What is Cryptocurrency?
Most people would never have even heard of cryptocurrencies 10 years ago, but now they're becoming increasingly popular. There are now several kinds of cryptocurrencies, and each one serves a different purpose. Cryptocurrencies are digital assets that provide several important advantages over traditional currencies. Cryptography is the art of using highly complex encryption algorithms. These digital assets are incredibly secure, with almost no possibility of counterfeiting. They're also resistant against inflation and easily transferable.
Peer to peer digital currency transactions are designed to cut out middlemen, including banks and governments Transactions in most cases are instant and on some chains are practically free. Other assets like Bitcoin can be considered a store of value, and are usually accumulated to be held for longer term appreciation. While Bitcoin is undoubtedly one of the pioneers and the most widely invested cryptocurrencies, it has several limitations Bitcoin was limited by its design, but after its limitations were discovered, more flexible blockchains like Ethereum were created to allow for more functionalities. These led to the development of smart contracts, decentralised financial systems, and non-fungible tokens.
How does Blockchain work?
Blockchain technology has several specialized aspects including the mechanisms of decentralized consensus building. There are several different kinds of blockchains and they might use a different kind of consensus protocol to validate transactions depending on the needs of the activity. Consensus mechanisms are mechanisms that ensure the necessary agreement for a particular data value or state of a network among multiple processes or nodes. Consensus mechanisms are used in cryptocurrencies, for example, to ensure that transactions are legitimate and that there is no fraudulent activity. Each of these protocols comes with its own pros and cons. Most blockchain projects use one of three different consensus mechanisms: Proof of Work (PoW), Proof of Stake (PoS) or Delegated Proof of Stake (DPoS). All these mechanisms aim at ensuring that every participant gets an identical copy of the distributed database.
1. Proof of Work (PoW)
Historically, governments just printed more money when they wanted to spend more money. However, Bitcoin and most other cryptocurrencies are not printed at all – they're mined. Mining is the process by which transactions are verified and added onto the blockchain public ledger, and is also the process by which new coins are introduced into circulation. A miner’ s job is to ensure that a blockchain remains intact and isn't tampered with. To do so, an algorithm takes the information from the new blocks and applies a mathematical formula which transforms them into a unique sequence of numbers, letters and symbols called a hash code. At that point in the blockchain, both the block and its hash are stored. Since the hash of each block is used to help create the hash for the next one, it becomes a digital signature that confirms that this block is legit and that every following block is legit too. Proof-of-work is different from the other consensus mechanisms because it requires a lot of energy to complete these algorithms. It requires a lot of computing power, and powerful graphics cards. However, it is because of the difficulty and cost of Proof-of-Work that it is such a safe and secure consensus mechanism.
2. Proof-of-Stake (PoS)
The idea behind Proof Of Stake (POS) mining is to give miners voting rights based on the percentage of the total supply of token they own. The larger their share of the total supply of tokens, the greater their chances of mining the next block of transactions and receiving new coins. However, the proof-of stake mechanism ultimately uses a random algorithm for reaching consensus. The amount of tokens that each miner holds is important, but several other factors play a role in determining which miner will be chosen to mine a new block. The main objective of proof of stake is to ensure that the stakeholders support the blockchain project in its long run.
3. Delegated Proof-of-Stake (DPoS)
A more democratic version of the POS mechanism is the DPoS mechanism. Those who hold the most tokens aren't automatically selected to confirm or validate any transaction. All token holders must choose a group of delegates who perform this task. The mechanism remains decentralized since all users in the network can choose which miners they want for verifying transactions. The advantage of DPos over POS is that it allows for faster verification and transaction processing, resulting in higher scalability.
Are cryptocurrencies bad for the environment?
One of the biggest criticisms of Proof of Work blockchains like Bitcoin is their high power consumption. Historically, mining has been criticized for being a waste of energy. However, it is completely subjective based on whom you ask. For some people who don't understand the importance of the mechanisms, it might be so.
However, there are some nuances. Is it as environmentally friendly as possible? Definitely not. But compared to something so frivolous as Christmas lights that waste countless kilowatt hours for a pointless light show... you may start to understand the value of ensuring the safest financial network the world has ever known. Comparatively, waste is definitely not the right word to describe it.
Cryptocurrency mining has also become an important part of the green revolution, which helps push forward environmentally friendly practices such as utilizing renewable energy, utilizing wasted energy, and pushing forward innovations such as using volcanoes to create electricity. There are also miners who are being integrated into electricity grids. They're being used as moderators for maintaining the stability of these systems. Cryptocurrency mining has the potential to revolutionize energy production and could help improve and stabilize the power grid into the future.
Environmentally Friendly Blockchains
If you're interested in investing in digital currencies, but want to do it in an environmentally friendly way, take a quick look here at some of the cryptocurrencies that are helping the industry forge its own thoughtfully and expediently sustainable path.
Polygon (MATIC)
Polygon was created by Ethereum developers to solve problems faced by ETH users by reducing fees, improve security, and create a better user experience. Instead of having to use large amounts of computing power for mining/verifying every transaction on the Ethereum Blockchain, Polygon has developed an alternative PoS mechanism where validators stake some amount of cryptocurrencies on a Smart Contract which then delegates the responsibility to validate/verify transactions based on smart contract logic and the amount of cryptocurrency they stake. By moving transactions off of the Ethereum mainnet and into their own sidechain called Matic, Polygon can process them faster and cheaper.
Algorand (ALGO)
Algorand is a new cryptocurrency that is completely free of carbon emissions. It has also partnered with Climate Trade, an environmental non-profit that helps businesses reduce their carbon footprint.
Cardano (ADA)
Ethereum ‘s co-founder, Charles Hoskinson, Cardano refers to itself as a third-generation blockchain. This cryptocurrency has recently been the target of some backlash over its struggle to gain the kind of momentum that Hoskinson had planned, but it's still the world's fifth-largest cryptocurrency.
Hedera Hashgraph (HBAR)
Hedera Hashgraph is a new cryptocurrency that's based on a note-compare protocol that eliminates the need to progress throughout the entire blockchain. Hedera HashGraph’s popularity has been on the rise, having just passed Ethereum (ETH) in terms of number of trades. The technology behind this cryptocurrency relies on a complex algorithm that uses a note-comparing method that eliminates the need for progress through the entire blockchain.
Ethereum 2.0
The Ethereum Foundation estimates the new version of Ethereum (Ethereum 2.0) will consume 99.95% less electricity when it is completed. The crypto plans upgrades in late 2021 that will allow for sharding, which will fragment the network and in doing so, allow for growth in the number of transactions without an energetic downside.