When it comes to mining cryptocurrencies, there are currently two well established protocols and they are Proof-of-Work (PoW) and Proof-of-Stake (PoS).

However, there is a third mining algorithm that many people may not have heard of: Proof-of-Capacity.

Indeed, it is not entirely unreasonable to assume this. Proof-of-Capacity is a really new mining algorithm that is currently only being used by one Cryptocurrency called Burstcoin.

Despite this though, there are many who think that proof of capacity is a viable alternative to the currently established methods of mining. So what is Proof-of-Capacity and why is it viewed as such a great mining solution?

Before we go over the technicalities of PoC, it helps to take a look at how the popular mining algorithms currently work.

Established Mining Protocols

Bitcoin Mining Farm ASICs
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PoW is currently one of the most well established mining protocols. This basically requires a miner to use computer resources to solve complicated mathematical hash functions (the “Work”). In the case of Bitcoin, a well-known hashing function called the SHA 256 function is used.

These hashing functions are one way functions that can only have one solution. They require this raw computing power in order to find the exact function input to get the right function output. One of the input variables in the hashing function is the “nonce”.

The nonce is the variable that the miner will continually iterate through until they are able to produce the right hash. This is brute force computing that requires a great deal of energy and resources to solve. As Bitcoin difficulty has increased, so too has the amount of power required to find the right nonce.

Proof of Stake mining (PoS) is quite a different concept from PoW mining. In this, miners have to hold a particular “stake” in the cryptocurrency in question in order to take part in the transaction verifications.

These stakers or “validators” will be a node and will create the new blocks based on the amount of coins that they currently hold in their wallets.

The Need for Alternatives

While the PoW algorithm used to work well when Bitcoin was a relatively nascent technology, the growth of the network has been exponential. The Bitcoin protocol is designed in order to increase mining difficulty in order to keep block times constant.

The result of this is that the mining difficulty has become so complicated that only the most advanced machines called Application Specific Integrated Circuits (ASICs) can mine the coins. They also require an immense amount of power in order to solve the hash functions.

For all the miners that are not able to solve the hash functions in time, the energy that they have expended will be wasted. The result of this is runaway energy costs that many see as bad for the environment.

While PoS mining can be less energy intensive, there are other externalalities that many cryptocurrency advocates have problems with. This is the notion of centralisation in the mining process. Staking coins means that those with the most coins can have more say in the mining process.

This means that the smaller mining operations will have much less of an impact on important decisions that are made by the larger nodes.

Hence, there is a great need for an alternative mining algorithm that is less energy intensive than PoW and allows for proper decentralisation of the network. This is where Proof-of-Capacity comes in.

What is Proof of Capacity?

Proof-of-Capacity is a consensus algorithm where miners will “plot” their hard drives in order to take part in transaction verification. In other words, the miners will compute and store the solutions to the mining problems before the mining has even begun.

There will be some solutions that will be achieved faster than others and these will be the ones that are chosen in the consensus round. These miners will be awarded the block and hence the coins applicable to that.

These solutions have to be calculated prior as they are too complicated to solve in real time. Moreover, the block times are really short at an average of 1 block every 4 minutes (compared to Bitcoin’s 10 minutes). This is why the solutions to the hashing algorithm must be saved prior.

The way that a miner is able to increase his / her chances of winning the block reward is by making sure that they have the most solutions (plots) saved on their hard drives before hand. This will increase the chances that your solution is the fastest.

How Does Proof of Capacity Work?

There are two components that make up the Proof-of-Capacity, these are Plotting and the mining on the hard drive. Plotting is the first stage and this involves you creating your unique plot files.

Plotting makes use of a hashing function called Shabal. This hashing algorithm is much harder to compute than the SHA 256 variant used in the Bitcoin protocol. Hence, the miners will compute the solutions to the Shabal algorithm in advance and store them on the hard drive.

Plotting the Hard Drive

When you plot your hard drive or create the plot files, you are producing nonces. This is slightly different to the Bitcoin nonce in that it is generated from the plot file. You will continually hash your data including your particular ID until you have solved the nonce.

Each of the nonces will contain 8,192 hashes and these are bundled together into a number of pairs that are termed “scoops”. In total there will be 4,095 scoops that will each be assigned that unique number. Below is a graphical example of the scoops.

Example of Scoop Proof of Capacity
Example of Nonce and Scoops. Image Source: burtwiki.org

Mining on the Hard Drive

One of the results of the calculation will be the scoop number. This scoop number will be between 0 and 4,095. The resulting scoop number and the corresponding nonce will be used to calculate a unit of time called the “deadline”.

This will be completed for all of the nonces that are on your hard drive and you will then select the shortest deadline. This minimum deadline is the amount of time that will pass since the last block was created until you can produce a new one.

If the deadline that you are able to produce is shorter than those of the other miners then you are allowed to create the new block and you will be entitled to the block reward.

Benefits of Proof of Capacity Mining

Given the many challenges that are faced by more traditional mining algorithms such as PoW and PoS, Proof of Capacity consensus algorithms have a number of advantages.

  • Mining with a hard drive is markedly more energy efficient than using specialised equipment such as an ASIC or regular GPUs. This will assuage the concerns of numerous environmentalists.
  • Miners who had invested in highly specialised mining rigs and ASIC chips would not have an advantage in mining the coins. This is often viewed as one of the drawbacks of the Bitcoin protocol.
  • There is a greater degree of diversification with Proof of Capacity. This is because of the low barriers to entry of obtaining a hard drive. They are usually quite cheap and allow more miners to jump into the fray.
  • The hard drive can be reused as normal pieces of equipment once you are done mining. Given that they are not so specialised, you can merely delete the data once you are finished and they are good as new. This cannot be said for ASICs.
  • There is very little optimisation benefits of newer hard drives (apart from size). Hence, the latest equipment is not a prerequisite for getting an edge on the mining of the coins.

Perhaps this is the reason that many in the cryptocurrency community are looking to the mining algorithm as a new panacea for an eco-friendly decentralised alternative. However, there are a number of cons that exist with Proof of Capacity mining. These include the following:

  • The data that is plotted on the hard drive is of no use beyond the mining of the coins. This means that there is a great deal of space that is left redundant.
  • Although there are lower barriers to entry with Proof of Capacity mining, people could also buy larger hard drives. There is nothing stopping an individual from purchasing much larger hard drives and using them to mine most of the coins. This could impact on the network decentralisation.
  • If the mining becomes popular then there is a possibility that it could be exploited by hackers. Currently, mining malware has proliferated exponentially to numerous computers around the world. These can sometimes be identified as PoW mining slows down the PC. However, with Proof of Capacity it is much harder to tell whether your spare hardware space is being used for illicit purposes.

“Proof” is in the Pudding

Proof of Capacity is no doubt one of the more interesting mining algorithms. Not only does it rethink the way mining has been approached over the past few years, it is also a solution that many see as ecologically sustainable.

It also lends itself well to the panacea of most crytpocurrency advocates: a perfectly decentralised ecosystem.

It is still a new concept and has not been used on the same scale that other algorithms have. It remains to be proven whether Proof of Capacity can overcome a number of the scaling obstacles that more established blockhains such as Bitcoin and Ethereum are facing.

Nevertheless, all innovative technology starts out as a simple use case and is further improved as obstacles are presented. It will be interesting to see how much Proof of Capacity can impact the cryptocurrency ecosystem.

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Posted by Editorial Team

Editors at large. Posting the latest news, reviews and analysis to hit the blockchain.