What is proof of work? The two most common types of consensus cryptocurrencies are proof of stake and proof of work. For early cryptocurrencies, such as Bitcoin, proof of work was the only way to stake. It is implemented by solving complex mathematical problems. Those who solve these sorts of issues are called miners. This method requires a lot of energy.
There is good news for those who want to try proof of work for staking crypto; this method has security and dependability advantages.
Since the mathematical equations needed to reach verification are so complicated, it is almost impossible to manipulate the system. As another advantage, proof of work is entirely decentralized, meaning that anyone can do it with the right amount of computing power.
Based on research done by Forbes, 64% of the cryptocurrency community uses proof of work for validation. Bitcoin, Dogecoin, Bitcoin Cash, Litecoin, and Monero are some of the most popular cryptocurrencies that use this method.
Proof of work algorithms
Proof of work could be a random process. That means many invalid answers are generated before finding a reasonable solution. The Hash cash proof of work system offers a protocol to validate the generated blocks. This software creates a challenge in the form of a game.
All miners compete against each other to solve the challenges for approximately 10 minutes. Each participant tries to solve the problem by finding a nonce that produces a hash with a value lower than or equal to that set by the network difficulty. The winner will be the miner with the most significant hard powerful, efficient reasonability. This generated the rest of the competitors will validate the block.
Now let’s see how Bitcoin generates blocks for its blockchain; the difficulty of finding this block could be between 1 and 2256. The mining software takes the header of the block they are trying to add and uses SHA-256 encryption to generate this number.
Again, a nonce is used to secure the block. This number is altered by miners each time they try to guess the number—the probability of guessing the number increases when the target value is higher.
Proof of work steps
- Pooling transactions
- Miners competing based on computational power
- Proceeding and validating the newly generated block
- Updating the blockchain by adding this new block
The following is an example of how proof of work leads to Ethereum mining. Each Ethereum’s block of transaction has a level of difficulty (e.g. 3,324,092,183,262,715) and a nonce (e.g. 0xd3ee432b4fb3d26b). What appears in Hash’s box is the answer that we are looking for; this might look like a string such as 0x44bca881b07a6a09f83b130798072441705d9a665c5ac8bdf2f39a3cdf3bee29.
Since miners are decentralized, two blocks might be validated simultaneously. In this situation, one will be accepted, and the subsequent block will make the chain longer. This means some of the blocks that were temporarily rejected might be taken as the blockchain gets longer.
So how do we make sure if this process is irreversible?
In Ethereum mining, the transaction will be irreversibly completed after one minute or six blocks. This is known as a solution-verification protocol.
Proof of work could be the subject of attacks and frauds, but Hashing makes frauds easy to spot. Bitcoin and Ethereum use open source software to run their proof of work protocols. Anyone with the proper hardware and computer skills can gain Bitcoin or Ethereum.
What is proof of stake?
Proof of stake is introduced as an alternative to validating the work method. Contrary to the proof of work method, you don’t need mining devices to increase your cryptocurrency assets in the proof of stake method. All you need here are some coins.
This means that it is easily attainable for everyone. In this method, cryptocurrency owners can stake their currencies, which gives them the right to check new blocks of transactions and add them to the blockchain. Therefore, owners create their validator nodes. Your coins will be locked if you stake them, but you can unlock them whenever possible.
Instead of a centralized governing unit, each cryptocurrency has a protocol to validate transactions. When a transaction block is ready, the protocol will choose a validator to check the accuracy of the block. This block will be added to the blockchain if the validation is completed, and the validator will receive a reward (typically, crypto coins).
In this method, your mining power is related to the number of coins you decide to stake. Cardano is an example of a cryptocurrency that uses proof of stake to verify the blocks of transactions to be added to the blockchain. Polka dot is another cryptocurrency that uses coins to help its blockchain.
The second-biggest cryptocurrency in the market, Ethereum, is transitioning from proof of work to proof of stake to validate the blocks of transactions. Ethereum lets you activate validator software by staking 32 ETH.
To stake through the proof of stake method, you either need a 24-7 dedicated computer, or you can create a set of validator credentials and upload your signing keys to them.
Pooled staking is known to be the best staking method if you don’t have enough coins. Since with a small amount of staked coins, your chances of being chosen as a validator is slim to none; you will find this useful method. In this method, owners invest cash in a pool to create a validation node. Later, the reward for each transaction will be divided among the pool members.
Solana, Avalanche, and Terra are other examples of cryptocurrencies that use the proof of stake method to create new blocks for their blockchains.
Each cryptocurrency offers stakes different rates of yields, which vary between 3.5% (for Terra) to 13.9% (for Polka dot). Ethereum, the second second-biggest currency, gives a 5.5% yield. Although yield percentage is not the only factor, you should keep it in mind. Each crypto has long-term potential in the market, which can shape your future profits.
Proof of work platforms
To stake your cryptocurrency, you must have access to cryptocurrency staking platforms. Aqru is one of the best platforms for those who want to stake their cryptocurrency outside the United States.
In Aqru, you will learn how to spend and stake Bitcoin, which is a good platform for newbies. You can even access your cryptocurrency staking account through the Aqru mobile app. The annual percentage yield in this platform depends on the cryptocurrency you wish to stake. Aqru does not provide services to Americans.
eToro is the most popular cryptocurrency staking platform in the US. On this platform, tokens will automatically be staked on your behalf as soon as you buy digital assets at eToro. This platform also offers automated rewards on Ethereum, Cardano, and Tron. APYs vary for eToro users, from 75% for bronze members and US clients to 90% for diamond members and platform+ account owners.
One of the best things about eToro is that there is no requirement to lock up your crypto tokens for any period. You can stake the coins in your wallet and cash out whenever possible.
On the other hand, Defi Swap has the highest interest rate. Defi Swap is a decentralized cryptocurrency exchange platform that farms its cryptocurrency. This platform is built to stake its coin (Defi coin). Coinbase, Crypto.com, Binance, Looks Rare, TradeStation, BlockFi, Nexo, Kraken, Gemini, and MyCointainer are some of the most known platforms for staking cryptocurrency.
Based on what cryptocurrency you want to stake and how much is your desired profit, you can choose among any of these platforms. The following is an example of how you can calculate your earnings from different rate yields:
Let’s say you wish to stake Cardano with a 10% yield for three months, and the tokens you want to stake are worth $10000. 10% yield will give you $1000 over one year, so your staking reward for this period will be $250. Keep this in mind, staking will save the value of your assets to some extent if the price of cryptocurrencies decreases.
The best cryptocurrencies for staking are Cardano, USDC, The Graph, Ethereum, and BNB.
Proof of work vs. proof of stake
The main difference between the two methods is the energy usage. Proof of stake is an energy-efficient method that does not require special equipment other than a computer. However, this method is not proven in terms of security. As mentioned earlier, you need a lot of coins to be chosen as a validator. Keeping in mind that some websites lock up your assets for some time, this method might not fit everyone.
On the other hand, the proof of work is a secure method to increase your assets. It is a decentralized method, which means you will be controlling all transactions. However, high energy consumption is the main drawback of this method.
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