Lots of people are getting into cryptocurrency now. No wonder, it can be a great way to earn passive income. However, especially with the rise of NFTs, there’s been a lot of talk about cryptocurrencies and mining being harmful to the environment. Before we talk about that side of things in depth, let’s first learn the basics.
As you might have heard, in 2022 Ethereum will switch from proof of work consensus mechanism (POW) to proof of stake (POS), which is also known as the Merge. But what is proof of stake and what’s the difference between the two?
Both POW and POS are consensus mechanisms. Consensus in cryptocurrency is an agreement between computers whether a transaction is valid or not. Since blockchain is a decentralized ledger of balances there isn’t just one entity or organization that validates transactions. Mechanisms are in place to choose a different validator each time and to minimize chances of fraud.
Crypto currencies consensus mechanisms also have built-in financial incentives, meaning each time you get to confirm a transaction you “mine” new tokens.
More energy – more power
Now, what is proof of work? POW is basically a technical term for mining. Every computer (or device) that is connected to the blockchain needs to solve mathematical problems. Once the problem is solved, the transaction is marked as valid and a new page of transactions (a.k.a. a block) is added onto the public blockchain. It requires a lot of computing power so the more devices you have connected the higher your chances are to validate transactions.
Eco-friendly is the way
What does being eco-friendly have to do with consensus mechanisms and Ethereum switching to POS? The proof of stake protocol uses a different process to confirm transactions and reach consensus. Instead of using a large amount of computing power and energy to solve math problems and process transactions, a cryptocurrency is staked (or locked) on the blockchain to earn a right to do so. The more cryptocurrency you stake and the longer you stake it, the more likely you are to process transactions and create (”forge”) a block.
This consensus mechanism doesn’t need significant amounts of electricity and also is less limited in the number of transactions it can process at the same time.
How do you participate in staking and why?
You can deposit (or stake) funds on a network computer (Validator node). For Ethereum the minimum amount you stake to register a node is 32 ETH. What if you don’t have that amount right away? That’s when the staking pools come in.
There are different staking pools that you can join and deposit a smaller amount of cryptocurrency to participate. Newly created (mined) ETH is then distributed among all of the stakers in the pool.
What are the advantages to joining a staking pool? You don’t need to be tech-savvy and have a dedicated computer for setting up a node yourself. You also don’t need to look for investors to your own nodes – remember, the higher the amount staked the higher the chances of forging a new block and getting staking rewards.
If you’re looking for a new investment opportunity – Ethereum staking might be the right choice for you.
Stay tuned if you want to find out more about both technical and ethical sides of cryptocurrencies. We’ll teach you how to become a validator and how to be more eco-friendly.
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