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Proof-of-Work (PoW) Tips To Earn Rewards By Staking Ethereum

On the one hand, for the Proof-of-Work (PoW) Consensus Protocol to work effectively, miners must invest in processing equipment and incur hefty energy charges to power the machines attempting to solve their computations. On the other hand, to “buy into” the block creator position, you need to own enough coins or tokens to become a validator on a Proof-of-Stake (PoS) blockchain.

The equipment and energy costs under PoW mechanisms are expensive, limiting access to mining and strengthening the security of the blockchain. Usually, the PoS blockchain mechanism helps to reduce the processing power needed to validate block information and transactions. In addition, it also lowers network congestion and removes the PoW protocol-powered reward-based incentives.

The Ethereum network began using a consensus mechanism involving the Proof-of-Work protocol. This allowed the nodes of the Ethereum network to agree on the state of all information recorded on the Ethereum blockchain and prevented certain kinds of economic attacks. However, Ethereum switched off its Proof-of-Work protocol in 2022 and started using Proof-of-Stake (PoS) instead.

This guide will focus on Proof of Work as it functions in the Bitcoin network. Commonly called a cryptocurrency, Bitcoin is technically a token—a representation of ownership of the blockchain’s value. The right of the asset token can be exchanged for something of equal value, much like how you hand someone a dollar for a candy bar—they now have the dollar, and you have the candy bar.

The Proof-of-Work (PoW) Consensus Mechanism Protocol Role In A Blockchain

Proof-of-Work (PoW) describes a consensus mechanism that requires significant computing effort from a network of devices. The concept was adapted from digital tokens by Hal Finney in 2004 through the idea of “reusable proof of work” using the 160-bit secure hash algorithm 1 (SHA-1). Following its introduction in 2009, Bitcoin became the first widely adopted application of Finney’s PoW idea.

In other words, Proof-of-Work is a consensus mechanism many Cryptocurrencies use to validate transactions on their blockchains and award tokens for participating in the network. Perse, Proof-of-Work is a competitive process that uses publicly available transaction information to attempt to generate a hexadecimal number less than the network target for that mining period.

Under the PoW consensus mechanism, thousands of mining programs work on one block until the hash is solved, then move to the next block. Many Cryptocurrencies, including Bitcoin, use PoW as the basis for their Cryptocurrency mining protocol. Essentially, the consensus mechanism protocol requires solving a complex mathematical puzzle before a new block of transaction data can be made.

Realistically, solving Proof-of-Work problems is more like a lottery than a competition. Like a gold miner hits a vein of ore with their pickaxe, hoping to strike gold, a Bitcoin blockchain miner hits a new block with data strings, hoping to unlock it. The main difference is that the Bitcoin miner is whacking away blindly. In addition, most of the elements that make up a block are known in advance.

Understand How Proof-of-Work (PoW) Consensus Mechanism Protocol Works

As mentioned, Proof-of-Work (PoW) is a cryptographic consensus mechanism that safeguards the legitimacy of digital transactions. The miners’ job is to figure out the only variable unknown in advance – the nonce. These randomly generated string numbers can only be figured out through trial and error. In most cases, Cryptocurrency miners have no clue how close they are to finding the nonce.

Accordingly, solving the puzzle requires much processing power, translating into high energy costs. Bitcoin keeps its block times at an average of 10 minutes—compare this with block times on the Ethereum PoS network. This has averaged to 12 seconds since September 2022. However, the PoW Consensus Mechanism Protocol requires a computer to engage in hashing functions randomly.

How Proof-of-Work (PoW) Consensus Mechanism Works

In particular, the consensus mechanism protocol randomly engages in hashing functions until it arrives at the output with the correct minimum amount of leading zeroes. Notwithstanding, it requires significant electricity and processing power to Mine Bitcoin and hash other Cryptocurrencies. Of course, Yes! Bitcoin uses a Proof-of-Work algorithm based on the SHA-256 hashing function, too.

