How Does Cryptocurrency And Blockchain Work?
Cryptocurrency is actually an application of blockchain technology. Without blockchain, there is no cryptocurrency, and it's worth noting that there are plenty of blockchains that exist without a cryptocurrency and that they don't need cryptocurrency to work. Blockchain is the infrastructure needed for cryptocurrency.When combined, cryptocurrency and blockchain can be used to create a peer-to-peer payment system that requires no central authority and is instead run by its users. Each transaction is recorded on a public ledger and is immutable, with validators confirming these transactions and being rewarded in the form of mining or staking rewards. Overall, the system creates a trustless payment network where you simply need internet access. The first example of this system in action is Bitcoin, as users send transactions, miners verify them, and are then rewarded with newly mined Bitcoin should they be the first to solve the cryptographic puzzle.
What Is Cryptocurrency Mining And Staking?
Bitcoin and cryptocurrency mining is a somewhat old-fashioned concept at this point. The energy consumption required to perform cryptocurrency mining has been a hotly debated topic that has led to things like Ethereum switching from a mining system to a staking system. That said, cryptocurrency mining for assets like Bitcoin, Litecoin, and Dogecoin, is still going strong. With cryptocurrency mining and staking, you're aiming to be the one to add the next block to the chain, therefore receiving the reward, but each functions differently. Crypto mining uses a concept called proof of work, while staking uses one called proof of stake.Mining (Proof Of Work)
With crypto mining and proof of work, the miner has two jobs. Their first job is to get the answer to a difficult math problem. The second is to construct a block that consists of the transactions that took place during since the previous block. The miner that solves the math problem first gets to construct the block. The process is called proof of work because getting the answer requires work, computer processing power, and electricity. With proof of work systems, the more processing power you have, the more likely you are to solve the problem first and receive the block reward.When a miner solves the math problem, they get to produce the next block with a set of valid transactions. The block reward is then given to the miner in the same asset as the blockchain being mined (BTC for Bitcoin, DOGE for Dogecoin). Other miners on the network then must confirm that the transactions within that block are genuinely valid and they then proceed to try and solve the next math problem to produce the next block. This is an endless loop.
Staking (Proof Of Stake)
Staking uses a proof of stake consensus mechanism. A proof of stake consensus mechanism means that the amount of power you hold depends on the amount of the asset you hold, rather than the computing power you can afford like with proof of work. In proof of stake systems, users are rewarded an amount of the crypto they are staking in proportion to the amount held by the user. This is in exchange for securing and validating transactions on the network.Staking is the process of taking your crypto assets and using them to help validate the network. This can be as a validator yourself or by delegating your stake to a stake pool operator. Validators run nodes and process transactions, which requires time and effort, while delegators allow validators to use their stake to help secure the network and vote on changes to it.
For example, Cardano (ADA), uses a proof of stake mechanism. Users can choose to be a pool operator, meaning they run a node and can receive other users' Cardano through a delegation, or a delegator, meaning they turn their voting power over to someone else but still own their ADA.
Delegating a stake allows you to receive rewards for your contribution without the necessity of knowing how to run a pool and the technical things that would require and is often the best choice for crypto holders. It's a great alternative to a proof of work system because users can earn rewards without having to spend money on electricity and processing power. The only risk is having your rewards slashed or withheld due to your validator being offline, or performing some other bad action, so do due diligence before delegating your crypto to a validator.