When Bitcoin first introduced cryptocurrencies to the world there were three-way to earn them;
You have to buy Bitcoins
either someone would have to give you
or you could Mine it.
Mining is generally known as proof of work POW by the name it is quite clear that Mining is about to proof your work to earn Bitcoin, Mining is a proof of work of blockchain where new Bitcoins are generated through an energy-intensive process of solving mathematical tasks. Mining was the most common method to earn Bitcoin but now earning cryptocurrencies is not only about Mining there is another way of earning cryptocurrencies which are Staking, Staking is an alternative way to earn Bitcoins instead of Mining, Staking allows users to put their coins at stake instead of relying on computer power and solving difficult mathematical tasks.
Table of Contents
1 What is Staking?
1.1 Proof of stake Explained.
1.2 What is the Mechanism of Proof of Stake? or How it Works?
1.3 Reward Rates.
2 Different Models of Staking and Their Working Mechanism
2.1 Staking Etherium
2.1.1 How much Ether is rewarded?
2.2 Staking Pools and Other Different Solutions.
2.2.1. What is Staking Exchanges?
2.2.2. What is Staking Pools?
3. What are the Advantages and Disadvantages Staking?
3.1. The Advantages of Staking.
3.2. The Disadvantages of Staking.
4. What is Mining?
4.1. Brief Description of Mining.
5. Staking VS Mining: The Comparison.
6. Proof of Work VS Proof of Stake: The Conclusion
1. What is Staking?
"Staking is the process that involves the buying and holding of cryptocurrency in your wallet for a given period of time this is according to the proof of stake algorithm which many new cryptocurrencies consider to be the basis".
Staking is generally known as proof of stake (POS)
Proof of Stake actually means that instead of committing electricity to run the computer to solve
1.1. Proof of Stake Explained
At a very fundamental level, "staking" means locking your crypto assets in a proof-of-stake blockchain for a given period of time. These locked assets will be used to achieve consensus, which is required to secure the network and ensure the validity of every new transaction to be written to the blockchain. Those who keep their coins in a Proof of stake blockchain are usually called "validators." For locking their assets and providing services to the blockchain, validators are rewarded with new coins from the network. Validators are rewarded for supporting the network by holding the coins in their wallet, therefore, their coins are increases depending upon how long they kept these coins in their wallet. Validators are required to provide better stable and secure services for a blockchain to perform efficiently.
1.2. What is the Mechanism of Proof of Stake? or How it Works?
Proof of Stake solves problems in separate ways, instead of solving puzzles in proof of work the general (validator) puts some of his valuable coins. Basically, the validator locks a certain amount of funds on an everyday computer that is connected to the network. In technical terms, the computer used for this purpose called a Node and the lock funds are known as Stake. Once the validator stake is in the place he takes part in the contest of which node will get to forge the next block, stakers forge block instead of mining them.
The winner of the contest is chosen by taking three factors in mind:
How much money is being staked?
How long have the coins been staked for?
Randomization (so that no single entity will gain a monopoly over forging)
1.3. Reward Rates
The reward rates are actiually computed based on the duration or maturity period selected to “fix” the coins in the wallet. Although each coin has different rates and rules, the mechanism remains the same.
Thus, the longer you hold your coins in your wallet, the higher is the reward. For example:
3 months: +20%
6 months: +50%
12 months: +100%
Below, you will see some picks of the higher-stake coins and the links to their wallets.
Coin
Annual Interest
Exchange
200%
100%
750%
500%
1000%
500%
200%
2014%
50%
33%
+60%
1618%
50%
2 Different Models of Staking and Their Working Mechanism
2.1. Staking Etherium
2.2. Staking Pools and Other Different Solutions
2.1. Staking Etherium
It is important to know that various coins are using for staking such as Tezos, Cosmos, and Cardano and each of the coin has different rules that how to calculate and distribute rewards.
Till 2020, Ethereum's blockchain was purely based on proof of work; in December of 2020 a new blockchain named "Beacon chain" was introduced that uses proof of stake: this is also called Ethereum 2.0 and it runs alongside the original Ethereum blockchain, Ethereum 1.0.
if you want to join as a validator for Ethereum 2.0 you will need to lock up 32 Ether as collateral, which in turn will earn you staking rewards. There's no way to lock up more than 32 Ether on a single node(computer), so if you want to increase your reward you can just need to set up multiple nodes with 32 Ether each node.
