⁉️What Is Crypto Staking?
Last updated
Last updated
Staking is an activity where a user locks or holds his funds in a cryptocurrency wallet to participate in maintaining the operations of a proof-of-stake (PoS)-based blockchain system. It is similar to crypto mining in the sense that it helps a network achieve consensus while rewarding users who participate.
In staking, the right to validate transactions is baked into how many coins are “locked” inside a wallet. However, just like mining on a PoW platform, stakers are incentivized to find a new block or add a transaction on a blockchain. Apart from incentives, PoS blockchain platforms are scalable and have high transaction speeds.
The proof-of-stake (PoS) consensus mechanism utilizes validators to verify transactions and maintain consensus in a blockchain network. The network incentivizes users to run validator nodes and stake their coins, which helps secure the network in return for earning interest on their stake.
There are some variations as to how PoS systems work depending on which protocol, but generally, the algorithm chooses blocks at random and assigns them to a validator node for review. The validator then checks the legitimacy of the transactions. If everything is accurate, the validator adds the block to the ledger and receives the block rewards and transaction fees. However, if a validator adds a block with the wrong data, its staked holdings will be penalized.
PoS is known for its superior energy efficiency, lower barriers to entry, and better scalability to PoW. In fact, the Ethereum PoS model also offers stronger support for shard chains, one of the most promising scaling solutions to date.
The main difference between mining and staking is the underlying blockchain consensus mechanism used to validate transactions. Mining is used for Proof-of-Work (PoW), most notably in BTC. Meanwhile, staking is mainly used for Proof-of-Stake (PoS), such as in Ethereum 2.0 – Ethereum’s shift from PoW to PoS consensus mechanism.
The following are some of the differences between mining and staking:
Mining – miners solve complicated mathematical puzzles vs Staking – nodes in the network engage in validating new blocks by locking up their funds.
Mining – the first miner to solve the mathematical puzzle adds a block to the blockchain vs Staking – nodes validate a new block by locking up native tokens in a smart contract.
Mining – requires specialised mining hardware (e.g. GPU) which consumes a lot of energy vs Staking – widely considered to be more environmentally sustainable, saving over 99% of energy consumption according to Vitalik Buterin.
Mining – more computational power (work), higher chance of solving the block and getting rewarded vs Staking – more native tokens staked (stored value), more likely to get selected to validate new blocks.
