Key Takeaways
- Crypto assets can be secured using either a proof-of-work or a proof-of-stake process. Proof-of-stake networks use substantially less electricity than proof-of-work networks.
- In a proof-of-work protocol, thousands of miners compete to earn the right to publish the next block to the blockchain. In a proof-of-stake protocol, validators are awarded the right to publish the next block based on the size of their economic investment in the protocol.
- Investors can choose to delegate their assets to a staking pool, which allows them to earn a portion of the staking yields while continuing to participate in the price change of the crypto asset.
In a proof-of-work protocol, such as Bitcoin, miners invest in computing power and electricity in order to secure the network. Miners can earn block rewards of bitcoin in exchange for their work securing the network and validating transactions. Miners compete with each other for the privilege of writing the next block to the blockchain. Because of the redundant effort of thousands of miners attempting to win the next block, proof-of-work protocols can use a significant amount of electricity.
In a proof-of-stake protocol, such as Cardano, Cosmos, Tezos, or Solana, validators invest in crypto assets. Rather than competing to solve a cryptographic puzzle to earn the right to publish the next block of transactions to the blockchain, validators in a proof-of-stake protocol are randomly chosen with a probability based on the size of their investment in the token. That is, if a validator owns or controls 1% of the supply of staked tokens, they have a 1% probability of being awarded the next block. Because only a single validator will be doing the work to publish the next block, proof-of-stake protocols use substantially less electricity than a proof-of-work protocol.
Validators in a proof-of-stake protocol own large amounts of the cryptocurrency whose network they are supporting. In exchange for securing the network and validating transactions, validators earn transaction fees and staking rewards. While validators own a substantial investment in cryptocurrency, they also control the computing resources necessary to provide continuous computing service to the network. In smart contract platforms, validators are also paid to execute the computer programs requested by users of the network.
Smaller investors and those who do not wish to run a validator node to process transactions and execute smart contracts can also participate in the economics of the network. Investors who would like to earn a staking yield can contribute their crypto assets to a staking pool, which increases the security of the network and the size of the stake controlled by a specific validator. Investors who stake crypto-assets continue to own the asset and are able to earn a staking yield while continuing to participate in the positive or negative price returns in the crypto asset.
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