Where Does Cryptocurrency Come From?

The most common method of cryptocurrency issue and emission is through mining. Mining is the solution of cryptographic tasks of varying complexity using computing equipment capacities. There is also forging – a special form of mining with voting and initial emission (ICO-Initial Coin Offering).

Bitcoin Mining Illustration
Bitcoin Mining Illustration

Why is this necessary at all, and why do miners get rewards? This process is somewhat reminiscent of the work of a torrent tracker. The participants of the tracker are engaged in the distribution of files, and for this, they receive a rating, which is subsequently used to download new data. Miners are using computing power to maintain network performance.

The ultimate goal of mining is to reach a secure, tamper-resistant consensus by compilation of a digital signature (hash) that closes the block. As soon as this happens, the block closes, the miner receives a reward, and a new block begins to form. Different cryptocurrencies are using different computing power, such as processors (CPU), video cards (GPU), or specialized equipment (ASIC, FPGA). Mining is one method of earning cryptocurrencies.

The following protocols (consensus algorithms) are used to determine the mining method:

  • Proof-of-Work (PoW). This is a security algorithm in which the authenticity of transactions is verified through the performance of certain tasks. In PoW, the higher the performance of the equipment, the more coins are mined.
  • Proof-of-Stake (PoS). This concept states that you can mine or validate block transactions according to how many coins you hold. PoS is a “credit” mining, the more coins there are in the wallet, the greater the reward.
  • Proof-of-Activity (PoA). A hybrid option between PoS and PoW that attempts to bring the best of both.
  • Other, less common protocols include: Proof-of-Capacity, Proof-of-Burn, and Proof-of-Storage.

The choice of equipment and its power depends on the hashing algorithm. Bitcoin has SHA-256. This algorithm is “tied” to equipment performance. Litecoin has Scrypt, a modified SHA-256, with great emphasis on RAM.

SHA-256 is a one-way function that converts a text of any length into a string of 256 bits. This is known as a hashing function. In this case, it is a cryptographically secure hashing function, in that knowing the output tells you very little about the input.

Methods for earning cryptocurrencies

In addition to mining, there are many other, simpler ways to earn cryptocurrencies. Let’s consider some of them:

  • Faucets. Faucets are services for distributing Bitcoin and other coins for performing small tasks: solving the captcha, web surfing, and so on.
  • Bounty. Bounty is the process of advertising new crypto projects through social media posting, reposting, document translations, and so on. Initially, you get tokens for free, which will soon become a full-fledged cryptocurrency.
  • Blogging/copywriting. Members of the Steemit – social network owned and operated by its users – receive a reward in the form of an internal cryptocurrency when making a new post. In the future, it can be sold on exchanges.

Bitcoin and other alternative coins, or simply altcoins (Ethereum, Ripple, etc.), can also be easily purchased. This is done through cryptocurrency exchanges, BTMs (Bitcoin ATM), or directly from other people. If you want to buy crypto online, it is enough to have a debit or credit card. Most of the legit exchanges are requiring proof of identity though, so don’t be surprised if you will be asked to provide a picture of your ID. This is because of the regulations governments put in place to reduce the anonymity of crypto users. You can also buy crypto with your fiat money (cash) by using machines installed in shopping malls, convenience stores, and gas stations. Usually, the price is 5-10% higher than you will see on big exchanges, so this is a less popular option.

It is also worth mentioning that in general cryptocurrencies are divided into two forms, coins, and tokens. What is the difference between a “Coin” and a “Token”? A Coin is a cryptocurrency that can operate independently. A Token is a cryptocurrency that depends on another cryptocurrency as a platform to operate. The most popular token platform is Ethereum where the majority of tokens are based on.