Staking is the method that is used in Proof Of Stake mechanism opposing mining and Proof Of Work coins. In PoW mechanism, users of blockchain are using their computational power to confirm transactions and produce new blocks through solving of mathematical puzzles. PoS works with help of validators and not miners.
What is staking in cryptocurrency world right now?
So, with the rise of a lot of problems connected to mining, like expenditures on electricity, blockchain community proposed a new method that will eliminate the use of excessive computing power. In PoS the consensus mechanism is completely virtual. In POS, instead of miners, there are validators. The validators lock up some of their coins as a stake in the ecosystem. Next, the validators are trying to bet on the blocks that might be created in the blockchain. After the block gets added, the validators get a reward proportional to their stake. Proof of stake coins has many systematic advantages but apart from that, some proof of stake currencies give various economic benefits to its HODLers by giving them an opportunity of staking their coins in a stake-able wallet.
Simplifying it, you can earn by holding some of the PoS coins and participating in consensus. Process of earning reward for validating the transaction is called minting, or forging, because it is a similar process to how real coins are “minted” by the government.This system provides both secure way of validating the transactions and a way to earn dividends from it.
There are a lot of new and old coins that are using staking as the main protocol for validating their transactions. Although, their market capitalization is not even close to BTC and other main cryptocurrencies. Nonetheless, there were discussions in Ethereum community about switching from Proof of Work mechanism to Proof of Stake. Ethereum co-founder Vitalik Buterin thinks that current system that is using of mining will eventually die out and it’s time to switch to staking. While the proof of stake Ethereum date was originally set for January 2020, this deadline has been missed and it isn’t clear when Ethereum’s PoS will launch now.
Standards of PoS and staking
Each coin that is working on PoS, or is planning to switch from mining to minting, has its own specially designed features of work. Nonetheless, all of them have the same standards of work.
First important concept of PoS mechanism is how to choose the node validator. Most of the coins are using The Node’s Wealth concept that sets the minimum value of a stake that the validator needs to have and gives a bigger chance of getting a reward for a block for a bigger stake that is HODled. Second concept is Randomized Block Selection when validators are selected by looking for nodes with a combination of the lowest hash value and the highest stake and since the size of stakes are public, the next forger can usually be predicted by other nodes. And the last concept is Coin Age Selection. The mechanism will most likely to prefer validators that hold coins that were minted the earliest. Coin age is calculated by multiplying the number of days the coins have been held as stake by the number of coins that are staked. Once a node has forged a block, their coin age is reset to zero and they must wait a certain period of time to be able to forge another block - this prevents large stake nodes from dominating the blockchain.
Also, there is a system that prevents the users to be inactive. Participants, who have a stake but are being offline, will start losing a portion of their stake until they will be active again or will reach a low amount of staked coins that will not let them be validators no more.
With the development of PoS mechanism enthusiasts created an idea that is called Staking Pool. A Staking Pool is formed when different coin holders gather their resources to raise their chances to validate a new block and get a reward. With combining their staking power they will get a reward proportionally to their individual contribution. Pools are most popular in the networks where an entry barrier exists.
So, what are the main differences between mining and staking?
Mining is using computational power of a miner and the first miner who solves the mathematical asymmetric puzzle will be selected to create a new block, so, pretty much is a competition of between miners to solve the puzzle. Opposing that, staking is using deterministic selection process between users who are holding the biggest amount of coins.
Proof of Work mechanism is relying on specialized equipment to optimize the processing power which usually leads to a large amount of expenses on electricity. Proof of stake is mostly relying on trusted validators who do not need special technologies of computation. Standard server grade unit is usually more than enough for staking.
Regarding the investment, the most of the money in mining will go into buying the hardware and expenses on supporting it. In staking, initial investment is spent to buy the stake of coins that you will be holding.
Staking is relying on trust to the validator and his ability to keep coins on his wallet untouched which doesn’t require high energy consumption. Mining requires a high energy consumption to support all of the equipment used.