When Bitcoin was launched in 2009, there were only three ways to acquire some; you could buy, bitcoin mine bitcoin or someone would have to give you some if you were lucky enough. The proof of work algorithm used in bitcoin and many other cryptocurrencies such as dogecoin, Ethereum, and Litecoin required Mining to create new blocks.
But with the introduction of the proof-of-stake algorithm as an alternative to proof of work, new blocks/coins can be created by cryptocurrency holders who simply “stake” their coins in a pool. For example, if you stake Moonbeam tokens, the coins will be used to validate transactions and secure the blockchain. In return, you will earn new MOVR tokens, which can then be sold or re-staked.
Crypto mining and staking both involve validating transactions, securing blockchain networks, and creating new coins that are then released into the blockchain (public ledger). The difference between them lies in how they carry out these functions.
Thanks to the upcoming launch of Ethereum 2.0, the comparison between mining and staking cryptocurrencies is relevant now more than ever. In this article, we will try to define and point out some of the differences and similarities between crypto staking and Mining.
What Is Bitcoin Mining?
Bitcoin mining involves the creation of new bitcoins as rewards for confirming transactions, maintaining and developing the blockchain ledger. Bitcoin mining uses sophisticated hardware that solves extremely complex computational math problems. The first computer to find the solution to the problem is awarded the next block of bitcoins, and the process begins again. This mechanism is referred to as proof of work (PoW) proposed by Satoshi Nakamoto.
In the early days of bitcoin mining, it was possible to mine on desktop computers with regular central processing units (CPUs). But the process was often too slow. These days, bitcoin is mined using large mining pools. Because of the massive amounts of electricity required to mine, the process is considered detrimental to the environment. Miners now resort to using environmentally friendly sources of energy like solar and geothermal energies to reduce Bitcoin’s impact on climate change.
Bitcoin mining is painstaking, costly, and only sporadically rewarding. Nonetheless, Mining has a magnetic appeal for many investors interested in cryptocurrency because miners are rewarded for their work with crypto tokens.
Staking in Crypto using Moonbeam as a case study
In the Moonbeam network, blocks are produced using Polkadot’s Proof-of-Stake model. This model relies on three major players: the collators, validators, and delegators.
- Validators: They secure the Relay Chain by staking DOT, validating proofs from collators, and participating in consensus with other validators.
- Collators: They are an active set of candidates who qualify as block producers. They maintain parachain (Moonbeam) by collecting transactions from users and producing state transition proofs for the relay chain to validate.
- Delegators: Cryptocurrency holders stake their tokens, vouching for specific collator candidates. Any user that holds a minimum number of tokens is eligible to become a delegator.
The top collators are ranked by the staked amount and are chosen to produce blocks with a valid set of transactions. A portion of each block reward goes to the collators that produced the block, who then shares it with the delegators based on their percental contributions towards the collator’s stake. In such a way, network members are incentivized to stake tokens to improve the network’s overall security.
Is Staking more profitable than Mining?
Mining remains a reputable method for successful cryptocurrencies considering the incentives and the significant role it plays in sustaining bitcoin blockchain over the years.
However, staking is nearly as lucrative as trading or Mining cryptocurrencies. It makes it easier for digital asset holders to earn returns on their assets, and it comes with little to no risk. Staking is often the go-to for many crypto investors considering the cost of setting up a mining shop and the threat that mining poses to the environment. Profits made from staking depend on how much and how long you invest. The more you stake, the more profits you get.
How Much a Miner Earns
Bitcoin halving ensures that the rewards for mining a block are reduced by half every four years. The initial mining reward per block in 2009 was 50 BTC. In 2012 after the first halving took effect, this reward was reduced to 25 BTC. By 2016, this was halved again to 12.5 BTC, and on May 11, 2020, the reward halved again to 6.25 BTC per block. This trend will continue until all the 21 million bitcoins have been mined.
The reward is currently at 6.25BTC/block and an average price of $47,000 per bitcoin as of December 14, 2021. The reward for mining one block is about $293,750 (6.25 x 47,000). Not a bad incentive to solve that complex hash problem detailed above, it might seem.
For projects like Moonbeam (a parachain on Polkadot), collators are rewarded with 5% annual inflation for their work 24 rounds ago after every round (600 blocks).
The 5% annual inflation is distributed as follows:
- 1% is used as reward for Moonbeam collators
- 5% for parachain bond reserve
- The remaining 2.5% will go to collators and delegators that stake their tokens.
Out of that 2.5%, collators get the rewards corresponding to their stake in the network. The rest are distributed among crypto holders according to their stake.
Although the proof-of-work is an effective and simple consensus on the next block producer, proof-of-work with Nakamoto consensus consumes an incredible amount of energy that has raised environmental concerns over the years in addition to the high cost of setting up a mining pool. The proof-of-stake model is a great alternative and is poised to be the new Mining of the future.