Guest Contribution written by: Oluwatojumi Oludayo
What is Mining?
Mining is an accumulation process which involves high computational power which is very energy-intensive and leads to high electricity costs. Without much emphasis, the initial investment or capital in the mining equipment is also relatively quite expensive.
It requires technical know-how as well as computational power to solve the algorithmic puzzles involved in blockchain networks. The mining process creates new coins and then releases them into the blockchain (public ledger). It uses an algorithm called Proof of Work (PoW) mining is performed by high-powered computers that solve complex computational mathematical problems.
What is staking?
Staking on the other hand is seen as an alternative to mining but in a slightly different version. It uses the Proof of Stake (POS) algorithm which is the basis of many new Cryptocurrency. Staking involves the purchase of crypto coins and holding them in a wallet for a particular period.
Staking can be seen as making fixed deposits in our local banks using fiat currency systems and receiving a percentage of interest on the money fixed at the end of the contract. While Staking you are rewarded with a defined interest at the end of the period as stipulated in the contract, then the 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.
Proof of work
The proof of work is known as a consensus mechanism designed to create an agreement among a group of people unfamiliar with one another on the basis of who gets to update the ledger. It is very resource intensive despite being a reliable solution towards the management of a decentralized ledger.
Proof of Stake
The proof of Stake is an alternative consensus mechanism designed to cover up for the flaws in proof of work which is electricity consumption and resource intensiveness which puts it at a disadvantage. Users can now stake actual coins rather than committing electricity to run several computers and try to win the contest in solving complex computational mathematical problems.
The different types of staking
There are two categories in which staking is divided into namely; Proof of Stake(PoS) and DPoS Delegated Proof of Stake(DPoS).
The PoS functions by withholding the stakeholder’s or investor’s coins for a period so all transactions made can be properly verified.
Whereas, Delegated proof of stake as the name implies involves the election of a representative or delegate by stakeholders to become a validator.
Below are the benefits attached to Staking:
- Transactional fees are earned when an application is made to become a DPoS.
- Getting a percentage of tokens as rewards for staking.
- Holding or reducing transaction fees for staking on exchanges.
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