Crypto currencies and digital assets have entered the life of common man like a storm. However, the confusion about its applicability reigns large due to unwelcome attitude of the Governments across the world towards the private crypto currencies. The reason are many but main reasons are stated to be to its use in illegal activities. But nobody is able to deny the potential of emerging technology underlying crypto currencies and crypto assets or digital assets. In fact, governments in major economic powers are preparing to launch their own digital currencies.
In this part of our Educational series, we would be explaining two important terms relating to crypto currencies.
With the dawn of crypto assets, the terms – Mining and Minting have acquired new definition in the 21st century. Though both the expressions correspond to the real-world mining and minting, yet in cryptocurrency terminology both the procedures are altogether disparate.
Mining and minting – the conventional view
The primary sector of the economy is the most important of the three sectors, other two being secondary and tertiary as primary sector deals with production by exploitation of natural resources. In primary sector, Mining has been one of the most ancient occupation seconded only by agriculture. Mining deals with extraction of metal ore from the soil and thus converting a natural resource into wealth. The metal ore is further purified to withdraw pure metal which was later on minted in various shapes and sizes to create coins. These metal coins were a symbol of one’s wealth. Even today the wealth of the country can be assessed in terms of its gold reserves as gold is one of the most precious metals.
Money Printing
At present minting coins or printing notes has overtaken the minting of precious metals and is controlled by Federal Reserve System in USA. In India this task is done by Reserve Bank of India, Government of India or by the central financial agency of country which is under the control of government. As a result of minting a value is assigned to the coins or currency in terms of the money used as a standard currency.
Dollar in America
To elaborate it further a currency note in dollars or rupees may not have that kind of intrinsic value in it, but it is used to settle debts and obligations according to the value assigned to it by the government. A 100 Dollar note does not need 100 Dollars for its printing and raw material or in other words any coin or bank notes value depends upon the value assigned to it. The quantum of notes that can be printed was directly proportional to the gold reserves of that country. The United States of America followed gold standard till 1971 but after that the system was not continued.
Rupee in India
In India, Minimum Reserve System (MRS) is followed since 1956 to decide the amount of currency in circulation. According to this system, the Reserve Bank of India has to maintain an asset balance of minimum 200 crore rupees all the times. The amount of currency in circulation has a direct impact on the inflation rate and that’s why the countries do not print any number of the currency.
Mining and minting – The Futuristic view
The innovative Crypto world has a novel style of mining and minting money. In crypto, Mining refers to an activity that comprises of keeping records of verified transactions on the blockchain (a digital public ledger). After a transaction is verified, cryptocurrency is generated and is given as a reward to the miner. It is perhaps not conducted with the tools like shovel or bulldozer but with the modern gizmos – a computer with some software and an internet connection.
When mining of Bitcoin is carried on, new bitcoins enter into circulation just like more new notes are printed for a country. At that level you don’t have to spend money for getting coins in your account. The crypto miners do not dig soil or cut rocks, rather they solve very high level complex cryptographic mathematical problems (also known as hashing puzzle). The first miner to solve the problem who adds a verified block to the existing chain receives the next set of Bitcoins. After that a new problem in search of a solution surfaces and the whole process gets repeated.
The amount of coins that a miner can earn depends on the number of blocks he can get verified which in turn is dependent on total mining power of the network. Mining turns out to be very expensive as it guzzles electrical power in large quantities.
Just like there is a limit to dig gold from a mine as the resources are exhaustible, same is the case with mining cryptocurrency. There is a limit to the number of Bitcoins that can be mined though the number is far ahead yet as the reward coins keep on decreasing in number with increase in the levels.
However, there is no ceiling for minting or printing currency. A country can print any amount of money provided it keeps inflation within control and value of currency intact on global front. Minting depends on the overall economic growth or GDP (Gross Domestic Product) of a country.
Minting in Cryptocurrency, as such, doesn’t require huge electrical resource as it just escalates the crypto already in circulation. In Currency like Ethereum where minting and mining both are done, Mining rules the creation of new blocks and Minting dominates the production of Ether from Casper which can be unlimited ( Under Casper, validators of the new currency set aside a portion of their ether as stake).
Proof of Work vs Proof of Stake
Interestingly Mining is based on the old and foremost mechanism of ‘Proof of Work’ (PoW) whereas Minting is a relatively new algorithm based on ‘Proof of Stake’ (PoS). There are some limitations in PoW and to overcome them PoS has come as a new protocol.
To understand both the terms in detail, we need to understand that in mining, to maintain the decentralization in cryptocurrency, consensus/ validation from all the nodes is required to form a new block. But in PoS authentication of a new block is done by any randomly selected currency holder depending on his stake in that particular cryptocurrency. The numbers of validators may also vary from currency to currency.
To participate in staking a substantial amount of money is deposited by the participant and in turn he is rewarded with transaction fee and not new coins whereas the miner was rewarded with coins after validating a new block by solving the problem. Both these mechanisms keep the blockchain safe. Hence in PoW, probability of mining new currency was dependent on solving cryptographic complex problems but in PoS it depended on the crypto holdings of a person.
It appears that currency holdings (PoS) will get an upper hand over analytical capabilities (Pow) over the time as PoS has helped in trimming the usage of energy significantly in contrast with PoW. Hence, we may conclude that Minting is more thoughtful about environment.
Thus, Mining will always be synonymous with creation of fortune irrespective of the epoch being talked about.
