Many people are simply confused by cryptocurrencies, and especially the mining process. Even those who have invested in these assets often don't understand how their transactions are verified, or how new cryptocurrencies are generated.
Unfortunately, most articles exploring these topics are either too technical or too simple, and fail to explain the process in terms that can be easily understood; hopefully, this one can describe the most popular forms of cryptocurrency mining in a way that both laymen and engineers alike can appreciate.
Proof of Work
Proof of work algorithms are used by Bitcoin and several other popular cryptocurrencies. These algorithms rely on miners who constantly run a computer program that receives records of new transactions (“blocks”) and attempts to verify them by entering different numbers into a mathematical formula until the attempted number, when combined with the data from the block, generates a number with a sufficient number of zeroes in the beginning.
For every block, there are many numbers that could accomplish this, but the only way to find them is to manually try numbers in sequence through the formula (called a “hash algorithm”) until the correct one is found; this requires a great deal of computer power, so most miners who deal with proof of work currencies use powerful gaming computers or large “farms” of servers.
The first miner to identify a valid number then broadcasts this to the network of other miners, the block is added to the permanent record of transactions (the “blockchain”), and the block will typically include a payment for the miner for their contribution to the network.
Several different proof of work algorithms are used, though Bitcoin's SHA-256 is by far the most common. Bitcoin routinely updates its mining protocol to require more leading zeroes and reduce the payment for block verification, in order to control the currency's inflation, though other cryptocurrencies follow different sets of rules.
Proof of Work Mining Pools
Since proof of work mining requires an immense amount of computer power to become profitable, many users combine their resources into mining pools. Participating in pooled mining means that users must share any profits with other users, but it usually results in more profits than could possibly be achieved with a single computer.
All participants will run a mining program, trying many numbers simultaneously, and then distribute any earnings between all users. Many different pool programs are available, including browser extensions that require no installed software, and they offer a wide variety of profit-sharing systems.
Proof of Stake
Proof of stake algorithms offer an alternative to proof of work that requires far less computer power; the user responsible for verifying a new block is simply chosen by the network's algorithm. Users will be chosen based on their role in the network; different cryptocurrencies use different criteria to select the validator, but the most common qualifications are owning a large quantity of the currency or having owned some for a long period of time.
While proof of stake algorithms are praised are more environmentally friendly than proof of work, the most common criticism is that major investors can sometimes hold an undue influence over the network.
Delegated Proof of Stake
Delegated proof of stake is similar to the proof of stake system described above, but instead of algorithmically selecting a validator, users are allowed to vote on the person responsible. If the selected user fails to complete the validation, they not only sacrifice their payment, but they also harm their reputation among the other users.
Delegated proof of stake systems also typically elect delegates, who maintain a degree of control over the system and can propose updates such as different block sizes, mining rewards, or network changes; the delegates usually cannot execute these changes themselves, but can codify their proposals and allow the network to vote on it. Delegated proof of stake is the most thoroughly democratic system used for cryptocurrencies, but since it requires regular participation, it has not gained widespread use.