First there was mining. Then there were ASICS. And then, someone came up with this brilliant new way for people to “mine” new coins with far less computing power. This method became known as proof of stake (POS). The concept is simple. Your wallet will mint new coins at a set rate according to the number of coins it contains. For example, let’s say you hold 100,000 of a coin that mints at 10% annually. Assuming things are all working well, at the end of one year your wallet will contain approximately 110,000 coins. If your wallet only holds 1000 coins, then you’ll end up with 1100 coins at the end of the year. This is not taking into account compound interest, where the newly minted coins themselves also mint at the same rate, but you get the idea.
If you are a small investor, the truly attractive thing about POS coins is that you do not have to invest in specialized computing equipment and even a small balance will grow over time. So what’s not to love, right?
I personally love Proof of Stake as a concept. I love the idea of my coins earning interest for me just because I’m running my wallet. There are no strings attached to that interest either. Once the new coins are minted and confirmed I am free to save or spend them as I see fit. I love the fact that I don’t have to deposit my coins with some third party in order to earn that interest, which is what I would have to do with fiat money, and even some cryptocoins. You want to be your own bank? Get some minting coins and run the wallets all day.
That’s the ideal of proof of stake coins. The reality, however, can vary widely, depending on a lot of things. Here are a few of the minting pitfalls to watch out for before buying a ton of the latest greatest proof of stake coin.
The coin could die This isn’t directly related to whether or not it’s a proof of work or proof of stake coin, but it is an important consideration. I am still the proud owner of Seedcoin, a powerful staking coin that for one week actually minted at 269% per minting instance, and then settled down to a solid 16% annual minting rate. Other than some coding related drama during that 269% week, the wallet worked very well, minting new coins like clockwork. I could unlock my wallet about once a week and get all my coins minting in less than two hours. It was fabulous…
…until one day I opened my wallet and it could not connect to any nodes. Why? Because no one was running nodes anymore. The network was gone. The coin was dead. I should have seen the signs and dumped when BitTrex, the one remaining exchange carrying SEED announced it would be deslisting it. But back then I was naive and hopeful. They have a word for that in the cryptosphere: bagholder. Yes, I still own SEED, but unless someone resurrects it, it’s literally nothing more than a few data points on my hard drive. Its current value: zero.
I will say that I do not consider my experiment with Seedcoin to have been a total loss. It was with this coin that I learned a lot about how minting works. Regardless of the way it died in the end, I got to experience first hand what it’s like for a minting coin to mint as advertised and where everything worked well from the technical perspective. But if you’re invested in a coin because you hope it will make you money (as opposed to because it will be a fabulous learning experience), then it won’t matter how well the coin mints from a technical perspective if it dies in the end before you have a chance to sell it off. So before you invest in a coin because it has good minting specs, do research the coin’s fundamentals to make sure it has a good chance of being viable long term.
The minting formula matters There are a number of factors that go into the actual script behind the minting–the math, as it were. It’s not necessary to understand all aspects of the equation, but it is helpful to know what the variables are and how they relate to each other. These variables include coin balance, minting rate, wallet weight, network weight, minimum coin age, maximum coin age, and number and size of inputs.
Coin balance: Coin balance is quite simply the total balance of the wallet. If you own 10,000 coins, your coin balance is 10,000. Assuming everything is working well, you can get a rough calculation of how many coins you’ll have in one year by multiplying your coin balance by the coin’s minting rate. You can get a more accurate calculation by taking into account the compounding that takes place when the newly minted coins themselves mint.
Minting rate: This is usually expressed as the annual percent yield of the coin. It can range from a low one percent to a high 25, 40, or even 100 percent. This rate can be the same throughout the life of the coin, but in most cases it incrementally decreases.
Wallet weight: This is the weight your wallet has relative to the network, and is usually expressed as a number (with the network rate also listed). The higher your wallet weight relative to the network rate, the more likely your chances of minting. The wallet weight is the combined weights of each input. If I have made five deposits to my wallet, I will have five inputs, each with its own individual weight. The coin weight also impacts the amount of coins that are minted in the minting instance. For example, an input of 100 coins that would mint one coin if it minted immediately upon maturity might instead mint 5 coins if it had to wait several days or weeks after that. This allows for all wallets, large or small, to mint at very close to the minting rate at all times.
Network weight: This is the combined weight of all wallets currently minting in the network.
