Staking is now popular in crypto as an alternative to mining as Proof-of-Work networks continue to decrease in their dominance of the space. 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.
Still, it's more than that. When you stake your 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 into the previous chains. But just unlike in mining where the person who finds the right hash completes the next block, in staking, the reward of verifying and validating transactions is shared amongst stakers. With this, it's necessary to note that the reward to a single staker is equivalent to the number 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, coinage, 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 coinage. Rewards also depend on the number of people staking as much as they do on the number of coins staked. Most of the variations also allow multisig addresses to stake.
For the end-user, there are more things to think about when mining than when staking. Sometimes even the benefits can be higher for staking than for mining and sometimes the costs and expenses can make things worse than when staking. Proof of work (PoW) mining (referred to as mining in this article) and Proof of Stake (PoS) minting or staking are different because the coins in a PoS are pre-mined.
For those who are not very much familiar with Proof of Work mining, please start here. In a basic sense, the process involves you buying a CPU, GPU or ASIC, installing relevant software for the coin you want to mine and maybe connecting your miner to a pool to combine mining effort with others and share rewards.
Both mining and staking involve confirming or validating transactions that are being executed within a given blockchain network. Overall, what I can add to this for now is that each requires some investment because the different PoS coins will require you to hold some coins before you can stake or help to maintain the network. No matter whether you are using a GPU or a 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 from staking.
In some cases, and for some people, mining is not done to earn income neither is the case with staking. Other factors as finding out in a previous report come into play such as the need to support a network one are part of. Other than that, there are still some advantages notable for staking over mining, which we'll discuss below.
1. Removes the need for buying high-end computer hardware
When an e-wallet is staking bound coins, it is guaranteed a fixed percentage of transactions for confirmation or validation. Additionally, it'll also win rewards no matter what its processing power is. In other words, 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 the mining pool in order to earn a substantial amount of coins. Subscribing to a mining pool will require a monthly or yearly fee depending on the service's specific contract in order to start mining. Still, the 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 powerful 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 a hardware wallet like the Ledger Nano S, in the case of cold staking.
Not requiring high-end computer hardware has the added benefit of lowering the cost of entry to the crypto network in question.
Still, in both cases, a user may need to keep connected to the 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 to verify transactions. Therefore, there will be bandwidth costs, sometimes negligible.
It's also important to remember that maintenance issues will likely increase further when mining than when staking. Your computer is heavily loaded and issues may arise which require extra attention such as adding in fans or cooling systems, and/or cleaning the extra mounted fan, etc.
2. Lesser factors determine the 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. This includes the cost of electricity, for instance, as well as 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 needed.
Additionally, it's dependent on the network difficulty, which is a factor of the number of people in the network. Said difficulty increases in parallel with the increase in the number of people mining on a network. Even when calculating the actual coin to mine, all of 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 to mine at all if the market prices for the cryptocurrency in question 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 chip involved in the mining may need to be replaced faster.
3. Less energy consumption
The biggest disadvantages of mining cryptocurrency in PoW is the large energy consumption requirement with the 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 when miners are connected to mining pools, it does not mean that there is no longer a need for expensive hardware or periodic maintenance to increase the profitability of their operations. 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 transactions. 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. This exercise involves trial and error where many combinations of hashes will be tried thousands of times and at high frequency, hence increasing power consumption. Plus the extra devices such as fans that are installed to cool the device in danger of overheating, increase power consumption. In Proof of Stake, as mentioned at the beginning of the article, the method of verification involves choosing a verifier or validator based on the number 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 low and minimizes the usage of a large number of accompanying equipment like fans, which only act to increase the amount of energy consumption of a crypto network.
5. Better security
PoS coins are less prone to hacking and to 51% attacks.
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 number 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 a way to hold coins without any major hassles. In some cases, although mining can carry more profits than staking, these profits may reduce significantly if the costs of mining operations are taken into account. When this occurs, the income earned from staking is generally considered to be 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 you are involved with. These, in turn, vary from one 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 of the coins that have been minted. Finally, it depends on a network's difficulty in the case of Proof of Work mining.
Just because staking has its own benefits do not mean that it does not carry its own risks as well. Some of the risks that apply to crypto mining also apply to crypto staking. For instance, the coins staked can lose value due to a decrease in their market price. In some cases, the amount earned may not be enough to cover price depreciation during a bearish run.