What is Crypto Mining ?Sviatoslav Piliaiev / Jul 4, 2022
Proof of work
PoW is when new blocks are secured and verified by the processing power of devices that sign up. It’s a race and the first to approve a new block gets free Bitcoin or any other token that they verified. This can be a single computer that is set up for crypto mining or an entire “farm” of hard drives that all work to verify a new block as fast as possible. As soon as one block is verified, rewards are distributed, other devices on the network confirm it and begin working on the next. It is basically a random number generation with some mathematical requirements, there have been cases where a single computer was able to solve it faster than all others and got the reward for validating that block on the chain.
Proof of Stake
PoS is the next step of processing, it aims to scale and improve PoW in many ways. Able to process more transactions, faster and with smaller fees. By staking the crypto on the network users are automatically participating in the processing of a new block. Here crypto mining is less of a race of those with higher processing power. Instead it is more of a reward based on the involvement in the chain with the amount staked and the time that it has been there. Depending on the cryptocurrency, there will be a number of validators among which crypto is distributed. The more there are, the less chance and amount of rewards there will be, but that also means that the chain is less centralized.
The first crypto mining method requires hardware that is used for processing, the latter uses purchased crypto that remains on-chain. Both do require an initial investment to participate, but lucrative earnings attract more and more people. These systems are restrictive and slow-down mechanisms that are created to maintain the integrity of the blockchain.
The risks are mainly associated with the high initial investment. The success of financing and rewards directly depend on the value of the underlying asset. If the price drops, so will the rewards as they are issued in crypto. Additionally, legislation is not well developed around the industry, and government involvement is not certain. This may negatively affect the whole crypto mining industry based on regulation and taxation.
Both of these methods depend on which cryptocurrency you aim to get as a reward, each has some advantages and issues. PoW is associated with significant energy consumption of those mining “farms” unlike PoS. The latter is also more suitable for cryptos that have layered chains like ETH that involve a lot of DeFi protocols built on top of them like stable coin smart contract or NFT minting.