Staking vs. Mining
Each of these components plays a crucial role in ensuring the operation of each blockchain network, but how are they different?
Blockchain technology is the foundation of all crypto-related products and services offered to users today. Typically, blockchain networks consist of multiple components, including distributed ledgers, peer networks, wallets, system integrations, system management, and smart contracts.
Each of these components plays a crucial role in ensuring the operation of each blockchain network. In addition to these components, blockchains also rely on concepts like crypto staking and crypto mining to secure their respective networks.
What do the concepts of staking and mining mean? How do these concepts affect the operations of a blockchain network? Are they similar? This article will answer these questions and deliver additional information on crypto staking and mining.
Apart from answering the questions listed above, we will also review the difference between staking and mining. However, to commence, let us briefly discuss crypto staking.
Staking crypto assets involves locking up digital currencies on a crypto wallet attached to a proof-of-stake (PoS) blockchain network over a fixed period. This action aims to maintain and improve the performance of such blockchains. Additionally, this process plays a crucial role in securing transactions on the blockchain.
Investors who lock up their cryptocurrencies on a blockchain network to secure them qualify for staking rewards. Cryptocurrency staking was created to improve the operation and safety of blockchain networks that run on a Proof-of-stake consensus mechanism.
However, with the addition of rewards to the staking process, many investors in the crypto space now view this concept as an investment opportunity since it serves as a way to earn passive income. Generally, staking rewards attached to this process are higher than those offered for investing in traditional financial platforms like banks.
It is essential to understand how Proof-of-Stake consensus mechanisms work to fully appreciate the role of cryptocurrency staking in maintaining a blockchain network.
Proof-of-Stake: How Does It Work?
The Proof-of-stake consensus mechanism is the direct replacement for the Proof-of-work consensus mechanism. This model uses validators (network nodes) to verify transactions and support consensus on a blockchain network.
Different variants of the Proof-of-stake model have been developed over the past few years. However, all of these variants share a similar working principle. Generally, the algorithm that manages the PoS mechanism randomly selects blocks and assigns them to a network node for review.
The network node validates the transactions and ensures they are legitimate. Once legitimacy is confirmed, nodes add such blocks to the ledger in exchange for transaction fees and block rewards. Nodes that add wrong blocks of data to the network are penalized.
Crypto Staking: How Does It Work?
Investors who want to enjoy staking rewards need to lock their crypto assets on a proof-of-stake blockchain. Usually, these investors are invited to join a staking pool to stand a chance of becoming validators.
Generally, investors who commit a significant number of crypto assets to the staking pool have a higher chance of becoming blockchain validators. After being selected as validators, stakers help secure the blockchain by validating transactions and adding new blocks of data to the network.
As previously stated, users will receive rewards for staking coins and validating transactions on a blockchain. Each time a new block is added to the blockchain, the validator is rewarded with newly minted crypto coins.
In most cases, staking rewards are paid using the same cryptocurrency staked by blockchain validators. These rewards are delivered using a different digital currency from the staked coins at other times.
Mining is the process by which Proof-of-work (PoW) blockchains like Bitcoin validate transactions and generate new coins. Cryptocurrency mining is an energy-intensive process, and it requires high levels of computing power.
In most cases, the mining process relies on extensive, decentralized networks of computers located in different parts of the world to verify and secure POW blockchains. These decentralized networks also serve as virtual ledgers that document all transactions performed on the blockchain.
In exchange for validating transactions on their blockchain, computers on the Proof-of-Work network are rewarded with newly minted coins. This process is continuous as miners secure and manage the blockchain. In return, they earn coins as rewards for their activities. The Bitcoin blockchain is the most popular example of a chain that uses the Proof-of-work consensus mechanism in the crypto space. How does it function?
Bitcoin Mining: How Does It Work?
At its inception, the bitcoin mining process was simple and uncomplicated. At the time, mining cryptocurrency was possible using a home computer. However, as Bitcoin's blockchain grew, the computational power needed to run the blockchain increased significantly. Hence the adoption of more specialized equipment for the mining process.
These specialized computers solve complex mathematical puzzles to verify and record new transactions on the blockchain. This process also leads to the minting of new Bitcoins. As previously stated, this process consumes lots of energy and computing power voluntarily provided by crypto miners.
The Bitcoin network adopts a lottery for distributing newly minted coins. To win the lottery, computers on the network must ensure they are the first to predict the value of a "hash." The term hash refers to a 64-digit hexadecimal number. Generally, the computer that is first to provide the correct hash will receive the new coins.
Staking vs. Mining: Similarities and Differences
There are some similarities between staking and mining. This section will consider some of the similarities between both concepts. Additionally, we will review their differences.
Crypto mining and staking play a crucial role in ensuring the operation of each blockchain network. Both concepts help to maintain, improve, and secure their respective blockchain networks.
Both concepts lead to the creation of new coins on their networks.
Stakers and miners earn rewards for maintaining and securing their respective blockchains.
Mining is associated with a Proof-of-work consensus mechanism, while crypto staking is attached to Proof-of-stake blockchain networks.
Mining requires specialized equipment that consumes enormous amounts of energy. Staking does not have high energy demands or require special computers for maintaining a blockchain.
The first crypto miner to solve the cryptographic puzzles adds a new block to the network. For staking, nodes add new blocks by locking their native coins into a smart contract.
To earn rewards, miners must solve cryptographic puzzles. In contrast, nodes simply need to lock their cryptocurrencies to validate transactions on the blockchain. Nodes will earn rewards based on the amount of their staked tokens.
Mining requires high computational power. Hence the need for specialized mining equipment. In contrast, nodes that commit a significant number of crypto assets to the staking pool have a higher chance of becoming blockchain validators.
See also: Yield Farming vs. Staking.
Crypto mining and staking are crucial to the operation of blockchain networks. Apart from maintaining and verifying transactions, both concepts also help to secure blockchains. When compared side by side, staking offers a less complicated means for investors to earn rewards.
Although popular assets like Bitcoin rely on crypto mining to operate their Proof-of-Work blockchain networks, many other top-rated crypto projects use crypto staking to protect their networks. Users can stake their crypto assets on many crypto platforms, like exchanges and DeFi protocols.