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How is staking different from cryptocurrency mining?

Staking is becoming a popular investment method not only for retail investors, but also for institutional investors. Recently, the Canadian public company Graph Blockchain announced an investment in Cardano for $ 300 thousand. With the help of this capital, the company plans to receive additional profit through staking, writes RBC Crypto.

What is staking

Staking is a way of passive earnings, in which users store coins on the Proof of Stake (PoS) algorithm and ensure that the blockchain works. This gives them the right to make a profit. This opportunity is only available to cryptocurrencies that operate on PoS, such as EOS, Tezos, TRON and Cosmos. In the future, Ethereum, the largest altcoin by capitalization, plans to switch to the PoS algorithm.

Staking completely replaces mining and makes it possible to extract new blocks without using large computing power. The point of staking is to ensure all operations on the blockchain and support the network. For this, holders of digital coins receive a reward. The more tokens a holder has, the more likely he is to become the creator of a new block.

How staking differs from mining

Mining is a process that ensures the performance of blockchains powered by the Proof of Work (PoW) algorithm. The first cryptocurrency, bitcoin, works on this algorithm. With the help of computing power, miners support the operation of the network and the execution of transactions in it, and for this they receive a reward. If mining can be called a competition of computing power, then staking is a competition between the owners of coins of a certain blockchain, says Maxim Krupyshev, CEO of the crypto payment system Coinspaid.

According to him, the main difference between staking and mining is that staking does not require large computing power, buying video cards or ASIC miners. Accordingly, staking is a more environmentally friendly and energy efficient way to create a new blockchain in the blockchain, Krupyshev noted. Another advantage of staking, he believes, is the fact that the owner of a cryptocurrency does not need to have the technical skills necessary to run and maintain a computer.

“Mining requires more involvement in the process, you have to constantly keep your finger on the pulse. In the case of staking, the process is simplified and open to a larger number of members of the blockchain community, the threshold for entering staking is lower than the threshold for entering mining, ”added Coinspaid CEO.

Staking risks

In general, staking looks like a less risky way of investing, since you do not need to buy physical equipment, but so far there is no adequate information on staking – how it works, what risks and what income it brings, explained Sergey Troshin, head of the Six Nines data center. He argues that no one plans to “throw themselves head first” into staking until it brings in excess profits. As in mining there is a risk of investing in equipment that may become illiquid, so in staking there is a risk of changing the value of the held coin, Troshin added.

How to get started and choose a coin to stake

To start staking, you need to have free funds to buy coins and the ability to freeze them for a long time on a special deposit smart contract, explained Maxim Krupyshev. You need to understand that investments may be required quite substantial, said the head of the fintech company Exantech Denis Voskvitsov. According to him, 1000 coins are needed to stake DASH. Therefore, Denis Voskvitsov advises choosing cryptocurrencies for staking based on the budget.

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