Ethereum merge date being closer than ever has got investors speculating about the dramatic impact on Ethereum's functioning as a whole and how the Ethereum staking mechanism will work under the PoS consensus.
It is now important to discuss the difference between crypto mining and staking and their impacts on a grand scale.
Mining and staking are the two most common methods for validating transactions and securing the blockchain, but what separates the two?
Here’s a look at the main differences between mining and staking.
Crypto Mining vs Staking Differences
When it comes to mining vs staking, the differences stem from the algorithms each use to add new blocks.
Crypto mining comes from its proof-of-work mechanism. In this decentralised system, the ‘work’ is mining. Miners will compete to solve a complex puzzle for the hash, which changes depending on the difficulty of the network. This helps secure the network and stop bad actors from hijacking the network, alongside achieving consensus for the decentralised network.
Crypto staking has similar objectives to mining in terms of validating transactions and achieving consensus. Its proof-of-stake mechanism was first used as an alternative to proof-of-work.
The difference comes from the means to these ends.
In contrast, staking requires cryptocurrency holders to ‘stake’ their coins. Users will lock their coins in for a fixed period where they cannot withdraw their assets, making them illiquid. For instance, while initiating crypto.com staking, users will have to lock their crypto with the exchange to earn interest on it for the prescribed duration.
The network will then choose validators for each block, depending on a node’s size and time staked. Compared to crypto mining, this requires a significantly lower amount of energy.
Both mining and staking have various advantages and disadvantages, too. Mining remains a reputable method for successful cryptocurrencies, given its use in Ethereum and bitcoin for many years. However, the hardware requirements are often costly and energy-inefficient.
Staking makes it easier for holders to earn returns on their assets, without garnering criticism for its environmental impact. Many cryptocurrency exchanges, such as Binance or Coinbase, even let users stake directly from their platforms. Some holders, however, may feel uneasy about locking their assets into staking for a fixed period, especially in periods of volatility.
Read More: How Long Does It Take To Mine 1 Bitcoin?
Crypto Mining vs Staking Profits and Rewards
Given the plethora of variables between cryptocurrencies that use proof-of-work and proof-of-stake, claiming one of mining or staking is more profitable is quite difficult.
This is especially true given the prevalence of pooling in both systems. Miners and stakers can contribute hash power or assets to their respective ‘pools’, to earn smaller, but more consistent, proportions of block rewards.
As for the variables, mining may have higher rewards, but this may be offset by the hardware start-up costs and electricity required for the process. Staking rewards will also vary depending on how long you ‘lock’ your assets away for, with high volatility potentially hitting these profits.
Both mining and staking reward their users with the network’s native cryptocurrency. The block rewards depend on the cryptocurrency and its tokenomics.
Read More: How Long Does It Take To Mine 1 Ethereum?
Crypto Mining Coins vs Staking Coins
The majority of the total cryptocurrency market is dominated by coins that use mining, largely due to the dominance of bitcoin and Ethereum. These two coins make up 41.89% and 17.05% of the total market cap, respectively. Dogecoin also uses crypto mining.
However, Ethereum will soon transfer over to a proof-of-stake system with Ethereum 2.0. Ethereum co-founder Vitalik Buterin even recently suggested Dogecoin should transfer to proof-of-stake, too. The merge date has already been announced with users anticipating changes in its ethereum gas prices after the merge.
The likes of BNB, Solana, Cardano and Polkadot are also among the largest cryptocurrencies that use staking to secure their networks.
[Featured Photo by Executium via Unsplash]
For more articles like this, take a look at our Planet Crypto page.