support its XEM cryptocurrency. In some ways, PoI is similar to PoS because participants (nodes) are marked as “eligible” if they have a certain amount of crypto “vested.” Then the network gives a “score” to the eligible nodes, and they can create a block that is roughly the same proportion to that “score.” But the difference is that the nodes won’t get a higher score only by holding onto more cryptocurrencies. Other variables are considered in the score, too, in order to resolve the primary problem with PoS, which is hoarding. The NEM community, in particular, uses a method called “harvesting” to solve the PoS “hoarding” problem.
Here’s how Investopedia defines harvesting: “Instead of each miner contributing its mining power in a cumulative manner to a computing node, a harvesting participant simply links his account to an existing supernode and uses that account’s computing power to complete blocks on his behalf.” (See the section, “Harvesting,” later in this chapter.)
Transactions: Putting it all together
1 When you want to use cryptos to purchase something, first your crypto network and your crypto wallet automatically check your previous transactions to make sure that you have enough cryptocurrencies to make that transaction. For this, you need your private and public keys (explained in Chapter 3 of this minibook).
2 The transaction is then encrypted, broadcast to the cryptocurrency’s network, and queued up to be added to the public ledger.
3 Transactions are then recorded on the public ledger through mining. The sending and receiving addresses are wallet IDs or hash values that aren’t tied to the user’s identification, so they are anonymous.
4 For PoW cryptos, the miners have to solve a math puzzle to verify the transaction. PoS cryptos attribute the mining power to the proportion of the coins held by the miners, instead of utilizing energy to solve math problems, in order to resolve the “wasted energy” problem of PoW. The PoI cryptos add a number of variables when attributing the mining power to nodes in order to resolve the “hoarding” problem that’s associated with PoS.
Cruising through Other Important Crypto Concepts
Earlier sections of this chapter talk about the basics of cryptocurrencies and how they’re related to blockchain technology. This section digs into other factors that make cryptocurrencies so special and different from government-backed legal tender, also known as fiat currency, such as the U.S. dollar.
Adaptive scaling
Adaptive scaling is one of the advantages of investing in cryptocurrencies. It means that it gets harder to mine a specific cryptocurrency over time. It allows cryptocurrencies to work well on both small and large scales. That’s why cryptocurrencies take measures such as limiting the supply over time (to create scarcity) and reducing the reward for mining as more total coins are mined. Thanks to adaptive scaling, mining difficulty goes up and down depending on the popularity of the coin and the blockchain. This can give cryptocurrencies a real longevity within the market.
Decentralization
The whole idea behind blockchain technology is that it’s decentralized. This concept means no single entity can affect the cryptocurrencies.
Harvesting
Harvesting is an alternative to the traditional mining used to maintain the integrity of a blockchain network. It was designed by a blockchain platform called NEM to generate its own currency called XEM. According to finder.com, this is how harvesting works: “Every time someone carries out a transaction, the first computer to see and verify the transaction will notify nearby users of that transaction, creating a cascade of information. This process is called ‘generating a block.’ Whenever someone with more than 10,000 vested XEM generates a block in NEM, they receive the transaction fees on that block as payment.” Also, as explained earlier in this chapter, harvesting uses a PoI system rather than PoS and PoW.
Open source
Cryptocurrencies are typically open source. That means that miners, nodes, and harvesters alike can join and use the network without paying a fee.
Public ledger
A ledger is the age-old record-keeping system for recording information and data. Cryptocurrencies use a public ledger to record all transactional data. Everyone in the world can access public blockchains and see entire transactions happening with cryptocurrencies.
Note that not all blockchains use a public ledger. Some businesses and financial institutions use private ledgers so that the transactions aren’t visible to the world. However, by doing so, they may contradict the original idea behind blockchain technology.
Smart contracts
Smart contracts are also called self-executing contracts, blockchain contracts, or digital contracts. They’re just like traditional contracts except that they’re completely digital. Smart contracts remove the middleman between the buyer and the seller so that you can implement features like automatic payments and investment products without the need for a central authority like a bank.
A smart contract is actually a tiny computer program that’s stored and runs on a blockchain platform. Because of that, all the transactions are completely distributed, and no centralized authority is in control of the money. Also, because it’s stored on a blockchain, a smart contract is immutable. Being immutable means that after a smart contract is created, it can never be changed again; it can’t be tampered with, which is an inherited feature from blockchain technology.
However, being immutable comes with its own disadvantages. Because you can’t change anything in the smart contract, that means that if the code has any bugs, you can’t fix them either. This makes smart contract security more difficult. Some companies aim to combat this problem by auditing their smart contracts, which can be very costly.
As time goes by, users can expect better coding practices and development life cycles to combat smart contract security problems. After all, smart contracts are still a pretty young practice, with their whole life of trial and error ahead of them.
Stick a Fork in It: Digging into Cryptocurrency Forks
What you get from a cryptocurrency fork won’t fill your tummy, but it may fill your crypto wallet with some money! Many popular cryptocurrencies were born as a result of a split (fork) in another cryptocurrency like Bitcoin. The following sections explain the basics of these cryptocurrency splits and how you may be able to profit from them.