The idea is that new crypto coins only are brought into circulation if they’re being dug out - just like gold. However, digging for crypto doesn’t need physically challenging work. Instead, it demands advanced computer programs that need large amounts of power and computer hardware.

So in that way, there’s still large amounts of resources used in the mining of crypto.

But this way of digging for crypto is only true for certain cryptocurrencies - or for certain blockchains to be exact - such as bitcoin and ethereum .

Bitcoin and ethereum are so-called proof-of-work blockchains.

This means:

Proof-of-work = new coins are issued through digital mining.

Terra (LUNA) is not a proof-of-work blockchain, but is instead a proof-of-stake blockchain.

With proof-of-stake, new coins are being issued - also called minting - through staking and validation of transactions on the blockchain.

This means:

Proof-of-stake = new coins are issued (minted) through staking and validation.

Staking and validation are two concepts that are central for proof-of-stake blockchains. You can learn more about what those concepts cover later on in this post.

Table of contents:

• What is terra mining?
• Overview: How proof-of-work works
• Overview: How proof-of-stake works

Overview: What is proof-of-work?

Cryptocurrencies based on proof-of-work: bitcoin , ethereum , dogecoin .

Proof-of-work is a validation method - also known as a consensus mechanism - which makes up the technological foundation for certain cryptocurrencies.

In short, the method should ensure that all information in a blockchain is credible.

For example, if the blockchain stated that you actually transferred 1,000 bitcoins to Henriette - how could we trust that, that was actually true? 

We can do so because bitcoin uses proof-of-work. Proof-of-work basically means that a computer runs some advanced programs to find the specific code that makes it possible to add the transaction between you and Henriette to the blockchain in a secure way.

Tip: Learn more about proof-of-work in our post “bitcoin mining ”.

When the code has been found, a reward is triggered to the person who ran the computer program. The reward is cryptocurrency - such as bitcoin or ethereum coins.

This works like a compensation for all the resources needed to run the computer program - because it can be expensive in terms of hardware and electricity to dig for cryptocurrency.

But with proof-of-work, you need to run computer programs to find the correct codes, which in turn triggers a reward in the form of cryptocurrency. The cryptocurrency is then “created” when the necessary code is found.

And that’s why it’s called “mining”. You’re “digging” for new cryptocurrency, and that’s how new coins are brought into circulation. Kind of how it works with gold and gold diggers.

Remember, it only works like this with cryptocurrencies that are based on proof-of-work. Terra isn’t based on proof-of-work and can thus not be mined either, like bitcoin and ethereum is.

Terra is based on proof-of-stake instead, which you can learn more about now.

Overview: What is proof-of-stake?

Cryptocurrencies based on proof-of-stake: terra , solana , cardano , polygon , chainlink .

A blockchain based on proof-of-stake adds transactions to the blockchain in a different way than with proof-of-work. Here, a randomly selected person in the blockchain network is responsible for validating the transactions.

This person is also called a validator. The person who is selected as the validator will also receive a reward - but it’s not a newly mined coin, like with proof-of-work. It’s a fee coming from a pool of already existing coins.

The validation work is then also compensation in proof-of-stake. The difference is just that the compensation isn’t also the issuing of new coins, like it is with bitcoin, ethereum and dogecoin.

Let’s say you want to be selected as a validator.

The selection is a drawing of lots, where one lot is equal to a coin. Your coins are not automatically in the draw, and they will only be in the draw if you stake them.

Let’s say you have 500 terra coins. You can stake 300 of them in the draw to become the validator. Let’s also say there are 10,000 coins in total in terra’s network.

Then you would have a 300/10,000th chance of being selected - or 0,3%.

The work as a validator is a demanding piece of work. You need to know a lot of advanced programs and codes - which is why not everyone can handle the work.

That’s why you can pool your coins with a competent validator and thus increase their chances of being selected in a proof-of-stake blockchain. This is also called a stake pool.

Example:

Helena works as a validator on terra’s blockchain. 

She has 500 terra coins, which she stakes in the draw. Now, she has a 0,5% chance of being selected.

You know Helena is a great developer, and you trust her validation. That’s why you would like to support her in getting selected, and you’re staking some of your coins in Helena’s name.

You’re staking 300 coins - so now Helena has 800 coins in her name and has now increased her chances to 0,8%.

So when Helena gets selected, she will complete the work and get rewarded a certain amount of coins. The reward is spread out over the pool of people, who staked coins in Helena’s name.

Like that, both Helena and the people who supported her are being financially rewarded.

Tip: You can read more about the rewards for staking terra coins and other crypto coins at StakingRewards.com .

But what if Helena ‘cheats’?

If Helena - or anyone else for that matter - tries to cheat with her validation - such as swindling the network out of money - her 500 coins are then confiscated. But the 300 coins you’ve staked in her name also risk being confiscated.

This is where trust in the validator enters the picture. Do you trust Helena enough to stake your coins in her name?

Summarization: The difference between proof-of-work and proof-of-stake in relation to mining

Proof-of-stake

The terra coins Helena receives as a reward for her work is actively issued by the blockchain after she completed her work validating transactions. Coins are minted. When the National banks issue new coins in their respective currencies, it’s also called minting.

Had it been a proof-of-work blockchain - such as bitcoin - the coins would not have been actively issued. For something to get minted it requires someone to actively choose to increase the amount of coins in circulation.

But don’t think of it as one single person who decides whether or not new coins are to be issued - contrarily, it’s all programmed into the blockchain system and it happens automatically. But the choice to program the system like that is then also an active selection which is one of the biggest differences between proof-of-stake and proof-of-work .

Proof-of-work

With proof-of-work the coins are only brought into circulation once they’ve been found - and they get found by “digging them up”. In that sense, proof-of-work functions quite similar to gold - you can’t issue new gold coins before the necessary gold has been dug up.

Buy terra (LUNA) with Lunar Block

Instead of getting into staking, validating and pooling your terra coins, you can buy them directly in Lunar Block . Lunar Block is a Danish and transparent crypto platform without meaningless fees. Buy and sell terra, and other popular cryptocurrencies directly from your phone. Remember, all crypto trading involves risks.

Get started with terra now

Cryptocurrencies can rise and fall

When you trade cryptocurrencies, you need to be aware that it carries a large risk. The value of your cryptocurrency can both rise and fall, and you can risk losing the entire amount you’ve invested in cryptocurrencies.

Cryptocurrency trading is done through Lunar Block. Lunar Block is not regulated by the Danish Financial Supervisory Authority (Finanstilsynet). That means you won’t have the same protection as when trading e.g. stocks or other regulated assets.

We do not counsel

We do not advise on currencies and do not make recommendations for either buying or selling. We can provide factual information about the different currencies, but past price developments are not an indication of future developments.

No information from Lunar Block should therefore be considered as recommendations and all decisions are up to you alone.