Since its inception in 2011, Proof of Stake is quickly becoming the preferred consensus mechanism for blockchains. As a formerly unproven and untested way to verify transactions, PoS provides new ways for crypto holders to increase their holdings for relatively little work.
It is only logical that crypto investors understand what processes are involved in PoS. The two main components of any PoS based network are staking and minting. They act as the cogs to the PoS machine. This article will look into what these processes are and how they work under the PoS algorithm.
Proof of Stake
As the two main consensus mechanisms, Proof of Stake and Proof of Workshare the same goal, to achieve distributed consensus and secure the network. The differences come in the objective mechanisms involved in reaching a consensus. Whereas PoW requires its miners to solve complex equations, PoS requires users to stake a certain amount of coin to gain consensus. Instead of miners, PoS has validators.
The core principles of PoS is rewarding stakers and achieving consensus through validators verifying transactions. Validators of the system get chosen in a pseudo-random selection based on factors including the number of coins staked, length of stake, and algorithm randomization.
Staking is buying cryptocurrency and locking them in a staking wallet for a particular period. By depositing and holding the assets, you are adequately securing the network and get rewarded. Keeping crypto in the staking wallet also earns the holder a right to get chosen as a transaction validator. In theory, anyone can participate in staking as it only involves locking assets in a specific destination.
The minimum amount required to start staking is as little as $1 but ultimately depends on the type of coin you’re holding. Once staked, these coins get frozen for a particular time. A user loses their chance at getting a reward when they remove their coins from the wallet prematurely.
The staking earnings depend on how much you are staking and for how long. The more coins staked in the network, the higher the reward rates.
Minting is the process of validating transactions, generating new blocks, and recording information on the blockchain within Proof of Stake. Transactions get verified by validators chosen pseudo-randomly on the network. Validators are to PoS what miners are to PoW. Taking over an active role in securing the network and verifying information on new blocks makes you a validator.
Most systems require a validator to stake a specified amount of assets in the network. The holding of coins in the network acts as an enforcer of a penalty mechanism and securing a more substantial incentive. The penalty mechanism slashes the coins staked by the validators when they try to manipulate the system or verify invalid transactions. The risk of losing their assets is enough to motivate validators to verify transactions honestly.
Incentives for a validator comes in the form of rewards in both network transaction fees for verifying transactions and staking rewards. Some networks reward validators with new coins that get produced over time.
Staking Vs. Minting
Minting has better rewards than staking. During staking, you’re only receiving the staking rewards, whereas minting gives the validator both staking rewards and incentives for verifying transactions.
To become a staker, you can start with as little or as many coins as you want and get earnings. On the other hand, minting requires you to have a certain amount of currency staked in the network.
Staking requires very little engagement from the user after holding coins, whereas minting requires the validator to actively participate in the network by running special software to maintain the system.
There is a waiting period involved with minting before you start earning new coins, whereas that is not the case with staking, as you can begin to receive rewards for holding coins almost immediately.
The only resource required for a stake is a staking wallet connected to the internet. While minting requires a computer that can smoothly verify transactions and appropriate software as well as a staking wallet.
Every network has its unique set of penalties for its users. However, penalties for validators trying to manipulate a system are more severe than a staker leaving the network. The two types of users have different responsibilities, and it makes sense that the one with more responsibilities to the system gets a harsher penalty. A staker prematurely removing their coins is likely only to lose their right to a reward. Whereas a corrupt validator is liable to lose the coins, they have locked in the system.
Minting and staking both fall under the PoS mechanism and tend to get interchangeably used. As a crypto enthusiast who wants to invest in Proof of Stake coins, its imperative that you understand how they differ.
It all naturally comes down to minting being the advanced level of staking in any Proof of Stake network. The more coins you stake, the higher the chances to get chosen as a validator and partaking in minting.