When Bitcoin first introduced cryptocurrencies to the world there were basically three ways to get some. You could either buy Bitcoin, someone would have to give you some or you could mine it. The mining process creates new coins and then releases them into the blockchain (public ledger). The rewards from mining involve the new coins as well as the transaction fees from the transactions accumulated in the block. The proof of work algorithm used in many cryptocurrencies required mining for new blocks to be created.
With the introduction of the proof of stake algorithm in more and more cryptocurrencies, staking your digital assets could be the mining of the future. We will try to draw out some of the similarities and differences between staking and mining in this article.
What exactly is Staking and Mining?
Using the Proof of Stake (PoS) algorithm that is the basis of many new cryptocurrencies, staking involves the purchase of cryptocoins and holding them in a wallet for a particular period of time. This is akin to a fixed deposit in the non-digital currency sphere. Similar to a fixed deposit which rewards you with a defined interest at the end of the period as stipulated in the contract, Proof of stake also rewards you with additional coins. By holding coins in your wallet, you are rewarded for supporting the network. Therefore, your coins will increase in number depending on how long you hold them in the wallet.
Mining requires technical know-how as well as computational power so as to solve the algorithmic puzzles involved in blockchain networks. There is the possibility of mining solo or joining a pool to make mining easier and more effective.
In fact, while many people are aware of mining and the hardware related to it, only a few people understand staking and its accompanying advantages.
The reward rates are actually computed based on the duration or maturity period selected to “fix” the coins in the wallet. Although each coin has different rates and rules, the mechanism remains the same.
Thus, the longer you hold your coins in your wallet, the higher is the reward. For example:
- 3 months: +20%
- 6 months: +50%
- 12 months: +100%
Below, you will see some picks of the higher-stake coins and the links to their wallets.
Note: There is a reward cap annually in most PoS coins, and the annual rewards could change. Please conduct your own research to validate these numbers before making any investment in staking a cryptocurrency. Reinvestment is usually allowed but only at the expiry of the selected term.
The Advantages of Staking
- You don’t have to spend money buying a machine, like ASICS or high-end GPUs used in mining.
- Instead of buying the hardware for mining, you purchase coins and lock them. This will lead to balance and value growth.
- The amount of coins grows as the rewards increase and once prices escalate; your wallet value goes up.
- Staking uses little resources when compared to mining or PoW. This means less electricity consumption and no need for extra machines to participate in staking.
- Given the holder of the coins is incentivized to keep them rather than selling them, there will be stability in the price of coins.
- Staking doesn’t require the technical know-how to participate.
The Disadvantages of Staking
However, once you stake a coin, you automatically lock that coin for a particular period of time and therefore, you cannot sell it.
But in conclusion, PoS strategy is saving the money you would have to spend on mining hardware or buying high-stake crypto-coins from a coin exchange, and committing them to your personal wallet, where you can watch their balance grow.