Considering cryptocurrency tokens are nothing but code, the identical code additionally dictates their creation. The software that dictates a cryptocurrency is decentralized, distributed throughout the network instead of on one server. Each token may be a series of encrypted bits stored and transmitted over the web.
To create or ‘mint’ brand new coins/tokens into circulation – Cryptocurrencies depend on a decentralized computational process called ‘mining.’
The primary purpose of mining is to validate and ensure crypto transactions. For every block of transactions that’s validated, a replacement cryptocurrency token is generated. A token is awarded to the miner who validates the transaction and successfully solves a cryptographic problem before anyone else. Solving the cryptographic problem is termed ‘Proof of work.’
However, mining isn’t the sole thanks to mint new tokens. There are different kinds of cryptocurrencies, classified as per how tokens are created.
TYPES OF CRYPTOCURRENCIES
The most common style of cryptocurrencies is Mineable cryptocurrencies. Because the name suggests, these cryptocurrencies are essentially generated through the method of mining. The newly developed tokens are rewarded to miners who can unravel complex cryptographic algorithms that help validate transactions and add them to the blockchain. Most of the prominent cryptocurrencies like Bitcoin, Ethereum, and Litecoin belong to the current category.
Then, there are other cryptocurrencies which may be called Non-Mineable cryptocurrencies. They can only buy these cryptocurrencies through digital wallets/platforms. Their tokens are already in circulation, and no mining is required to come up with them. For validating their transactions, they use trusted validators instead of making the verification receptive to all miners. The more coins one holds in their wallet, the lower the charge per unit they will earn.
Additionally, rather than using ‘Proof of Work’ to verify transactions, they use another method called the ‘Proof of Stake.’ Here, ownership or stake in an exceeding cryptocurrency is employed as a criterion for choosing the validators for transactions. Thus, the selection of validators depends on the number of tokens of cryptocurrency that an individual owns. Furthermore, the fundamental quantity that they need to hold these.
Cryptocurrencies like Ripple, Stellar, Cardano, and NEO, to call some, may be classified as non-mineable cryptocurrencies.
Another in-between category would be Pre-Mined cryptocurrencies. Specific amounts of tokens of any cryptocurrency can theoretically be pre-mined regardless of whether the currency accepts Proof-of-work or Proof-of-stake as its validation process.
This usually happens just in ICOs or Initial Coin Offerings, where coins are bought pre-sale and are mined later. Although Bitcoin and Ripple are considered pre-mined cryptocurrencies, AuroraCoin may be a more direct example of a pre-mined currency.