because you might have fewer nodes signing blocks than Bitcoin. However, one benefit to PoP currencies over other cryptocurrencies is you don’t suffer as much risk of double-spending attacks or 51% attacks since all participants must sign off before transactions go through.

Next, we’ll look at proof-of-activity.

To start, two groups must divide proof-of-activity mining. The first group uses proof-of-work to find a block that it will send out for verification. Verification ensures that everyone in the pool has an incentive (the potential reward) and competes with each other to mine blocks containing valid transactions; if they do not send these funds quickly enough, they lose their rewards. Next, the second group consists of miners who have successfully mined a block using proof-of-stake instead of traditional proofs like Bitcoin or Ethereum. See the graphic below.

Critics frown over the possibility of centralization over time with proof-of-activity. The criticism is due to its original implementation, where the algorithm gave four mining pools a unique transaction in the initial block. Bad actors could easily manipulate the block as cryptocurrency originally had a much smaller user base and, therefore, lower hash rate than many other proof-of-work coins, such as Bitcoin or Ethereum. If all transactions continued to be processed by the same four pools, one could easily manipulate cryptocurrency through these pools as a whole.

However, proof-of-activity has since outgrown its original implementation. Now, hundreds of mines exist. Thus, centralization is no longer seen as an issue by supporters as opposed to when it first emerged.

Yet still, the power consumption of the proof-of-work phase is high and remains unattractive to investors looking to go green.

Solving for implementations of proofs can come from many different places, not just Silicon Valley. For example, proof-of-selection’s entrance to the cryptocurrency scene.

Proof-of-selection determines correctly mined cryptocurrency. It responds to the Byzantine general’s dilemma. The Byzantine general’s dilemma is when a group of generals is fighting and strategizing with one another. As a result, they send messages back and forth to stay in communication, but they can’t be sure if the enemy will intercept the messages and use them for dubious intent. Enter Officer Kennie Jenkins of the United States Navy. He knew that an imperfect plan put in action promptly was better than a perfect one that comes late. Therefore, he devised a way to use proof-of-selection in a blockchain while on active duty.

The Byzantine general’s dilemma poses the question, “is there a way to prove one party has information the other does not?” The answer or proof-of-selection is given by “a sort of cryptographic ‘sealed envelope’ that only the person with the right key can open.”

Jenkins and his team were responsible for overseeing cryptocurrency transactions on government contracts. At first, he didn’t see a future for cryptocurrency and had doubts about its longevity. However, after another officer challenged his claims, he found a solution in an old field of mathematics called proof-of-selection, and Jenkins applied it to cryptocurrency. All parties use proof-of-selection when they are unable to agree on information passed between them. The proof doesn’t need to be a complex algorithm, and it doesn’t need to prove the cryptocurrency’s independence. It merely needs to ensure correctly generated cryptocurrency.

Jenkins’ proof-of-selection serves as an overall solution to cryptocurrency’s most pressing issues: proof-of-work and confirmation bias.

For confirmation bias, 51% of cryptocurrency miners must approve transactions. However, because cryptocurrency miners are scattered and anonymous, it isn’t challenging to achieve a unanimous consensus on any transaction. In other words, cryptocurrency can be “double-spent” with confirmation bias. Proof-of-selection helps cryptocurrency combat confirmation bias by proving correctly mined tokens through its verification process.

Verification methods are front and center in the minds of proof creators. Therefore, another method exists that may sound a bit odd in the sea of solutions: proof-of-burn.

Proof-of-burn is a mining method where the cryptocurrency miner has to provide alternative cryptocurrency tokens as proof-of-work. In addition, the cryptocurrency miner must prove they invested in cryptocurrency mining power. This mining method will help with the long-term cost, as it eliminates cryptocurrency miners who do not act in good faith.

It is similar to the proof-of-work algorithm, except there is no need for a secure cryptocurrency network. The idea is that instead of burning real money, the cryptocurrency miner must burn another type of valuable resources such as a coin or altcoin. Then, the burner sends the coin to an unspendable address. Finally, the verified “work” rewards the burner with real currency.

With the cryptocurrency mining method of proof-of-work, miners must provide tokens as proof-of-work. Then, after miners complete a block, they get a token reward. However, the cryptocurrency mining method is not sustainable because it consumes too much energy. The proof-of-burn cryptocurrency mining method is less energy efficient because miners must provide alternative token algorithms such as proof-of-work.

Proof-of-burn isn’t great. True, it adds a verification process for work done, but it still consumes too much energy.

Cryptocurrency enthusiasts need to be aware of as many proofs as possible. With miners competing for tokens, there are many ways to get involved with different proofs. We’ll look at another example below.

Proof-of-capacity is a consensus algorithm that uses hard drive space available to mining devices on the network to decide and validate transactions.

Proof-of-capacity is designed to alleviate the burden on proof-of-work, proof-of-stake, or other algorithms. It also solves the problem of how miners are rewarded for maintaining the blockchain. For example, if proof-of-capacity miners don’t provide storage space, they won’t mine bitcoin. However, if new proof-of-capacity miners start using this algorithm and other types of proof methods are phased out, these miners with proof-of-work or proof-of-stake may be losing out on a significant source of revenue.

The proof-of-capacity algorithm takes advantage of its hard drive space, and users can decide mining rights by offering proof-of-capacity. They get rewarded with additional cryptocurrency for providing more storage as well. As proof-of-capacity increases in popularity, different cryptocurrencies have begun to experiment with proof-of-space. Vertcoin and Burst are proof-of-capacity cryptocurrencies that are known for being ASIC-resistant.

Another way to say this is mining is the proof-of-work provided to proof-of-capacity algorithms to receive the currency they mine. PoC miners are rewarded with cryptocurrency for offering evidence of hard drive space. They get rewarded with additional cryptocurrency for providing more storage space. The downside is wealthy investors can gain a majority by providing more space.

Every proof has its weaknesses, yet with innovation, we can come to a more perfect proof one day. For example, one proof that is similar to proof-of-capacity is proof-of-space.

Instead of using energy to create new coins, this type of consensus algorithm is achieved by demonstrating one’s legitimate interest in service by allocating nontrivial space necessary for the challenge presented by the service provider.

A prover sends a verifier some data to prove that they have reserved the necessary space in proof-of-space. They must consume little time and resources for this process to be practical and fast while still secure for everyone involved.

For example, the service sends work for the computer and the resources required to perform the job. Let’s say x amount of memory and y amount of storage. Next, the computer acknowledges the request, then performs the work. Finally, the job must be small and meet the agreement of verification for both contracts.

As you can see, proof-of-space is a minor tweak from capacity, yet adding enough to require a little more verification of resources.

Finally, we will look at proof-of-spacetime. While sounding out there, it’s a derivative of proof-of-capacity with some added assurance.

Proof-of-spacetime is an algorithm in which the prover has spent the agreed-upon amount of time holding the required amount of space. It is related to proof of capacity, but the makers believed the space and its availability are inextricably linked. Also, it is not necessary to store any valuable data. Finally, there can be a tradeoff between space and time, which allows flexibility.

Cryptocurrency is a complicated topic with many different types of cryptocurrency proofs. Before you start investing in crypto, it’s essential to understand the differences between all of these types. As an investor, what are some things you should know? The proof-of-capacity and proof-of-spacetime algorithms offer exciting solutions for those who want to invest without spending too much on energy costs associated with mining cryptocurrencies or paying money upfront for hardware like investment funds to do in other currencies. Proofs such as these provide an alternative way to mine coins that don’t require the same level of capital expenditure as traditional investments but still offer similar potential returns if executed correctly!

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