Whether you’re a novice in the crypto market or have ridden the waves of volatility for a while, you may be familiar with the terms of staking and mining. These two operations are essential for blockchains to be productive, and even if they’re considerably different, they are responsible for how innovative the crypto market has become.
However, both have been involved in controversies. Crypto mining started along with Bitcoin, the first cryptocurrency, and its purpose is to create new blocks on the blockchain and ensure safety so you can learn how to buy Bitcoin with bank transfer pretty quickly.
But considering Bitcoin’s halving event, where miners’ rewards decrease by half every four years, it has become more challenging to acquire hardware at a decent price that can work to keep the income greater than the bills.
At the same time, staking was leveraged by Ethereum, whose ecosystem is one of the richest regarding high technology. It allows users to access income by staking their tokens, which is a passive way to gain money. But as users need to use pools to be able to stake, some of these ecosystems have grown much more than others, leading to centralization risks.
Today, we analyze both technologies and decide which is more advantageous.
Mining: an activity full of twists and turns
Mining is crucial to a blockchain because it helps verify transactions and prove their validity. It requires miners to blend hardware and software to be able to find solutions to complex mathematical problems to receive rewards.
In the beginning, miners would receive 50 BTC for each block mined, but in 2024, during the fourth halving, miners will receive only 3,125 BTC for the same number of blocks verified as before.
To achieve profitable mining income, users need to power up their rigs with the latest application-specific integrated circuits (ASICs) that can cost up to a few thousand dollars. They also need a digital wallet and an exchange account to be able to own these rewards.
The problem with mining is that it became more difficult to do, so users join mining pools, where multiple individuals combine their computational power to mine and then split the rewards. This is a more accessible way to mine cryptocurrencies like Bitcoin, which is already energy-intensive, but Monero or Litecoin also follow similar mining requirements.
Staking: crypto kept out of sight
The purpose of staking is similar to mining. As users stake their own funds, they strengthen the blockchain and make it more attack-resistant and efficient in processing transactions. Staking only works with PoS-based blockchains, where you lock up your tokens and avoid using them.
Depending on how much time you stake crypto or the system’s requirements, you may be rewarded with more or fewer coins.Staking alone can also be difficult, so most individuals access staking pools to win better rewards.
In some cases, when they’ve gained a lot of cryptocurrencies, they can become validators and validate transactions to secure the blockchain.
Although it doesn’t require such a massive upfront cost as in the case of mining, staking poses worrying centralization risks in a decentralized environment. It happens when certain mining pools leverage promising opportunities for stakers and, therefore, increase their staking rewards.
In the case of Ethereum, for example, only a few staking pools rule over the market due to their size.
Is crypto mining overrated?
Cryptocurrency mining has become less innovative due to its high energy consumption. Bitcoin mining, for example, slowly became a threat to the environment as all the computational power used for it is a growing part of US electricity consumption.
Mining rigs also cannot be recycled or re-used, considering most are created especially for this purpose. Hence, they contribute to e-waste, ending up in landfills.
Plus, new mining hardware is always propelled on the market, so miners have to buy new rig components every once in a while. Crypto mining also requires high-tech skills to master, which may not be worth it in the long term if the mining reward continues to diminish.
Is crypto staking unsafe?
Crypto staking has a few disadvantages, too. First, it exposes stakers to loss of investment since the tokens deposited can lose almost all their value if the market goes down, while the yields might not be enough to cover the losses. Given stakers can’t liquidate their position before the pre-determined period, they won’t be able to use them in an emergency.
One of the most prominent drawbacks of staking includes annoying penalties. Most blockchains want to discourage misconduct by stakers and validators, so they introduced slashing.
When validators are inactive or mistaken the block votes, the blockchain lowers the number of deposited tokens, so they will receive fewer rewards. This can also happen when technical errors arise, so the lack of accuracy is a significant problem.
So, which is best, after all?
Based on all the previous aspects, staking may be considered better than mining in terms of easiness and costs. Indeed, staking doesn’t ensure the same rewards as mining does, but stakers don’t have to invest in expensive computational power once a year. Some blockchains require a certain staking fee at the beginning of staking, which may be more or less approachable.
At the same time, even if the mining rig is responsible for verifying transactions, setting it up and handling the software can be difficult. Validators, on the other hand, only need to find a trustworthy source of staking and lock native coins.
On the other hand, mining and staking are becoming different on other blockchains. Green mining is becoming a thing on networks like Solana and Cardano, while staking can be delegated and done in exchanges and pools. Hence, they can evolve in different branches and become efficient simultaneously.
Conclusion
Mining is one of the most-known ways to create new blocks on blockchains and has been mainly done by Bitcoin. On the other hand, staking is popular on Ethereum, where the technology behind it is a bit more different.
Each of these operations ensures networks are safe by verifying each transaction, but they’re also damaging to the environment and posing centralization risks to users and businesses.
Article and permission to publish here provided by Mary Hall. Originally written for Supply Chain Game Changer and published on December 12, 2024.
Cover image by Miloslav Hamřík from Pixabay