Staking is now a popular in crypto, as an alternative to mining and proof of work mining is decreasing in dominance. For the end user, staking involves merely holding a given minimum amount of coins in the wallet and unlocking it for staking and letting the wallet online 24/7 to work to earn rewards.
But it is more than that: when you stake coins, you are letting the wallet be involved in the confirmation and verification of transactions in the network and the generation of new blocks which are created and added in to the previous chains. But just like in mining where the person who finds the right hash that completes the block to be added to the previous chain, in staking, the reward of verifying and validating transactions is shared among stakers and the reward to a single staker is equivalent to the amount of coins the staker is holding in his staking wallet. For instance, if the amount of coins staked in a wallet is 5% of the total in the network, the node can mine 5% of transactions.
Just to mention, there are variations within Proof of Stake algorithms and each of these variations has a different arrangement of governance, coin age, and reward distribution and payment mechanisms. Most of these variations require that the coins be held for a given amount of time before they can start earning rewards. This is what is referred to as coin age. Rewards also depends on the number of people staking as much as they do on amount of coins staked. Most of the variations also allow multisig addresses to stake.
For the end user, there are more things to do in mining than in staking, sometimes even the benefits can be higher for staking than mining and sometimes the costs and expenses make things worse than staking. Differentiate proof of work (PoW) mining (referred to as mining in this article) and proof of stake (PoS) minting or staking because the coins in a PoS are pre-mined.
For those who are not very much familiar with proof of work crypto mining, please start here: basically the process involves you buying a CPU, GPU or ASIC, installing relevant software for the coin you want to mine and may be connecting your miner to a pool to combine mining effort with others and share rewards.
Both mining and staking involves confirming or validation of transactions that are going through or being executed within the given blockchain network. Plus what I can say for now is that each requires some investment because the different PoS coins will require you to hold some coins before you can stake plus maintain network and whether you are using GPU or CPU, there will be some initial costs and it is almost always the case these days that you are going to need to connect to a mining pool to earn anything substantial.
In some cases, and for some people, mining is not done to earn income neither is the case with staking. Other factors as found out in a previous report comes into play such as need to support a network one is part of. But other than that, there are some advantages notable for staking over mining, which we want to discuss for today.
Below are some advantages that may make staking a more desirable and attractive option than crypto mining.
1. Removes need for buying high-end computer hardware
When an e-wallet is staking bound coins, it is guaranteed a fixed percentage of transactions to confirm or validate and win rewards no matter its processing power. There is no need to buy a high-end machine. In comparison, mining in most cases requires investing in a high-end machine and almost always connecting to mining pool in order to earn substantial amount of coins. Subscribing to a mining pool will need you to pay some money monthly or yearly depending on the contract, in order to continue mining. The latter -- or need to connect to a mining pool -- is almost a requirement for a miner these days even when a crypto can be mined with a PC.
Do you need a powerful computer to stake? With staking, almost any PC and even when you need to stake multiple coins you will not necessarily require a very power machine. Even when you need to stake multiple coins on the same machine, you may need to do some mere improvement to the RAM and storage. Staking can be done even on a Raspberry or via hardware wallet like Ledger Nano S for cold staking.
This fact of not requiring a high-end computer hardware has the benefit of lowering the cost of entry or initial cost.
Of course, in both cases, a user may need to keep connected to internet as to keep connected to the mining pool or synced with blockchain in mining, or in the case of staking, to keep the wallet online to be able verify transactions. Therefore, there will be bandwidth costs, sometimes negligible.
Machine maintenance issues will mostly likely increase when mining than when staking. Your computer is heavily loaded and overheating issues may require extra attention such as adding in fans or cooling, and/or cleaning the extra mounted fan etc.
2. Lesser factors determine value of staked coins; no ASICs or expensive hardware to be hit with depreciation
Profitability in staking, like in mining, is also affected by fluctuations in the currency prices just like mining. However, in comparison, mining tends to be affected by many more factors; the cost of electricity for instance, power consumption, which can be expected to be huge for a GPU miner that's mining on a 24-hr basis, as well as the price and availability of the mining hardware. It is also dependent on the network difficulty, which is a factor of the number of people in the network. Difficulty increases with increase in the amount of people mining in the network. Even when calculating the actual coin to mine, all these plus other factors such as the more efficient software to mine, will come into play.
In some cases, the cost of mining makes it unfriendly for mining at all if the market prices for that crypto are very low.
Coming further down to it, there are more things to worry about when mining than when staking: for instance, the GPU or ASIC may need to be replaced faster.
3. Less energy consumption
The biggest disadvantages about mining cryptocurrency in PoW is the large energy consumption requirement with entry of ASICs which are more specialized mining machines. The other option which is lesser energy intensive is GPU, and although some coins can be mined with PCs, there is still higher energy consumption in PoW than in PoS. First of all the ASICs and GPUs are more expensive. Even where miners are connected to mining pools, it does not mean there are no more expensive hardware to buy or maintenance to do to increase profitability. The disadvantage of increasing power consumption is increasing bills paid for electricity.
One huge advantage of Proof of Stake coins is that they utilize less amount of energy in the verification of transactions. That's because PoS utilizes a completely different method of confirming transaction: in PoW mining, miners are competing mathematically to solve math and find the hash that is added to the block to be mined and added to the previous chain. The exercise inside the algorithm involves trial and error where many combinations of hashes will be tried in thousands times and at high frequency, hence increasing power consumption. Plus the extra devices such as fans installed to cool the device in danger of overheating, increase power consumption. In Proof of Stake, as mentioned in the beginning of the article, the method of verification involves choosing a verifier or validator based on amount of coins they are staking so no math to solve.
4. Greener and environmental friendly
Proof of Stake is more environmentally friendly given that it keeps energy consumption lower plus minimizes usage of a large number of accompanying equipment such as fans, which only act to increase the amount of energy consumption.
5. Better security
PoS coins are lesser prone to hacking and also the threat of 51% attack is lesser than in PoW coins.
6. Better predictability and guarantee of rewards and more financial benefits
The income is guaranteed for stakers in a Proof of Stake network as it depends on the amount of coins staked unlike in PoW mining where the coins are randomly rewarded to the most powerful computer systems or hash-power. This is in addition to the fact that the coins in the wallet can be withdrawn at any time. Besides it is sort of a method of holding coins without much hussles. In some cases, although mining can carry more profits than staking, the profits may reduce significantly if costs are taken into account. And in other cases, the income in staking is higher.
This financial comparison, however, depends entirely on which crypto you are intending to stake since that determines the reward distribution mechanism and reward sharing, which varies from crypto network to another; and it determines the number of coins in the reward to be given and the number of people sharing the rewards depending on how popular the network is. It also depends on the number of coins you intend to stake, which defines your share from the total of all the coins minted. It also depends on network difficulty in case of Proof of Work mining.
The above benefits of staking do not mean staking does not carry its risks. Some of the risks applying to crypto mining also applies to crypto staking. For instance, the coins staked can lose value due to decrease in crypto market price. In some cases, the amount earned may not be enough to cover price depreciation during a bearish run.