Peercoin Definition

What Is Peercoin?

Peercoin is an alternative cryptocurrency launched in 2012 that is based on the Bitcoin framework. Like Bitcoin, Litecoin, and Dash, Peercoin stores value, offers complete anonymity, and can be sent over the internet without any central authority (such as a bank).

Peercoin was created by the software developers Sunny King and Scott Nadal. It was the first digital currency to use a combination of proof-of-stake (PoS) and proof-of-work (PoW) consensus algorithms.

Understanding Peercoin

Peercoin is an altcoin. An altcoin is any cryptocurrency that isn't Bitcoin. Altcoins often present themselves as better alternatives to Bitcoin; Peercoin was the first altcoin to target the issue of Bitcoin's high energy consumption. In addition to energy efficiency, the founders of Peercoin aimed to provide increased security.

Bitcoin's protocol requires miners to solve difficult math problems in order to validate transactions on a blockchain. The first miner to solve a given puzzle gets a reward in the form of a few bitcoins that were created. Solving these puzzles requires a significant amount of computing power and, therefore, consumes a lot of electricity. This is one of the problems that Peercoin tries to solve.

Peercoin tokens are initially mined through the commonly used PoW hashing process. As the hashing difficulty increases over time, users are rewarded with coins via the PoS algorithm. PoS block generation is based on the coins already held by individuals; for example, someone holding 1% of the currency will be rewarded with 1% of all PoS coin blocks. This process is also referred to as "minting."

Block generation through PoS requires minimal energy compared to the process necessary for generating hardware-intensive PoW hashes. As the PoW blocks offer fewer rewards, there is a transition to using the PoS portion of the algorithm (which requires minimal energy for generating blocks). This means that over time, the Peercoin network will consume less energy.

At first, Peercoin was seen as a potential rival to Bitcoin. Peercoin's market capitalization reached $162 million in November of 2013. It reached that same level again approximately four years later, in January 2018. At its 2013 peak, it was the fourth-largest cryptocurrency in terms of market capitalization (behind Bitcoin, Litecoin, and Ripple (XRP)).

Despite a promising and innovative start, Peercoin no longer ranks on the lists of top coins to watch or invest in. As of Apr. 11, 2023, Peercoin's market capitalization is $13.16 million, holding the 747th spot on CoinMarketCap.com's crypto list. Peercoin does have an active foundation, however, and work continues to be done by the Peercoin community.

How Is Peercoin Different From Bitcoin?

While Peercoin is based on Bitcoin's framework, the two cryptocurrencies can be distinguished by their different approaches to mining. Bitcoin secures its network with a PoW system, while Peercoin is a hybrid cryptocurrency that also utilizes PoS. In fact, Peercoin was the first virtual currency to utilize PoS.

In a PoS system, participants who already own Peercoin are the ones that verify transactions on the network. The more peercoins a user holds, the more important their verification is for the network. Since having more peercoins is an advantage for miners, this system is intended to incentivize users that save their Peercoin (rather than spending it).

Compared to Bitcoin, Peercoin is a more energy-efficient method for securing the blockchain.

Peercoin's Built-In Inflation

Peercoin's founder, Sunny King, has said in an interview that there is a tradeoff between zero inflation in the value of a cryptocurrency and its security. For example, miners of Bitcoin will not be rewarded with new bitcoins eventually, and their entire revenue will be dependent on fees, decreasing the economic incentive to maintain the network's integrity.

Peercoin's minting system builds inflation into the system so that there is always an economic incentive for miners. According to Sunny King, "the alternative design approach is to acknowledge the minimum inflation rate needed to secure the network but let transaction fees be destroyed to counter inflation. In my opinion, this is a better approach that can provide better and more stable security to the network while conditionally preserving the strong store-of-value properties."

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