For beginners in Cryptocurrency Trading, market investors, and traders, this helps Bitcoin to validate and confirm transactions and issue new asset holdings. To be on the same boat, for example, we can consider the hashing functions for block #775,771.

Here is the block that was mined on February 9, 2023:

00000000000000000003aa2696b1b7248db53a5a7f72d1fd98916c761e954354

Technically, the block reward for that successful hash was 6.25 BTC and 0.1360 BTC in fees. This means that the nonce was 2,881,347,934, with 1,519 transactions in the block, and the total value was 1,665.9645 BTC. Remembering that a hash is generated and the nonce starts at zero, this block was hashed by a miner 2.8 billion times. That’s before reaching a number less than the target.

Because they are decentralized and peer-to-peer by design, blockchains (like Crypto networks) require some way of achieving consensus and security. PoW is one method that makes it too resource-intensive to overtake the network. Other mechanisms also exist that are less resource-intensive. Without a PoW protocol, the network and the stored data are vulnerable to attack or theft.

Proof-of-Work (PoW) Protocol Vs. Proof-of-Stake (PoS) Consensus Mechanism

Of course, Cryptocurrency mining is a competitive process, so it has become a race between those with the most computational power. As such, miners join pools to increase their chances of receiving a reward because it takes enormous computing work to be competitive. On Feb. 9, 2023, the mining pool FoundryUSA accounted for nearly 32% of the Bitcoin network’s three-day hashrate.

This is the number of hashes a network can perform per second. FoundryUSA hashed 89.81 exa hashes per second (EH/s)—the pool generated nearly 90 quintillion (90 x 1018) hashes per second. In other words, a Proof-of-Work method requires nodes on a network. They provide evidence that they have expended computational power (i.e., work) to achieve consensus in a decentralized manner.

As well as to prevent bad actors from overtaking the network. On that note, the two most popular consensus mechanisms are proof of work and proof of stake. Bitcoin’s top competitor, Ethereum, used Proof of Work on its blockchain until September 2022, when the highly-anticipated transition to proof of stake was made. With that in mind, below are some critical differences between the two.

Proof-of-Stake (PoS)

Proof-of-Work (PoW)

  • Participants do the verification
  • Participants offer Ether as collateral
  • Ether is paid for transaction fees only
  • The nature of PoS is less competitive
  • Less computational power and energy are used
  • Validation is done by a network of miners
  • Participants do not need Ether as collateral
  • Bitcoin is paid as a reward and for transaction fees
  • The nature of PoW is pretty competitive
  • It uses lots of energy and computational power

It’s also worth noting that PoW is a much slower validation method than other mechanisms. For example, more transactions occur than the Bitcoin network can handle. Transactions are stored in a mempool waiting for validation, with average confirmation times between Jan. 1 and Feb. 9, 2023, ranging from seven to 91 minutes (confirmation is when your transaction is confirmed).

Using The Distributed Ledger Technology (DLT) To Drive The Blockchain

Distributed Ledger Technology (DLT) is the technological infrastructure and protocols that allow simultaneous access, validation, and record updating across a networked database. DLT drives blockchain technology. Usually, it will enable users to view any changes and who made them, reduce the need to audit data, ensure data is reliable, and only provide access to those who need it.

Finney was the recipient of the first Bitcoin transaction. PoW forms the basis of many other Cryptocurrencies, allowing for secure consensus. Unfortunately, the Proof-of-Work consensus mechanism has now been deprecated. Ethereum no longer uses proof-of-work as part of its consensus mechanism. Instead, it uses Proof-of-Stake (PoS) and staking consensus mechanism.

But that does not mean that the Proof-of-Work (PoW) Consensus Protocol does not still apply to other Cryptocurrency marketplaces, mainly where miners must invest in processing equipment. Blockchains are distributed ledgers that record all Bitcoin transactions, similar to how you would enter transactions in a spreadsheet. Each block is identical to a cell with unique information.

