Understanding Cryptocurrency Mining and Alternative Models

NEW DELHI: Mining has become synonymous with cryptocurrencies and is a critical process. Yet there are more actors in the crypto market that work on Proof of Stake (PoS) models or derived models of Proof of Work (PoW) and don't need to be mined in order to be traded.
There are over 800 pre-mined or non-mineable cryptocurrencies whose shares are slowly but surely growing in the crypto fair according to ADVFN, the UK-based leading private investor website. This is no surprise given that they save huge amounts of energy overall.
A quick look into the two major types of cryptocurrencies, on the basis of mining activity:
1) Mined Cryptocurrencies: These cryptocurrencies have decentralisation at the core of their mining process, using mostly Proof-of-Work (PoW) and sometimes Proof-of-Stake (PoS) models.
* Here, cryptominers are distributed coins after they are mined by the users.
* Mining involves solving complex algorithms using expensive computing hardware for which miners are rewarded a block that is added to the blockchain. These blocks validate the transaction.
* This validation of a block leads to the generation of a new cryptocurrency, which is the miner’s reward for solving difficult mathematical puzzles.
* Among mined coins, Bitcoin rules the roost with almost over $1 trillion market capital followed by Ethereum with a market share of $351 billion and Binance with over $60 billion capital.
2) Pre-mined Cryptocurrencies: These coins are mined with the first block of new cryptocurrency by roping in software developers and engineers. Then these coins are distributed before the official launch of the coin to the developers, employees and investors.
* Pre-mined coins could also be called non-mineable cryptocurrencies as they are bought like tokens and not mined.
* Non-mineable cryptocurrencies allow users to buy the tokens or seeds in the hope of profitable return in future.
* They generally function on a PoS-model, or a hybrid of PoS and PoW.
* Some premined coins also use the Byzantine Fault Tolerance (BFT) model.
* They are distributed before the official launch to incentivise the developers, ICO investors and token holders who have contributed and invested the most in developing and advertising the cryptocurrency initially.
Pre-mining is often criticised for the artificial inflation of their value by ICO fundraising.
* The launch of pre-mined coin helps in establishing the functionality of the prototype coin in the market.
* It is mostly centralised and more susceptible to security issues.
* Cardano, Ripple, Solana, Polkadot are a few examples of top-notch pre-mined coins. Cardano, here boasts of the highest market capital among pre-mined coins at $67.03 billion.
* Some cryptocurrencies have both pre-mined and mined coins. Interestingly, the first Ether was also offered as a pre-mined reward to those who funded it in the first ICO of July and August 2014. But it now continues to be mined like Bitcoin.
* They are energy-efficient: not using the process of mining, they do not consume massive amounts of energy.
* These could be extremely valuable, as they have limited stock like mined cryptocurrencies. Although their supply is limited, they are readily available in the market so the price is likely to increase. BTC, on the other hand, needs to be mined to bring new supplies in the market but undergoes fluctuations.
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