Minimum coin age: This is the minimum amount of time that must elapse from the time a deposit was made before those coins are eligible for minting. Minimum coin ages can be as low as a couple hours and as high as thirty or more days. This is determined by the coin’s development team and worked into the coin’s code. For example, PIGGY coin has a minimum coin age of eight hours. This means that if I make the first deposit to my PIGGY wallet at 9:00 am, the earliest the wallet will mint is 5:00 pm. The actual time of the first minting is usually going to be a bit later, though, and will depend on other factors, especially the amount of coin in that deposit, the weight of those coins (which will be the same as wallet weight for only one deposit), and network weight.
Maximum coin age: This is the maximum amount of time that a set of coins sitting in the wallet will increase in weight prior to minting. For example, Diamond coin has a maximum coin age of thirty days. This means that an input of coins which has not minted will reach its maximum possible weight at the end of thirty days. It will not increase in weight past that time. This feature makes it advantageous to have your coins grouped in a few large inputs rather than many tiny inputs. For example, in a Diamond wallet containing 1,000 coins, it is best if it’s a single input of 1,000 coins or even ten inputs of 100 coins each. However, 1,000 inputs of one coin each will have a difficult time accumulating enough weight to mint in a timely fashion.
Number and size of inputs: The most basic meaning of number of inputs is the number of deposits made to the wallet and the size of each deposit. A wallet balance of 1,000 coins can be divided up any number of ways, such as two deposits (inputs) of 500 coins each, or two thousand inputs of a half coin each. Although the wallet’s overall chances of minting are based on the total wallet weight, each input mints separately. This means that larger inputs will mint more readily than smaller inputs. If the individual small inputs reach maximum coin weight and still aren’t minting, it is possible that their weight is too small to effectively mint, and should be combined by gathering all the small inputs and sending them as a deposit to a wallet address to create a single larger input. This new deposit will reset the coin weight and age to zero. The Diamond wallet has a feature which automatically combines inputs which have reached maximum coin age and not minted as part of the minting operation, but not all minting wallets do this. If the wallet doesn’t automatically gather small or “dust” inputs, then you will need to manually gather them to improve their chances of minting.
If you regularly send the coins to other addresses, then you can create “change” inputs from withdrawals. For example, let’s say you send 15 coins to your favorite trading platform, but it comes from an input containing 20 coins. The 15 coins will go out to the trading platform, but the remaining 5 coins will be put in a new input, often under a completely different address. You can monitor and even control this by activating the “coin control” feature in most QT minting wallets. With coin control, you can choose which input your withdrawal will use. You can select the most recently minted coins which will have the lowest coin age and weight while holding back the coins that are more mature and very close to minting.
Another part of the minting formula to consider is how the wallet handles minted inputs. In my own experience, when the coins in an input mint, the wallet adds the minted amount to the input and also divides that new total into two approximately equal smaller inputs. For example, an input of 100 coins which mints two coins will then be divided up into two new inputs of 51 coins each. This results in the input size decreasing with each minting instance. However, as the input size gets decreased to a certain point, the wallet will then tend to gather up smaller inputs into larger ones for minting. There are other ways for a wallet to handle a minting input. For example, when the Paycoin Microprime addresses were actually minting (they are currently broken), the minted coins got sequestered to an address you set called a scrape address, and the Microprime input remained the same, usually 1,000 coins. The Neucoin wallet does not split up inputs, but simply adds the minted amount to the original input, creating a new, larger input. It helps to know how the wallet will handle inputs, as that will impact the results.
Finally, it is important to note that not all minting coins take into account all the variables just listed. NeuCoin is a notorious example which makes it a poor choice for a small stakeholder to attempt to mint with his own wallet. Neucoin has a rapidly decreasing minting rate (It began at 100 percent and is gradually decreasing to six percent over a period of ten years). The chances of a particular wallet minting are based strictly on input size. Coin age and weight are not taken into account. A small input of coins does not grow in weight, so there is no increased probability of it minting for each day that it doesn’t mint. This makes minting Neucoins essentially a lottery with every block. Just like your chances of winning the lottery are slim to none if you only buy one ticket (no matter how many times you play that one ticket), a tiny Neucoin input’s chances of winning the minting lottery at any given time are slim to none. The Neucoin minting formula definitely favors very large inputs in the same way that a lottery player who bought several thousand tickets would be more likely to win the jackpot than one who only bought a single ticket. This is the sort of revelation that is no fun to learn after having bought a stash of coins to mint.