Information such as transaction amounts, wallet addresses, time, and date are recorded and encrypted into a block header—a hexadecimal number created through the blockchain’s hashing function. The hash from each block is used in the blockchain that follows it when its hash is created. This creates a ledger of chained blocks that cannot be altered because of the new block hash.

Getting To Know More About Hashes, Nonce, And Steps For Solving Them

When a block is closed, the hash must be verified before a new block can be opened. This is where the Proof-of-Work Consensus Mechanism Protocol comes in. The hash is a 64-digit encrypted hexadecimal number. With modern technology, a hash can be generated in milliseconds for a large amount of data. However, miners try to guess that hash, which takes a long time to compute.

Hashes include a series of numbers called the nonce, short for “number used once.” The program on a node can work to solve the hash. As such, they begin mining it so it generates a hash from publicly available information using a nonce equal to zero. On the one hand, if the hash is lower than the current network target, the miner has successfully solved the hash.

The network target is a mathematical result of a formula converted to a hexadecimal number that dictates the mining difficulty. On the other hand, if the hash is lower than the current network target, the miner has successfully solved the hash. The network target is a mathematical result of a formula converted to a hexadecimal number that dictates the mining difficulty.

Equally important, if the hash is greater than the target, the mining program adds a value of 1 to the nonce and generates a hash again. The entire network of miners tries to solve the hash this way. On the Bitcoin blockchain, the miner that solves the hash is given the current reward for the work done. Remember, single or individual PoW miners cannot compete with pools for prizes.

Why Using The Cryptographic Consensus Mechanism Protocol Is Essential

Markedly, Cryptocurrencies like Bitcoin do not have a physical form. This makes them vulnerable to double-spending attacks. To enumerate, double-spending attacks occur when someone spends the same coins twice. After spending them for the first time, they reverse the transaction or delete all records of it, thus allowing them to complete a transaction without actually giving away the coins.

As mentioned, PoW is one of the essential parts of the blockchain mechanism, helping prevent the data in the blockchain from being tampered with. As such, generating a PoW requires a significant amount of processing power, which translates into energy costs, to validate each transaction in the network. This is because all transactions require a certain amount of work to be verified.

Thus, creating false transactions also requires work and money. But that’s not necessarily bad since investing so much energy and money into mining is also why Bitcoin (BTC) transactions can be trusted as legitimate transfers of value. Be that as it may, this safety feature ensures that all the transactions are fair and that coins are only spent once. There are still a few more essential benefits.

Why PoW Matters:
  • First, it’s the method to secure transactions on blockchain technology and other protocols.
  • Secondly, it’s the mechanism used in Cryptocurrency mining.
  • Thirdly, it is a critical element in preventing double-spending attacks.
  • Fourthly, it requires solving complex cryptographic problems to create new blocks on the chain.

In layman’s language, the PoW method has proven to be a reliable way of securing Cryptocurrency networks, but it does create an immense energy requirement. Because of this, alternatives to Proof-of-Work (PoW) are being explored by many cryptocurrencies. For newcomer investors and beginner traders, the frontrunner among these outdated protocols is the Proof-of-Stake (PoS) protocol.

The Topmost Recommended Methods To Earn Rewards By Staking Ethereum

As a rule of thumb, staking is a public good for the Ethereum (ETH) ecosystem. Any user with any amount of ETH can help secure the network and earn rewards. Staking is the act of depositing 32 ETH to activate validator software. As a validator, you’ll store data, process transactions, and add new blocks to the blockchain. This will keep Ethereum secure for everyone and earn you new ETHs.

However, to earn more, it all depends on how much you are willing to stake. You’ll need 32 ETH to activate your validator, but it is possible to risk less. On that note, there are many ways to participate in Ethereum staking. For your information, these paths target unique users and vary in risks, rewards, and trust assumptions. Some are more decentralized, battle-tested, and risky than others.

Proof-of-Work (PoW) Tips To Earn Rewards By Staking Ethereum

Remember, ETH rewards are given for actions that help the network reach a consensus. You’ll get tips for running software that properly batches transactions into new blocks and checks other validators’ work because that keeps the chain running securely. The network receives more robust security against attacks as more ETH is staked, requiring more ETH to control most of the network.