2.1.1. How much Ether is rewarded?
In Ethereum 2.0 every validator that participates in the forging of a block gets a percentage of the newly minted Ether when it's created. If the number of validators is more, the smaller the proportion of the reward will be.
For example,
If 1 million ETH is staked, the max annual reward for each staker could reach 18.10%, however, if 3 million Ether are staked, that annual reward rate would drop to 10.45%. You can think of the total amount of new Ether awarded as a pie with a fixed size, and the more validators you have that want a piece of that pie – the smaller each slice will be.
2.2 Staking Pools and Other Solutions
These alternatives allow for the everyday person to take part in staking, stake ETH and earn staking rewards – without the considerable effort or risk of running your own node.
2.2.1. What is Staking Exchanges?
The easiest way to stake for a non-tech savvy person would be to use staking services supplied by exchanges. Certain exchanges allow you to stake your coins through their validators even if you only have a small amount for a fee.
Evaluation of staking rewards by exchanges
Evaluation of Staking Rewards by Exchanges based on the Estimated Annualized Rate of Returns.
2.2.2. What is Staking Pools?
This is another option to join a staking pool. Just like mining pools, staking pools are groups of validators joined together to get a better chance at forging the next block. Staking pools are also allow validator to deposit less than the minimum staking amount since all of the funds are pooled together.
If validator decide to go with a staking pool it's important to research certain aspects of the pool:
Like;
Reliability of its validators
Pool fees
Customer support
Pool size
User reviews
Whether or not you are required to give up your private keys to the pool.
3. What are the Advantages and Disadvantages Staking?
3.1 The Advantages of Staking
In staking the validator don’t need to spend money buying a machine, like ASICS or high-end GPUs used in mining.
Instead of buying the hardware for mining, validator purchase coins and lock them. This will lead to balance and value growth.
The amount of coins grows as the rewards increase and once prices escalate; validator wallet value goes up.
Staking uses little resources when compared to mining or PoW. This means less electricity consumption and hence there is no need for extra machines to participate in staking.
Given the holder of the coins is incentivized to keep them rather than selling them, so there will be stability in the price of coins.
For validators Staking doesn’t require the technical know-how to participate.
3.2. The Disadvantages of Staking
· In staking once validator stake a coin, he automatically lock that coin for a particular period of time and therefore, he cannot sell it.
· But in conclusion, PoS strategy is saving the money validator would have to spend on mining hardware or buying high-stake crypto-coins from a coin exchange, and committing them to his personal wallet, where he can watch their balance grow.
4.What is Mining?
"Mining requires technical know-how as well as computational power and uses an algorithm called Proof of Work (PoW) mining is performed by high-powered computers that solve complex computational math problems - when computers solve these complex math problems on the network, they produce new coins".
4.1. Brief description of Mining
With mining, the more powerful a computer validator have, the more guesses it can make in a second, increasing validator chances of winning the contest. Thanks to the laws of math and probability, it is highly unlikely that any single person or group will gain a monopoly over updating the ledger, and that's how decentralization is maintained. Mining's technical term is "proof of work" – because by displaying the right solution, miners prove that they've put in a lot of work, as there is no other way to get to the solution aside from using computing power to constantly work at trying to guess it.
5. Staking VS Mining: The Comparison
Mining requires high computational power which is very energy-intensive and leads to high electricity costs. Not to say the initial investment in the mining equipment is also relatively expensive. On the other hand, Staking does not require those costs. Instead, an individual needs to stake some amount of coins as collateral for a determined time.
6. Proof of Work VS Proof of Stake: The Conclusion
Proof of Stake( POS) is an exciting and a new concept that allows everyday users to participate in securing a certain blockchain and earning passive rewards. With the transition of Ethereum to POS this consensus mechanism is gaining massive exposure, but it’s still early to tell how successful this transition will be.
Proof of Work is the current way how to mine Ethereum, Bitcoin, Dash, and some other cryptocurrencies. However, you should now be fully aware of the many issues associated with Proof of Work. This includes the amount of electricity it requires, the centralization of power that mining pools now have, and the threats of a 51% attack.
We have also listed some of the solutions that the Proof of Stake model brings to the cryptocurrency industry. However, as blockchain technology becomes more advanced, lots of other consensus algorithms are hitting the market, all with their pros and cons.
Now, if you managed to mine yourself a good amount of cryptocurrencies, you should make sure to keep them in secure wallets. Ledger Nano S and Trezor Model T are among the most recommended options. Also, if you decide to exchange them to other coins, choose reliable crypto exchanges, such as Coinbase and Binance.
quide?... oh... you meant guide...