Introduction to Crypto: Where do the cryptocurrencies come from?

Cryptocurrencies are created in different ways. One method of obtaining them is through Proof of Work (PoW), also known as the process of mining cryptocurrencies by miners. A miner is a person with a computer running software to mine cryptocurrencies.

The process is called mining because, like any other natural resource, in most cases only a limited amount of a given crypto- currency exists. For example, there will only be 21 million Bitcoins in existence and to date a little over 19 million have been mined.

Mining traditional commodities (e.g. gold) requires investment in excavators, dredgers and other machinery. With cryptocurrencies, the miner invests in a powerful computer, also known as a miner, to solve complex mathematical problems. When these are solved, the system creates new coins and awards them to the miner who solved them.

Miners also use their computers to verify transactions and to counter fraud in the system. The more miners working online, the faster the transaction verification and the less opportunity for fraud. The miner is paid for verifying transactions which is a small percentage of the total value of the transaction. A miner can there- fore make money in two ways: by mining cryptocurrencies and by validating the transactions.

The second method of acquiring cryptocurrencies is the so-called Proof of Stake (PoS) – an alternative mechanism for verifying trans- actions and creating new blocks on the Blockchain.

The owners of PoS cryptocurrencies offer their already owned coins as collateral to validate transactions. They become valida- tors, i.e. the equivalent of miners from proof of work systems. The process of pledging coins is commonly known as staking. Validators are selected to verify transactions based on the number of staked coins in the system.

In order to become a validator, the owner of a specific cryptocurrency has to stake a certain number of coins. For example, Ethereum requires a minimum of 32 ETH to be staked. Validators, like miners, earn money by securing the Blockchain and verifying blocks with transactions.