2 Cryptos Kicking Miners to the Curb
It seems safe to say that digital assets are here to stay.
Around the globe, security tokens are being regulated, and utility tokens are being developed. Investors are getting a hearty crypto education through booms and busts, and even the NASDAQ is chattering about crypto.
All that said, two major players have been forgotten amid the hubbub: the cryptocurrency miners and the validation method they make possible, PoW.
In 2017, digital currency miners played a critical role in the evolution of the blockchain industry. It was miners who influenced the SegWit2x decision. It was also miners who diligently purchased hardware and drove the stock prices of companies like AMD and NVIDIA through the roof.
In the end, miners are to cryptocurrency as bees are to flowers: absolutely critical.
They are vital because currently they are one of the only reasons certain digital currencies work. They are the backbone of the proof of work (PoW) validation method.
Yet as the blockchain industry evolves and interacts more with the corporate space, the role of the miner has fallen to the wayside. To the average investor, the miner and proof of work have been forgotten.
But forgetting the crypto miner and PoW is a massive mistake. It is the weaknesses demonstrated by the PoW mining validation method that have pushed us toward a brighter crypto future.
Busy Bees and Energy Junkies: The Story of Miners and PoW
As the digital currency world evolves, the PoW validation method and cryptocurrency miners present a paradox to many new investors.
Both PoW and miners are critical to the operation of many cryptocurrency networks. They can also be detrimental to those systems.
That means, like bees in a flowerbed, miners tend to drift just out of sight doing their critical duties. We don't notice them until something goes wrong and we get stung. And over the last couple of years, a few things have gone wrong, causing people to question the PoW validation method.
But before we get into that, it's worth taking a second to talk about how the proof of work validation method works and the role miners play.
What digital currency miners do is use hardware and software to solve computer algorithms. These algorithms, in turn, confirm transactions that take place on the Bitcoin network, adding them to a block. Each block on the Bitcoin blockchain holds around 2,000 transactions.
Of course, miners don't do this because they are altruistic nerds with extra computer equipment. They do this because it turns a profit.
Every time a miner confirms a transaction, they are rewarded with Bitcoin. That means if you started mining early in Bitcoin's lifetime, you could have mined your way to millions.
And in those early days, mining was pretty easy work. There wasn't a lot of traffic on the Bitcoin network, and mining could be done from your personal computer.
Then that all changed.
As Bitcoin aged, the algorithms needed to confirm transactions became harder to solve. There was also more competition, forcing miners to become more innovative. Soon they were using more expensive hardware and joining together to mine in groups referred to as "mining pools."
In these mining pools, when an algorithm was solved, the miners divided the bounty.
In 2018, mining is a wildly different thing than it was in the early days. Miners are having to shell out the big money for expensive hardware, and these expenditures shrink profit margins.
Now, some of the big mining operations are actually headed by corporations or countries, which can afford to foot the cost.
Of course, to the average miner who started dabbling in Bitcoin in his garage, this is not good.
To the general community, it's not good, either. It further centralizes the mining process and opens the market to manipulation.
As Cryptos Boomed, PoW Faltered
As a digital currency network grows, more and more problems arise around the proof of work model that sustains it.
Bitcoin is a good example. Bitcoin has relied on proof of work since the very beginning, growing through the hard work and profits of miners.
As noted above, increasing difficulty has boxed miners out of their own paychecks and made mining a hobby of major industrial-scale operations.
This leads to the first major problem with PoW: power centralization.
In 2017, it became apparent that mining centralization was a very valid concern.
If only large entities can afford to run mining operations, then that puts the power of networks like Bitcoin in the hands of just a few players. If these players have the power to manipulate the network, then they also have the power to manipulate the people using it.
Centralization because of the PoW mining method is a huge issue that goes against everything digital assets have strived for.
And then there is the other huge problem: energy consumption.
In today's digital currency world, miners are using more energy to mine than is used by the entire nation of Ireland. That's a lot of power, and if we were to make the leap to a crypto economy reliant on PoW, it would be completely unsustainable.
There is simply no way proof of work could exist if the energy costs keep going up with it.
And that brings us to the final segment of today's mailing: the solution.
As proof of work and the world of miners become harder to navigate, many digital currency companies have turned to the issue of network validation to find solutions.
Here are two of the most notable.
Two Cryptos Moving Away From PoW
One of the ways investors can stay ahead of a potential proof of work disaster is by eyeing cryptocurrencies that are looking at new validation methods.
The first and most notable of these cryptocurrencies is Ethereum, which just posted its consensus code for review.
The Ethereum network wants to move toward a consensus method known as proof of stake, or PoS. Proof of stake allows transactions to be validated through staking, which only requires members of the active community. This method would be far less energy intensive.
It also would remove quarrelsome miners from the equation. Submitting the code for this transition is a big step for Ethereum and will hopefully help it navigate future energy consumption obstacles.
Another notable digital currency that has moved away from proof of work is NEO, the Ethereum of China.
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Alexandra Perry is the managing editor of Token Authority and the associate editor of Technology and Opportunity. She also contributes weekly content to Wealth Daily, a free investment research newsletter that addresses a range of market topics. She has multiple years of experience working with startup companies, primarily focusing on artificial intelligence, cybersecurity, alternative energy, and biotech. Her take on investing is simple: a new age of investor can make monumental returns by investing in emerging industries and foundational startup ventures.