Technical aspects of running a minting wallet Once you know and understand a given coin’s minting algorithm, you then need to set up and run the wallet itself. For the most part this is a simple process. You download the latest version of the wallet from the coin’s website, unpack it, install it, and then run it. You then add coins to it by sending coins to the wallet’s address.
Next, you have to wait out the coin maturing period. The coin’s specs will usually give you a time in days, but the actual number that is used in the calculation is number of blocks or confirmations. Your coins will not be able to mint until they mature, or reach the required number of confirmations.
During the maturing period, you should encrypt your wallet. Before you do that, you want to record the private key for the wallet’s address–all addresses you intend to send coins to. You go to the console (through the “help” menu item) and type “dumpprivkey” followed by the address. When the console reveals the private key, copy it and store it in several secret places. This will allow you to recover the wallet’s address in the event that you lose the wallet’s encryption key. You can also backup the entire wallet, an activity that should be done regularly.
Encrypting the wallet is a matter of choosing and confirming a password for the wallet. Keep the password safe and don’t lose it. (But if you do lose it, you can import the private key into a brand new unencrypted wallet). Once the wallet is encrypted you can always open it and look at the balance, but in order to send coins anywhere you need to enter the wallet password.
Minting wallets have a menu item that allows you to open the wallet for minting only by entering the password. Do this and once the coin maturing period finishes, your wallet will begin to mint. Various wallets have indicators of what’s happening, usually giving information about your wallet’s weight, the network weight, and an approximate amount of time it will take for your wallet to mint.
Those are the basics, but there are interesting complications, the most common one being that not all wallets are created equal. Some wallets work extremely well and will mint coins day in and day out without a hitch. Other wallets are buggy. For example, the Paycoin wallet recently had its Microprime addresses quit minting altogether. When I inquired about it I was told the Microprimes were broken and there was no ETA on when they would be repaired. It can be a frustrating situation when you bought a stash of coins in order to mint them and the wallet won’t mint them. Other times the wallet may mint, but requires constant monitoring and updating in order to work with the network. As I mentioned before, the Seedcoin wallet required at least four updates during the single week that it was minting at 269 percent. Updating a wallet is generally a fairly simple process. You download a zip folder with the wallet installer, unpack the folder, run the installer, and then open up the wallet. However, it can be time consuming to do this four times in one week!
Another common issue is that the block chain can get corrupted or it can fork. I recently had the PIGGY block chain on my computer get corrupted. A common cause of this is a hard shutdown of the computer. The corruption was such that I couldn’t open my wallet. Fortunately the coin developer was available to help. The solution ended up being deleting the block chain and downloading it all over again. Downloading the block chain is not a big deal if the coin is only a few months old. But when the coin is over a year old, the download process takes hours, sometimes even days, to complete. During that time you cannot send funds out of your wallet and the wallet will not mint. For a coin that mints every eight hours, that was a lot of lost minting time. Fortunately, the increased coin weight did result in more minted coins. However, it is a big deal to not have access to one’s wallet for days at a time while the block chain is downloading.
Even more insidious than the block chain getting corrupted to the point of the wallet not working until a new block chain is downloaded is when the block chain forks and your wallet ends up on the wrong chain. Unlike an outright corruption which can become obvious when you try (and fail) to open your wallet, a fork does not give any indication of anything being amiss until you attempt to send your coins out and they get lost. Or you find that all the time spent minting since you got on the fork was to no avail. Truly, the only way to know if the block chain forked is to stay in touch with the coin’s community and watch for any announcements. Forks can be intentional (such as when a new feature is added to the coin) in which case everyone in the network has to update to the new wallet by a certain date, or forks can happen randomly, in which case it’s usually the developers who will tell you the fork happened and which is the correct chain that you can check your wallet against. If your wallet got on a fork, the solution is the same as for a corruption: you need to delete the block chain from your computer and download it all over again, sometimes multiple times.
There are probably several more wallet issues which can be corrected by downloading the block chain again. Regardless of the reason, having to download the block chain all over again is an annoying and time consuming process. In my opinion it is one of the biggest reasons for people choosing to use online wallets rather than desktop wallets for everyday use. Up until recently, though, you would lose the option to mint your balance if you opted for an online wallet instead of the desktop client.
