Mining and Proof of Work
Before we delve into staking, let us first try to understand the challenge that it is trying to solve. Bitcoin and altcoin hold the promise of supporting transactions digitally without the need for centralized authority. Initially, the solution to managing blockchain (a decentralized ledger balance), was done through mining. Mining is a sort of competition where powerful computers try to guess the solution of a complex mathematical problem for a reward. The first to find the solution gets the right to write the next page of the transaction (a block) into the ledger.
With mining, the more powerful computer a miner use, the more guesses they can make hence the higher chance of winning. The technical term for mining is “proof of work” since successful miners prove that they have done a lot of work.
The major challenge with Proof of Work, as a way of validating transactions and earning digital coins, is that it consumes power and requires highly expensive and powerful computers to perform it.
Proof of stake (POS) is an alternative of proof of Work. Instead of committing computing power, Proof of work allows users to put their coins at stake. The network then randomly selects a user to help create the next block of transactions. Proof of works enables the blockchain to be updated continuously in a decentralized manner without the need for powerful computers.
Proof of Stake Explained
Proof of stake is the process of securing or locking cryptocurrencies in target wallets for a certain period of time to exchange them for rewards. It is all about holding funds in the crypto wallet to support the operations of blockchain. This mechanism allows blockchains operation within an acceptable and reasonable degree of decentralization. The concept of proof of stake states that one can validate block transactions according to the number of coins that they hold and that simply means that the more the coins are owned the more the mining power of the various individuals or miners.
Just like in the proof of works, competition is key in proof of stake, and the amount of resources people who stake holds affects their success. This system leaves little chance for the individuals holding fewer coins to succeed. This is where staking pools come in.
What is a staking pool?
This is where a group of holders come together and merge their resources thus increasing the chances of validating blocks and receiving rewards. Their staking power is combined and the rewards are shared proportionally to the various contributions to the pool. A lot of expertise and time is however required to set up and maintain a staking pool and as such, mostly a fee is charged by the pool providers from the staking rewards distributed to participants. It is however ideal for new users to join a staking pool as it requires a low minimum balance than staking individually.
Cold Staking and Hot Staking
Cold staking simply is the staking on a wallet that is not connected to the internet and this may be done using a hardware wallet. In networks that support cold staking users are allowed to stake while holding their funds offline. The stakeholders will however stop receiving rewards if they move the coins out of cold storage.
Hot staking, on the other hand, requires your device to be online hence the name “hot.” The device must be online to secure the network and to generate block rewards for transactions. Hot staking pays a little more than cold staking since you use more resources and skills to perform the task.
Proof of Stake has a couple of advantages over proof of work. First, it is simple to use as the platforms that offer to stake have made it easy to get started. Second, it has ow entry since no expensive equipment is needed. The idea of staking pool even makes it better since anyone with any amount of coin can participate in the process by joining a pool.
Are you interested in staking? There is a lot more you can learn. Stay tuned for more updates.