Cryptocurrency Mining Vs. Staking: What’s The Difference?

Cryptocurrency mining gets a lot of bad press over its energy consumption despite moves toward green crypto mining, but its energy-efficient cousin “staking” gets little to no attention even though it is a better and more accessible design for a blockchain. The differences between these two algorithms are massive, but most people don’t understand why crypto mining is needed in the first place, or how staking corrects its issues. With Ethereum’s upcoming upgrade to Proof of Stake imminent, it helps to understand why this is important.

Blockchains are primarily designed for decentralization, and are run by hundreds of computers around the world that work together to process transactions and store users’ account data and history. To accomplish this, computers in the network need to work together to process valid transactions while protecting against fraudulent transactions. The main problem with digital currency that was solved by cryptocurrency is preventing users from spending their money twice (“double-spending“) without relying on a centralized organization (like a bank) to control the data and validate transactions. The mysterious creator of Bitcoin, Satoshi Nakamoto, presented the first solution to this problem in the Bitcoin Whitepaper.

Related: What Is Digital Currency, And How Does It Work?

Bitcoin uses an algorithm called “Proof of Work” (PoW) to validate transactions and protect the network from malicious users, which CoinDesk covers in greater detail. This approach is commonly called “mining,” and crypto miners typically use GPUs or specialized ASIC miners for it. PoW involves using computing power to guess solutions to a difficult cryptography problem during the creation of each block of data, and for anyone to submit bad blocks they would have to control more than half of the energy being used for mining across the whole network. Even then, they would only gain limited abilities, such as double-spending and reversing transactions, but they can’t alter the blockchain’s history prior to the attack, and due to the energy cost of PoW this attack would present an incredible economic expense on their part. PoW ensures that malicious actions are economically unfeasible to attempt, and that is why Bitcoin uses it.

What About Proof Of Stake?

There is a second-generation solution to PoW’s energy-intensive nightmare, and that is “Proof of Stake” (PoS). In PoS, a security deposit is combined with economic incentives to make malicious activity expensive and absurd to attempt, rather than using computational power and cryptographic puzzles to deter attackers. There are several variations of PoS, but it basically requires each “validator” to put up an amount of cryptocurrency as collateral (their “stake“) in order to validate transactions and earn block rewards, and the more they put up the more rewards they earn. If they choose to validate a block incorrectly/maliciously then they are punished by losing some or all of their stake, but if they do their job correctly then they receive the block reward instead.

Proof of Stake, though technically experimental, is accepted as being a superior solution for blockchain consensus, as it relies on economic incentives to secure the network rather than computational energy (or “work“), and many modern PoS blockchains allow anyone to stake their crypto and earn rewards, no matter how small their stake. Instead of investing millions in real estate, a warehouse, mining rigs, and gigawatts of electricity like in PoW, a PoS validator only needs to buy some cryptocurrency, withdraw it to their wallet, and stake it to begin validating transactions and earning rewards. CoinCodex has a good list of PoS blockchains, such as Cardano (ADA), Solana (SOL), Polkadot (DOT), and Avalanche (AVAX). Ethereum is also currently transitioning to PoS from PoW, which will fix the environmental harm of its NFTs and set the foundation for further development.

PoW was the first design for creating a decentralized electronic cash system, and while highly effective it is also energy-intense and prone to centralization of crypto mining operations. Its successor, PoS, is a powerful solution to those issues as it replaces electrical energy with economic investment, and opens up the ability to earn passive income from cryptocurrency to everyone, though its long-term drawbacks and potential for centralization are still not fully understood.

Source: CoinDesk, CoinCodex