And that’s also how crypto mining could be understood. Here, mining is a digital activity, happening through computers. When a crypto miner finds crypto, the person is being rewarded with crypto coins or tokens, and the total number of coins or tokens in the blockchain ’s economy increases.

That’s how bitcoin mining for example works.

But that form of mining only happens with cryptocurrencies, who use the so-called “proof-of-work” method to dig for crypto.

Polkadot doesn’t use proof-of-work. Here, they use nominated proof-of-stake. That also means that polkadot technically isn’t being mined at all.

The fact that polkadot uses nominated proof-of-stake needs to be seen in a different light as cryptocurrencies who use regular proof-of-stake such as cardano and polygon .

How polkadot (DOT) is “mined”

First and foremost, you need to know that polkadot is the name of the blockchain , while DOT is the name of the blockchain’s native cryptocurrency . Just like ethereum is the name of the blockchain, while its’ native cryptocurrency is called ether (ETH).

Before we can explain how new DOT tokens are being issued under nominated proof-of-stake (NPoS), we first need to explain how it works with proof-of-work (PoW) and regular proof-of-stake (PoS).

Proof-of-work mining

In a proof-of-work blockchain, new coins are issued through mining. But mining isn’t only “finding” new coins, such as with gold diggers and their gold – in connection with crypto, mining is also the way in which new transactions are confirmed and validated on the blockchain.

If you were to buy bitcoin , your purchase is registered on the blockchain. Your purchase is also called a transaction. Every transaction on a blockchain is publicly available, so everyone who participates in the network can see what’s happening.

After enough transactions have been registered to collect them in a larger bundle – also called a block – the block must be added to the blockchain.

This is where the bitcoin miner enters the picture. Because before a block can be added to a blockchain, the block’s encrypted hash code needs to be found.

A hash code could for example look like this:

C9BF0A990E24B01EDD21D89570ABB5C5CCE9FAB81224E40B8DB5969C59A3EE23

As you can see, the code is quite long and hard to guess. That’s why crypto miners need to run a program on their computer, which guesses all sorts of different codes before the actual hash-code is found.

Everyone can participate in the guessing game. That’s why there’s a race on who can find the right answer first.

When a person finds the correct hash code for the new block of transactions, the person is then rewarded with bitcoins. That’s the way that new bitcoins are brought into circulation.

But before the person can receive their bitcoins as a reward, the rest of the blockchain network checks that the transactions in question correspond to the transactions in the public blockchain ledger. If more than 50% of the network can confirm the transactions in the block, it’s added to the blockchain.

The person will then receive some newly “mined” bitcoins as a reward for their hard work of finding the correct hash code – and that’s how more bitcoins are produced.

But at the same time, bitcoin mining also makes sure that all blocks being added correspond to the transactions in the public blockchain ledger. That’s how cryptocurrencies gain trust and security.

Proof-of-stake mining

To explain proof-of-stake we’ll be using cardano as a reference point, which is a cryptocurrency that uses that method. 

With proof-of-stake, which cardano uses, the mining takes place in a different way. Here, there’s no open competition to be first.

Instead, certain people are being selected to find the correct hash code for new blocks. The way that these people are selected happens through staking.

Staking means to bet a stake, to either lose or win a bet or a draw. 

Practically, this means that people in the cardano network can “stake their coins” in the draw to be selected to find the next code. So if you were to stake 10 cardano coins, and there are 10,000 coins in total, you’d have a 1% chance of winning the draw.

In reality, it’s a bit more complicated. Very few people own enough coins to actually have a real chance of being selected. That’s why there’s been created so-called stake pools – a collection of several people’s stakes, so they have a bigger chance of winning as a group.

When a stake pool then gets selected to validate the next block in the blockchain, every participant in the stake pool will then get rewarded according to the amount of coins they’ve put in the pool.

Nominated proof-of-stake

Now that you have an idea of what proof-of-stake is, it’s easier to understand what nominated proof-of-stake (NPoS) is.

With proof-of-stake we have a draw about who gets to be the next person to validate a transaction block in the blockchain. If it were cardano for example, it would be a draw between all cardano owners, who have staked their cardano in the draw.

With NPoS it’s not everyone who can participate in the draw. It’s only nominated candidates who get to be a part of the draw to become the validator of the next transaction block in the blockchain. In that way, it’s more like an election instead of a draw.

The nomination of candidates happens through staking of polkadot tokens. For example, if you wanted to nominate Andy to be a validator, you could stake 10,000 DOT tokens in his name. 

If Andy wins, he gets to be a validator, which triggers a reward of 100 DOT tokens. At the same time, you’re also getting a cut of the reward, because you’ve helped to nominate - and thus support - Andy’s work.

If Andy were to try and trick the network, such as making false validations, all tokens from the nominations will be slashed. Slashing means that a certain amount of your staked tokens will be lost. It can be everything from 0,1% and up to 100% – depending on the character of the bad behaviour.

You can read more about polkadot’s slashing policy here .

The reward of 100 DOT tokens to Andy (or other validators) is set for all validators no matter the amount of nominations, this is to make sure that the validator’s power isn’t being centralised with just one person.

On top of that, the potential slashing losses would be larger with validators who have a large amount of nominations (measured on the total amount of tokens in the nominations). Like that, the polkadot blockchain encourages different validators to be nominated to thus spread out the responsibility of validating transaction blocks – which is the whole founding idea of a decentralised blockchain.

If you’re interested in becoming a validator or nominator, you can read more about the rules here .

How are new polkadot tokens being issued?

Polkadot has a certain amount of tokens. It’s the network itself who decides the total amount of tokens. In 2020, a vote was held to decide whether or not to increase the amount of tokens from 10 million to 1 billion, where 86% of network participants voted yes.

Like that, 990 million new DOT tokens were issued.

Besides that, polkadot’s economy is inflationary. That means that the developers behind the cryptocurrency made it clear that new tokens should be issued continuously. When more tokens are issued, the buying power of a single token will automatically fall – just like we know it from regular inflation in the economy.

Polkadot is designed to develop with a 10% inflation rate per year, approximately.

Buy polkadot via Lunar Block

Do you want to be a part of the polkadot network? Then you can download Lunar completely free and sign up to Lunar Block – probably Denmark’s most user-friendly platform for buying and selling cryptocurrency.

Here, you can trade polkadot and other cryptocurrencies with just a few swipes at a set low price – and without creating a wallet first.

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