profitable to mine a crypt. Unlike conventional government-issued money, cryptocurrencies are created as a result of user actions. The issuance of assets in this case occurs through labor- and energy-intensive mining or simplified, environmentally friendly staking.
Until the end of 2020, the latter was less popular. Everything changed when the Ethereum team released the Ethereum 2.0 update. Staking received trump cards and greatly influenced the location of players in the virtual market.
profitable to mine a crypt| Mining: while you trample, you explode
The addition of new coins to the blockchain as a result of mining is used in cryptocurrencies that use the PoW (Proof of Work) consensus algorithm and its varieties.
The consensus algorithm is the mechanism by which distributed networks decide whether to include a transaction in a block.
Users who add it to the blockchain receive a reward for this in the form of a certain number of new cryptocurrency units. This consistency ensures that these operations comply with all protocol rules.
PoW, the first consensus algorithm, is the basis for the operation of bitcoin, litecoin, ethereum and many other cryptocurrencies. The process of generating new coins in them is based on the resolution of a complex mathematical problem. The result is not found with the help of calculations, but by ranking the potentially correct answers. The user with the higher equipment capacity is more likely to make the correct decision faster. After that, you become the author of a new block and receive a reward.
Therefore, in mining, the more impressive the hardware, the more solid the earnings will be. But it is worth considering the fact that with an increase in the number of miners mining coins, the overall capacity of the network also grows. Consequently, in order to maintain high profits, a member of the crypto community needs to constantly increase the computing capabilities of the team.
Stakeout: the soldier is sleeping – the service is on
In 2011, staking became an alternative to mining. Its operation is based on the consensus algorithm. PoS (Proof-of-Stake) and its varieties. When staking, the author of the block is not the one with the most powerful computer equipment, but the one with the most coins and their holding time. The thicker the user’s virtual wallet and the longer he has it, the greater the chance of receiving a reward for adding a block.
The PoS algorithm is the second most popular in cryptocurrency protocols. It is used in the blockchains of ethereum, cardano, tron, eos, tezos, etc. Staking does not require expensive equipment to support the network. For this reason, it is more attractive to common users and institutional investors. Holders of a large number of coins have an impressive number of cryptocurrencies in their wallets, which is a dead weight in PoW coins. At the same time, in a PoS asset, the mere storage of virtual money generates passive income. This is a kind of analogue of a bank deposit.
The interest of large investors in this type of profit is evidenced by serious acquisitions of individual companies. For example, on March 29, Canada’s Graph Blockchain bought $300,000 worth of Cardano (ADA) PoS coin and plans to invest in Polkadot in the same way. An even more significant example is the sale of $750 million worth of bitcoins by hedge fund FD7 Ventures to invest the proceeds in Cardano itself.
The release of the Ethereum 2.0 protocol in December 2020 allowed users to stake the coin. The roadmap of the second largest cryptocurrency in terms of capitalization provides for a complete transition to the PoS algorithm and the abandonment of mining for several years.
Just 2 months after ethereum staking became possible, the number of coins locked for this purpose exceeded $4 billion.
For and against the PoS consensus
Staking has a number of benefits:
- Unlike mining, which consumes more than 1.17 TeraWh per month (which is comparable to the electricity consumption of an entire small country, for example, Slovenia), this is a very ecological way of mining cryptocurrencies.
- There is no need to configure equipment, monitor its operation, update and replace faulty equipment.
- It is not necessary to look for a place to house farms. Everything you need fits easily into a laptop or PC.
However, there is no perfect model in the world of cryptocurrencies. While staking has many benefits, there are also features that can deter potential virtual currency holders from entering the process. Of the significant ones, it is worth paying attention to the following:
- Possible losses. If the value of the cryptocurrency falls, the investor may lose the funds invested in it. In the same way, you can lose money during mining, but in this case, the user will have expensive equipment. You can sell and return part of the investment.
- Depending on the choice of digital currency, buying the minimum amount of coins to start the staking process can result in a round sum. For example, Ethereum needs at least 32 ETH, which is equivalent to more than $65,000. And to launch a Dash masternode, you need 1,000 coins, or more than $268,000 at current exchange rates.
- To get the best return, you should invest in little-known virtual assets that have a high probability of growth. However, such investments are associated with serious financial risk.
- Centralization of cryptocurrencies or the concentration of a large number of them in the hands of a few users. The situation is relevant for young coins with a low cost.
- There is a risk of decreased turnover due to a lack of “free” coins needed for transactions.
Three pillars: functionality, profitability, liquidity
When choosing a cryptocurrency to stake, experts recommend paying attention to the following factors:
- Functional. It is necessary to find out what role a particular currency plays in the ecosystem of the project. That is, if it is used only as a monetary unit or gives the right to receive part of the utilities and services. New cryptocurrencies used exclusively for financial settlements are unlikely to be able to compete with better-known counterparts.
- Produce. A simple rule applies here: the higher the profit, the higher the risk. The most popular and reliable PoS coins offer an annual return of 5-12%. New projects can raise the percentage to 60 and more, but there is a great danger of currency depreciation in a few months.
- Liquidity. Staking involves the purchase of virtual assets worth at least several thousand dollars. Therefore, it is worth evaluating how quickly these funds can be returned if necessary.
- Also, before investing in staking, it is necessary to collect as much information as possible about the goals of the project, its team and the progress in the implementation of intermediate stages.
The Royal Path – Diversification
Despite the allure of PoS coins, mining is still the most popular option for earning coins today. But in the future, such crypt mining may be victorious. Among the reasons are the full transition to the PoS model of Ethereum, the second largest currency after BTC, and the growing dissatisfaction with the impact of mining on the environment.
Unfortunately, there is no unequivocal answer to the question of which cryptocurrency mining method is more profitable or more promising. It all depends on personal preference. And if staking only requires money and a style that won’t let you down when looking for promising coins, then mining requires some technical knowledge and a lot of time to maintain the farm.
Perhaps the ideal option is a combination of both methods. Diversifying your sources of profit will allow you to hedge the high risks of investments.