Cryptocurrency is a means of exchange like the US dollar. However, unlike so-called fiat currencies, crypto remains completely digital, decentralized and tracked exclusively by a distributed ledger known as a blockchain.
Blockchains provide authenticity of a cryptocurrency transaction by verifying one of two methods: proof-of-work (PoW) or proof-of-stake (PoS). Without these vital cryptography-based verification methods, cryptocurrency could not survive as an exchange method.
Proof-of-Work
The world-famous (sometimes infamous) Bitcoin is backed by the PoW verification method. PoW relies on raw computing power to solve cryptographic problems called hashes. This process, known as mining, is a kind of competition between Bitcoin miners—a race to solve each new hash and add a verified block to the blockchain.
When a miner wins the race, they are rewarded with a few coins (the current value of one bitcoin is more than $64,000). This method incentivizes miners to continue mining and introduces new coins into the economy.
Proof-of-Stake
The PoS method uses less energy and is, therefore, better for the environment. Those who want to participate in the validation process for a PoS-based cryptocurrency like Ethereum must be willing to “stake” the currency by locking a minimum amount of their holdings in a communal safe. The more coins a validator stakes, the more transactions they can validate.
Validators are chosen at random to validate new blocks, and each block must be validated by more than one validator. When a specific number of validators verify that a block is accurate, that block is finalized and officially added to the blockchain.
Blockchain technology can and does keep track of more than just cryptocurrency. Other notable items include non-fungible tokens (NFTs), decentralized banking and video games.