To become a threat, you would need to hold the majority of validators. As such, you would need to control the majority of ETH in the system–that’s a lot! Essentially, Ethereum (ETH) Stakers don’t need to do energy-intensive proof-of-work computations to participate in securing the network, meaning staking nodes can run on relatively modest hardware using very little energy.

Solo Staking

In this case, Solo Home Staking on Ethereum is the gold standard option. It provides total participation rewards, improves the network’s decentralization, and never requires trusting anyone else with your funds. Those considering solo staking should have at least 32 ETH and a dedicated computer connected to the internet ~24/7. Some technical know-how and tools can help.

Staking-As-A-Service

Sometimes, you don’t want or don’t feel comfortable dealing with hardware but still want to stake your 32 ETH. In that case, Staking-as-a-Service (SaaS) options allow you to delegate the hard part while you earn native block rewards. These options usually walk you through creating a set of validator credentials, uploading your signing keys to them, and depositing your 32 ETH. This allows the service to validate on your behalf. Conversely, this staking method requires a certain level of trust in the provider. The keys to withdrawing your Ethereum coins are usually kept in your possession to limit counter-party risk.

Pooled Staking

It’s important to realize that several pooling staking solutions now exist to assist users who do not have or feel comfortable staking 32 ETH. Many of these options include what is known as ‘liquid staking,’ which involves an ERC-20 liquidity token that represents your staked ETH. For instance, Liquid Staking enables easy and anytime exiting, making staking as simple as a token swap. This option lets users hold custody of their assets in their Ethereum wallet. At the same time, Pooled Staking is not native to the Ethereum network. Although some notable third parties are building these solutions, they also carry their risks.

Centralized Exchanges

Many Centralized Exchanges provide staking services if you are uncomfortable holding ETH in your wallet. They can be a fallback to earn a yield on your ETH holdings with minimal oversight or effort. Of course, the trade-off here is that centralized providers consolidate large pools of ETH to run large numbers of validators. However, this can be dangerous for the network and its users. Why? It creates a sizeable centralized target and failure point, making it more vulnerable to attacks or bugs.

With that in mind, if you don’t feel comfortable holding your unique keys, that’s okay. All the options mentioned above are here for you. Remember, there is no one-size-fits-all solution for staking, and each is unique. As such, the Ethereum team usually provides some information on popular projects in their space, but always do your research before sending Ethereum (ETH) anywhere.

In the meantime, you can check out the Ethereum wallets page to learn how to take actual ownership of your funds. When ready, level up your staking game by trying one of the self-custody pooled staking services offered. Still, EthStaker is a community for everyone to discuss and learn about staking. Join tens of thousands of members from around the globe for more support and advice.

In Conclusion;

Generally speaking, Proof-of-Work (PoW) is known for its energy consumption. The University of Cambridge tracks the Bitcoin network energy demand and uses a “best guess estimate” to determine its usage. The network operates as much energy as some small countries. Most centers use more robust mechanisms to drive their industrial database than the Bitcoin network.

Usually, most miners have no clue how close they are to find the nonce. All they can do is try repeatedly until one randomly gets it right. It is a system where you cannot work more intelligently but only harder. Each attempt to solve the puzzle requires a certain amount of processing power and the more ability you have, the more shots you can complete in the same amount of time.

This makes it more likely that you are the one who mines the block and reap the reward that comes with it. Miners are compensated for their work with transaction fees and newly mined coins. Solving a proof-of-work problem with most Cryptocurrencies creates a couple of new coins. These coins are awarded to the miner who solved the problem. Also, some Cryptocurrencies have no limit.

Essentially, they have no limit on how many new coins can be mined. Others, like Bitcoin, have a fixed amount of total possible coins. As more miners compete to unlock new blocks, proof-of-work problems become more complex. Thus, the average time it takes the miners to find the right combination remains constant. This average time, referred to as block time, differs from currency to currency.

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