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24.10.2018

What is more rewarding: mining or staking?

There are three basic methods for acquiring crypto-coins: you can purchase coins using fiat currency, someone can give you coins, or you could mine for new coins using a proof of work algorithm. Many cryptocurrencies rely on the proof of work (PoW) algorithm, as well as the miners that drive it, to generate new blocks and verify transactions.

As incentive for doing so, miners are rewarded with freshly minted crypto coins. However, as blockchain technology evolves, it has become increasingly common for cryptocurrencies to make use of a fourth method: a proof of stake (PoS) algorithm. Staking digital assets through the proof of stake algorithm is a novel way to access crypto coins and create capital using the blockchain. Under this system, foragers (the equivalent to miners) are randomly selected to verify transactions and build blocks based on their stake in a currency.

While proof of stake technology is rather exciting, it differs from mining in many ways. Therefore, if you are looking to make money off of cryptocurrency, it can be hard to know which method to use. By understanding the basics of both mining and staking, those interested in cryptocurrency can make a more informed decision about which method is more rewarding.

What is proof of work?

Within the blockchain networks, miners play an important role (read more: How to start mining?). In order for a new block to be added to the chain, a complex mathematical puzzle must be solved. This is known as proof of work. Miners are responsible for solving these complex puzzles and in exchange for this service are rewarded with new crypto coins. While mining may sound lucrative, it comes with several disadvantages. Firstly, mining is very resource intensive. Specifically, it can be very costly to purchase all the necessary mining equipment and while mining equipment has come down in price, the cost of electricity is often a barrier for those interested in mining. Because of the start-up costs associated with mining, many people are looking for alternative ways to make money from cryptocurrencies.

What is staking?

PoS is similar to PoW in the sense that it is still based on a consensus drive algorithm. That is, the goal is still to achieve distributed consensus by incentivising users to validate other peoples’ transactions while maintaining the system’s integrity. Unlike PoW, which requires users to validate transactions and create new blocks by solving mathematical problems, a PoS system requires users to prove ownership or their stake in a certain number of cryptocurrency units.

Users choose to stake a portion of their coins so that they have a chance of being selected to validate block transactions. If selected, users are rewarded with new coins. Depending on a user’s wealth (or in other words number of coins they stake), the algorithm randomly assigns an existing coin holder to verify block transactions. What this means is that those who already hold coins are responsible for verifying transactions on the blockchain. Therefore, individuals who hold more coins have more opportunity to a be selected to verify a transaction and as a result, a greater chance of earning a reward.

In order to use the PoS algorithm, coin owners must be willing to hold their cryptocurrency in a digital wallet for an extended period of time. This process can be likened to leaving money in a long-term investment account as users must be willing to go for a long period of time without accessing the money, but in turn, are financially rewarded for doing so. Essentially, in exchange for staking coins, individuals can earn what can be likened to interest for holding their coins over a long period of time.

Which is more rewarding?

Staking has become an increasingly popular method for harvesting crypto coins because the barrier to entry is relatively low. Unlike mining, it is not necessary to purchase expensive, crypto-specific equipment. Further, staking requires relatively less energy use and is therefore more economically and environmentally sustainable than mining.

However, proponents of PoW argue that PoS incentivizes users to stake their coins for long periods of time, thereby removing the coins from circulation and effectively making them inactive. If coins are held up in stakes, the overall ability of a coin to function as a currency is diminished. It is for this reason that many continue to mine for new coins, which can still be very rewarding. It is important to note however that once a coin is fully mined, block rewards will cease to exist. At this point, PoS may be the only option for incentivising crypto coin holders to verify transactions and maintain the blockchain.

While most crypto coins rely on one algorithmic system or the other, we may see more hybrid PoS-PoW systems in the future. For now, both methods are useful for verifying blockchain transactions while still providing rewards to users. By understanding how each method works and the costs associated with each, those interested in using the blockchain to generate an income can make a more informed decision.

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