Many of you do not know the behind-the-scenes of how transactions are verified and blocks are generated. This thread will explain of the various ways and concepts that this is done.

Proof of Work

Proof of Work is defined as an economic measure to deter denial of service attacks and other service abuses such as spam on a network by requiring some work from the service requester, usually meaning processing time by a computer. Proof of Work is not a new concept. For additionally reading on the history of it, read here. Coins like Bitcoin use Proof of Work.

Simply put in terms of crypto currency, this means that calculations are required by the network nodes in order to form a distributed ledger. This process is called mining.

A distributed ledger is a decentralized system that can agree on and keep track of the correct amount a wallet has by providing a history of every single transaction.

The Purpose of Mining

Mining is the process in which Proof of Work is generated. Before we go into the exact purpose of mining, we need to address what a Block is. A block is a permanent storage of record that includes a group of data of all or some transactions that have not yet been included in previous blocks.

The main purpose of mining is to verify the legitimacy of a transaction and prove that it is not a double spend. A double spend is when the same coins are spent more than once. Since mining is a strenuous process, miners are rewarded for their work upon successful completion of mining a block. Rewards vary by coin and can change over time.

Explaining like I am five, here is what happens:

• A transaction is made and included with other transactions in a Block;
• Miners verify every transaction in the block are legitimate;
• In order to do this they must solve a mathematical problem;
• Rewards are handed out to the miner that successfully solved the problem;
• All legitimate transactions are stored in the mined block on the blockchain.

Due to the strenuous computation nature Proof of Work, it can become an expensive process.

Proof of Stake

Proof of Stake is an alternative to Proof of Work and aims to achieve distributed consensus. The idea was first discussed on bitcointalk in 2011 and first used with Peercoin

Instead of having miners prove each and every transaction is legitimate, proof of stake requires that a person stake (hold or lockup) coins and validate ownership. There are different ways the new block creator are selected to avoid centralization or more than 51% ownership taking control. We will talk about this next.

• Randomized Block Selection

NxtBlackcoin

Read the whitepaper here.

• Coin Age Selection

Coin age refers to the age of transaction inputs.

Coin age is equal to the number of coins sent times the average age on these coins. Age is measured in days. Age is reset to zero whenever a coin is sent AND whenever a coin provides a signature. Coin age could be used to calculate mandatory fees, block reward or proofhash target.

Unspent coins must wait 30 days before they can begin competing to generate the next block. Coins like NovacoinPeercoin

The reward for staking will either come from new coins generated by inflating the current supply, called minting, or they may come from recycled transaction fees, called forging.

The Differences from Proof of Work

• Proof of Stake is more efficient. Electricity and hardware is not needed.
• More people are encouraged to run nodes due to efficiency.
• Proof-of-stake is not ideal for a distributed consensus protocol.
• The "Nothing At Stake" problem. This can be avoided in different ways.

Variations of Proof of Stake

• Proof of Stake Anonymous (PoSA)

First introduced by Cloakcoin

Read the whitepaper here.

• Delegated Proof of Stake (DPoS)

Delegated Proof of Stake was first seen on Bitshares

Read the whitepaper here.

• Proof of Importance (POI)

An expansion by NEM

Read the whitepaper here.

• Proof of Storage

Proof of Storage was first formulated in 2013. Coins like Storj

Read the whitepaper here.

• Proof of Stake Time (PoST)

First to use this is Vericoin

Read the whitepaper here.

• Proof of Stake Velocity (PoSV)

Reddcoin

Read the whitepaper here.

Proof of Activity

Proof of Activity (POA) was first proposed in 2012 as an alternative to Proof of Stake. It is a method that compliments Proof of Work and helps prevent a 51% Attack, which is when a user or pool controls 51% or more of a network's mining hashrate. Proof of Activity, in short, selects a random peer from the network to sign a new block. This method requires continuous data exchange. In order to reduce traffic, the block "template" does not include the transaction list and is instead added by the last signer.

Read the whitepaper here.

Proof of Burn (PoB)

Proof of Burn is exactly what it is called. You are providing proof that you have burned some of your coins in the process of sending a transaction to an address that is unspendable. This method only works with coins mined from Proof of Work crypto currencies. Users will try to burn the most amount of coins to hopefully "win" the block reward. Most times Proof of Burn has been introduced to seed other coins by destroying the value of one.

You can read more on the concept here.

Proof of Capacity (PoC)

Crypto currencies that utilize Proof of Capacity, also known as Proof of Space, use Hard Drive Mining to validate new blocks. Burst coin

Proof of Checkpoint (PoC)

Proof of Checkpoint is a hybrid system that utilizes any Proof of Stake system with a Proof of Work system. The idea of this concept is to mitigate attacks on the Proof of Stake system; however, it is still subject to an attack on a node that has been offline for an extended period of time and can in turn be used to provide false information about the blockchain.

Every x amount of blocks on the Proof of Stake system requires a Proof of Work block to be mined. Each Proof of Work block contains no transactions and are directly linked to both the Proof of Work network and the Proof of Stake network.

End Note

Everything I have talked about are quick overviews of the concepts. I wanted this thread to be easy for members to educate themselves. For the technical aspects on the various concepts, please read the whitepapers that I have linked.