Security matters The other issue that is paramount if you are going to conduct your own minting (be your own bank) is wallet security. The most likely and egregious wallet hack is when someone gets access to your wallet, dumps all the private keys, then imports them into his own wallet and sends the coins to an address you can’t access. This is unfortunately all too common. These hacks can happen through a number of back doors to your system including but not limited to vulnerabilities in the operating system, another wallet that you’ve downloaded containing malware, malware such as keyloggers being inadvertently downloaded and installed from having visited compromised websites, certain kinds of social engineering, and more. Most computer users do not in practice consider security to be a high priority. There are many common computer usage behaviors that are actually anathema to maintaining good security. For the most part, users do not suffer from these behaviors and most users probably do not have anything on their hard drives that would be of interest to hackers. However, those practices can put the cryptocoins on your computer at risk. Ideally, you would not be running more than one wallet on your system, but instead run each one on a different computer or Raspberry Pi. Ideally, the wallet would be heavily encrypted and you’d change the password regularly. Ideally, you would be running a good antimalware protection program which will still allow your wallets to run. Ideally, the place where you store all your wallet passwords and private keys would be very secure as well, but not so much that you yourself are locked out!
With security, the more of it you have, the less convenient it is for you to work. For a while I kept my wallet passwords on a separate encrypted flash drive. But then I found the process of decrypting the flash drive, then accessing the file with the passwords to be overly cumbersome, so I came up with a more convenient system which is most likely less secure. Each person has to come up with what they consider to be an appropriate balance of security and convenience. Being your own bank in this case can turn into a heavy and expensive burden, which is why most people are happy to let the banks be the banks.
Alternatives to desktop minting clients Fortunately, if you’d like to take advantage of minting, but are not prepared to run your own desktop minting client, there are some interesting online alternatives opening up, mainly shared minting wallets and POS (proof of stake) pools. For a while, Next and Fimk, which mint on a completely different type of platform, both spawned minting pools where people could send their balances to a website and they would then receive their share of the minting proceeds. This allowed people to take advantage of the economy of scale (a larger total minting pool, which was very important for those two coins), and also have all the security handled separately. Of course, the disadvantage was that if the pool operators turned out to be scammers you lost your balance. Fimk had an ingenious setup where you could lease your balance to a pool while still retaining control of your balance, a much better option for the original owners. In that case, if the pool operators turned out to be scammers all they could take was the minted coins, and you could cancel the lease at any point to minimize even that loss. I am not aware of any other coin which has that feature.
Coin Wallet is an online wallet service which is also a minting pool. Each user is given a subwallet for each coin the site supports, and individual addresses can be generated for each coin. The user can then send the coins to the appropriate addresses and withdraw them at will. Most of the coins Coin Wallet supports are minting coins, and to participate in the minting (or staking) pool, you just have to deposit some coin to your Coin Wallet account. Once the maturity period expires your coins will start earning a piece of the overall minting proceeds. A portion of the minting proceeds will go back to Coin Wallet as a pool fee, similar to how mining pools work, but account holders have access to the rest of the minting rewards as soon as they mature. I have tried Coin Wallet with a number of my staking coins, both the ones I have large holdings in and some that I only have dust amounts (faucet earnings). Either way, the coins are minting and accruing rewards just for sitting there. I am liking the service, but still hesitate to recommend it completely because I am not sure how well the site is protected from hackers, nor how honest the operators are. The site is continually adding new coins and appears to be growing, and users do retain control over their coins once deposited. The best part about it is that even microearnings from faucets will mint and get credited to individual accounts. Coin Wallet allows one to own many different minting coins in any amount and not have to bother with running the individual clients. If you want to try out Coin Wallet, start with faucet earnings to see how it works, and then gradually add coins you buy, but only invest what you can afford to lose.
Another interesting online minting option is StakeMiners. StakeMiners works a lot more like cloud mining, in that you make your deposit in Bitcoin, and the service then buys altcoins to mint. Once a week the minting rewards are divided up and paid to users in Bitcoin. This is a good route for those who want to take advantage of minting coins, but don’t actually want to deal with the coins themselves. StakeMiners only uses a few of the many minting coins available. They choose coins to mint based on their own criteria of what makes a profitable minting coin.
I expect more minting options will open up as time goes on. Minting is too fabulous an opportunity to not take advantage of, and hopefully as more reliable online minting wallets and pools open up, the entry barrier for nontechnical users will be considerably reduced.