Cryptocurrencies can be classified into either coins or tokens. Furthermore, it is also possible to distinguish between cryptocurrencies with a floating value (e.g.
Coins are classified as the native cryptocurrencies of their blockchain. Notable examples are
Tokens are, by this definition, dependable on the blockchain of a coin and could not function without it. Blockchains such as Ethereum (
Stablecoins are coins or tokens designed to remain at a stable market price. In contrast to regular cryptocurrencies, stablecoins have close to zero price volatility because they are pegged against other assets, most often a fiat currency like the US Dollar.
It is noteworthy that stablecoins mostly are not tied to a single blockchain and rather exist on multiple. For example,
There are three main types of stablecoins: fiat-, crypto-, and algorithmic backed.
A consensus algorithm is an underlying mechanism on the blockchain enabling cryptocurrencies to be decentralized. It allows all network participants to agree on the validity of all recorded transactions on a blockchain and agree upon new transactions included in the next block added to the chain. The consensus algorithm secures the blockchain and gives integrity to the whole system by making compromising attacks too costly.
Proof of Work
The resource spent in the PoW algorithm is computational power. In this mechanism, so-called miners, try to solve a computational challenge by finding the hash for the next block in the chain and, therefore, prove their invested work.
All miners in the network compete simultaneously to find the next block and receive the rewards. Thus, this process is resource-intensive, and the energy consumption of PoW blockchains is high. Additionally, energy demand increases with the popularity of a cryptocurrency.
System security depends on the amount of mining power available on the network and thus on the cost of a 51% attack. The more mining power, the higher the cost and the lower the likelihood of an attack. Nakamoto (2008) shows that only attackers owning more than half of all resources have a high chance of a successful attack. Furthermore, even in this costly case, Nakamoto (2008) argues that attacking the system would undermine the entity's investment in the coin and mining hardware and is therefore not attainable.
Proof of Stake
In contrast to PoW relying on external investments, the PoS consensus uses cryptocurrency ownership as a resource. Validators need to stake a certain number of coins to participate, meaning locking up the coins for the duration of participation.
As validators get chosen one at a time for new block creation, with chances based on the staked amount and time of stake, there is no wasted resource as writers do not compete simultaneously. Additionally, there is no competition for computational power as creating a new block does not require solving a challenge, and therefore, no special equipment is needed.
In addition, this concept increases scalability, as no time-consuming work is involved, and decentralization, as no special hardware, is required.
As the writer's investment is now more closely related to his work as a validator and can even be slashed in case of fraudulent behavior, the incentive for malicious behavior decreases. To conduct a 51% attack, one would need to own over 50% of all coins, which would be highly costly and directly undermine the staked coins' value.
Other Consensus Algorithms
The two consensus algorithms most commonly used in cryptocurrencies also form the basis for nearly all other consensus methods, which use variants with different advantages and disadvantages.
Delegated proof of stake (dPoS), used in cryptocurrencies like
© Prof. Dr. Isabell M. Welpe / Florian Knöchel