Staking and mining are two terms often seen in the cryptocurrency world. But have you ever wondered what’s the difference between staking and mining? It’s quite hard to delineate, especially since these two consensus mechanisms almost work identically in blockchains.
But today, we’ll focus on differentiating cryptocurrency staking and mining. We’ll take a good look at the two algorithms, review the main difference between both, assess their pros and cons, and check the reasons why choose one over the other.
What is Mining?
Mining is the process of adding new blocks to the public blockchain ledger after verifying crypto transactions. The algorithmic process used in mining paves the way for minting fresh cryptocurrency coins. The new coins are given to successful miners as a reward for their computational power. The consensus mechanism behind mining is called Proof of Work (PoW).
When a crypto transaction is made, it is clumped together in a “block” and added to the public blockchain ledger. A node (computer connecting to the crypto network) is then utilized to maintain verifiable records of these blocks.
Now, mining happens when a node receives a transaction, verifies its validity, and adds it to the blockchain. A transaction is repeatedly hashed and structured until a block hash appears. Miners continue hashing using different numbers (nonce) until a valid block hash appears. This valid block hash is then verified by other nodes and finally added to the blockchain.
Mining is a resource-intensive process that takes up lots of computing power. New crypto-coins are created to reward the node who succeeded in coming up with a valid block hash.
What is Staking?
Staking is the process of locking up a set number of crypto assets to support the operation and security of a blockchain. It uses the Proof of Stake (PoS) consensus mechanism to verify blockchain transactions and keep the network secure.
Instead of solving complex hash challenges, staking’s consensus mechanism randomly assigns a coin to validate the next block of transactions.
A person can only validate transactions equal to the number of coins he staked. Hence, there’s a higher chance of being assigned the validation work when a person has a high number of staked coins in a network. For example, you staked 10% of the total coins in a network, which gives you the right to validate 10% of transactions for new blocks.
Main Differences Between Staking and Mining
What is the main difference between both blockchain activities? It’s the computational power (energy) that they both use to validate transactions and mint new crypto coins. Mining’s continuous hashing activities take up a lot of energy and resources. Meanwhile, staking takes up fewer resources to operate. Another key factor is security due to the fact that the decision making power is spread out more stakeholders than with mining.
Other differences include the following:
- Staking also doesn’t require expensive hardware, unlike the set-ups used in mining new coins.
- ASIC and other hardware used in mining may depreciate, whereas asset values staked through PoS generally do not depreciate in time.
- Mining assigns rewards randomly (only if you’re using high-level computing systems); staking relies on 3 variants (staking age, randomization and node’s wealth) to select a node and offers more predictable rewards especially if you have large stakes of a particular coin.
Limitations to Mining
Here are the possible disadvantages and limitations to mining:
- Electricity rates rise due to the need for powerful processors in solving hash puzzles
- Higher electricity rates and hardware costs may not compensate for the value of bitcoins you mined
- The risk of a successful majority attack/51% attack doesn’t disappear even if mining provides security for the blockchain network (especially true for smaller altcoins)
- Mining may become a non-profitable activity if crypto coins value plunges down
- Rewards are randomly assigned only to those nodes with high computational power
Limitations to Staking
Meanwhile, there are also disadvantages and limitations to staking:
- You cannot use your locked-up coins to trade, invest, or do any kind of transaction
- Some platforms only allow a few kinds of crypto coins to be staked
- Not all staking platforms offer services to different countries or US states
- Joining a staking pool lessens your profits from staking
Why Choose One Over the Other?
You can mine cryptocurrencies if you have enough hardware and electrical resources. Make sure that your operating costs won’t exceed your projected mining profits, or else you’ll lose your assets instead of gaining any. Meanwhile, you can choose to stake instead if you have large reserves of coins in your wallet.
Mining and staking are two protocols that can both validate cryptocurrency transactions and add more blocks to the blockchain in different ways. But they’re both profitable for crypto enthusiasts – it’s a matter of choosing which one is most feasible for you.