Bitcoin enthusiasts may have had ample reasons to praise the digital coin, but they could not disprove the huge environmental costs of bringing it into circulation. The call for concerted action to limit the climate impact led emerging blockchains to devise ways to make the mining of new coins and tokens more eco-friendly.
Let's take a look at how the technology of mining new cryptocurrencies has evolved with the introduction of a process called staking and how it is different from mining--the traditional process that was first followed by the bitcoin network.
But first, let's understand why there is a need for either.
Blockchain is a decentralised technology, meaning no central authority controls the data. Cryptocurrency transactions are stored on blockchains, also known as a public ledger. This public ledger is stored in multiple computers (nodes). Anyone can participate in storing the public ledger. A copy is stored in every node to secure users' transaction data. The users of these nodes validate the transactions and store them in the public ledger. It can be done by two methods: staking or mining.
Crypto mining vs staking
The basic difference between staking and mining is the algorithm used to validate transactions and add new blocks to the blockchain.
What is Mining?
Mining uses the proof-of-work (PoW) consensus mechanism. In this system, miners are users with powerful computational hardware, which they use to solve complex computational puzzles. It validates the transactions and provides security to the transactional data stored in the blockchain.
Mining requires powerful GPUs (Graphics Processing Units) that perform complex calculations to solve these puzzles. These GPUs use extensive amounts of energy to perform calculations -- one of the most significant issues of cryptocurrency mining. The extensive amounts of energy utilised by miners negatively impact the environment leading to a large carbon footprint. The GPUs are another problem as they are very expensive and hard to maintain.
But why do miners do go through the hassle of doing all this? The answer is simple. They are typically awarded a small amount of the cryptocurrency they are mining every time they solve the puzzle and validate transactions on the blockchain. The amount differs with every cryptocurrency, but the rewards are higher than the staking method.
How is Staking different?
Staking uses the Proof-of-Stake consensus mechanism. It was introduced as an alternative to PoW when people started realising the environmental cost of mining. It also removed the need for expensive GPUs that were necessary for mining.
The staking method requires cryptocurrency holders to 'stake' their coins. Users have to lock their coins on the blockchain network for a fixed period where they cannot withdraw them, making them illiquid. The network will then choose validators for each block, depending on a node's size and time staked. The user becomes a validator by simply locking a certain amount of the cryptocurrency they are holding in a pool.
The staking rewards depends on how long the cryptocurrency is locked away. The rewards are lower than what a miner gets. When locked, the user will not trade regardless of the market volatility.
The most significant advantage of staking or PoS over mining is that the energy consumption in staking is drastically lower. That's why many blockchains are moving towards a PoS/staking model to reduce the negative environmental impact of cryptocurrency trading.
To sum it all up, PoS consumes less power, requires miners (validators) to have an only internet connection and the relevant cryptocurrency to stake, and does not need any advanced skills to solve cryptographic puzzles to find a new block.
The Ethereum network has now started work to shift to the PoS mechanism. Ethereum 2.0, as the transition is referred to, has already started and is slated to complete in 2022. It will make the Ethereum network more scalable and sustainable.
(Edited by : Yashi Gupta)
First Published: IST