What is cryptocurrency issuance

Proof-of-Work

In 2021, PoW still dominates cryptocurrency mining. The essence of the algorithm is simple: a miner solves a mathematical problem with the help of a computer and sends the result to the network, which checks it against a template. If the values match, the user receives a reward.

Solving PoW problems requires a lot of computing power. It takes much less resources and time to check the results. Extraction of crypto coins is complicated by the ever-increasing complexity of decrypting blocks, so miners join pools, summarizing computing power. In this case, the reward is divided among all participants in proportion to the resources involved.

Proof-of-Work protects the blockchain from DDOS attacks and the influence of low-powered miners. To attack the network, you need to have 51% of the network hashrate, which is economically unfavorable in most cases.

The disadvantages of PoW mining include:

• High electricity costs. Experts estimate that by the end of 2021, it will take up to 91 TWh of electricity to mine cryptocurrency. This is 157% more than in 2020 (67 TWh).
• The risk of attack is 51%. The algorithm only provides security in large blockchains where miners compete for a block. In smaller networks, a hacker can gain a decisive percentage of computing power and reorganize the chains. In 2018, several projects were attacked 51% at once: MonaCoin, Zencash, Verge, Litecoin Cash, Aurum Coin. The total losses amounted to $2.8 million.

Proof-of-Stake

The PoS consensus algorithm was created as an alternative to the costly PoW. Proof-of-Stake is a mechanism that determines the right of users to confirm transactions based on the amount of digital currency in the wallet. PoS mining does not require special hardware. The work of the blockchain is supported by validators – holders of crypto coins that provide their assets to the system (this is called staking). The algorithm randomly selects a user, giving him the right to form a block. The validator is rewarded in native currency.

PoS-mining solves the main problems of PoW: it does not require power consumption and eliminates the risk of a 51% attack. For an exploit, the hacker must buy back 51% of all coins in circulation. In this case, he himself will suffer an attack that will disrupt the stability of the cryptocurrency. The algorithm is faster than PoW and creates a more scalable block chain with high throughput.

Disadvantages of PoS mining:

• Additional motivation to accumulate assets in single hands, which negatively affects the decentralization of the network.
• Nothing-at-Stake problem. An attacker may try to create a blockchain fork – an alternative chain with fake blocks to use it to perform double spending.

Types of issuance

Every year, hundreds of digital coins appear on the market. There are 3 types of cryptocurrency issuance:

• Limited with a one-time issue of coins – without the possibility of mining.
• Limited controlled – the number of coins in circulation is gradually increased by mining up to a set limit.
• Unlimited – constantly increases through mining.

The maximum supply of a particular asset and the current number of coins in circulation can be found on the monitoring sites CoinMarketCap, CoinGecko.

Limited one-time

Cryptocurrency is issued at once in full volume. It is impossible to mine such coins, but it is profitable to invest in them at the early stages of development. Under other favorable conditions (in-demand product, strong team), the asset will grow in value. In addition, crypto coins with a one-time limited issue are practically immune to inflation caused by the excess of supply over demand.

Examples of such currencies are Ripple, Cardano, NEM and others. The creators of XRP initially “froze” 53.6 billion coins out of the total number (100 billion), and then gradually brought them to the market. This approach allowed to create an artificial shortage of cryptoasset, and the developers received a reserve of time for the development and popularization of the project.

Limited controlled

Most popular digital currencies (Bitcoin, Litecoin, Dash) work according to this principle. The limited controlled issuance of bitcoin is due to mining. New coins appear on the market gradually. The rate of mining is predetermined by the PoW algorithm. The total number of coins cannot exceed the set limit. This mechanism keeps supply and demand at approximately the same level, or the former exceeds the latter. As a result, the value of BTC increases, and its exchange rate rises.

The shortage of crypto coins is also ensured by regularly reducing the reward that miners receive for each block found. The commission is halved approximately every 4 years (during the halving process).

Unlimited controlled

In some networks, the issuance of new koins can continue indefinitely. Digital currency is created by miners, and developers control its circulation. Such a mechanism is implemented in Ethereum, Dogecoin, Solana and other projects. The main advantage of these crypto coins is the speed of transactions. However, experts fear that unlimited issuance may lead to the depreciation of assets in the future. Therefore, developers gradually increase the difficulty of mining or burn koins to create an artificial scarcity.

Principles for regulating the issuance of new coins

The more money supply governments and central banks pour into the economy of an individual country, the more inflation swings. But cryptocurrencies are issued according to a certain plan, which is regulated by pre-approved algorithms:

• Blocking a part of coins and gradually bringing them to the market. The method is used in projects with a one-time issue. Developers create an artificial deficit of the asset and get a reserve to attract new investors.
• Increasing the complexity of mining. New crypto coins in the network are created with a certain time interval. For Bitcoin it is 10 minutes, for Ethereum – 14.2 seconds. The time remains unchanged regardless of the number of miners and attracted capacity. The difficulty of mining crypto coins gradually increases: in the Bitcoin network – every 2016 blocks (approximately every 2 weeks), Etherium – 1000.
• Decrease in the reward for mining. In the BTC network, the payment for finding new blocks is halved every 4 years. At the same time, the release of new coins slows down and creates a moderate deficit of the asset on the market. The same processes occur in other projects.

How to know the real number of coins in circulation

It is impossible to determine the value of cryptocurrency without knowing how many units are on the market, and what volume will be released in the future. Theoretically, the number of coins in circulation should be equal to the current issue. In practice, this is not the case.

According to CoinMarketCap monitoring data, there are 18,870,343 BTC in circulation in November 2021. These crypto coins are stored on 38,890,675 wallets. According to Blockhain.com, the Bitcoin network processes an average of about 300,000 transactions between 500,000 addresses per day. Another 28.4 million wallets have zero balance. Thus most of the holders of the asset do not use it in any way. They only accumulate digital currency.

Some users may have lost or forgotten their wallet key – these crypto-coins can no longer be recovered. When estimating the number of koins in circulation, you need to take all these factors into account. The real numbers will be much smaller than the statistical ones.

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