Money has come a long way, from the metallism era to the current more efficient fiat currencies. However, the invention of fiat money did not mark the end of the quest for more reliable financial technologies. And decades later, a new and more advanced form of money emerged. This brand-new idea was cryptocurrency, an electronic form of money. Therefore, even transactions on excellent cryptocurrency exchanges like bitcoin up go through validators. But remember that no new technology comes without its fair share of challenges. So, no matter the impressive characteristics of virtual funds, various problems still exist.
One of the most common challenges with developing cryptocurrencies was technical limitations. So even Bitcoin, which emerged as the first-ever successful virtual money, was not near perfection in the early days. No one even cared about Bitcoin apart from a few optimists who went ahead to acquire some coins. While Bitcoin and its assets are popular in various investment activities today, that was never the primary goal for developing it. Bitcoin’s development project intended to prevent future financial meltdowns like 2008.
As people began familiarizing themselves with cryptocurrency technology, Bitcoin’s potential became more pronounced. And presently, you are likely to come across many stories about Bitcoin on various online sites. These include social, business, and news platforms around the globe. Some of Bitcoin’s technical challenges accelerated the development of additional cryptocurrencies. There are some you can stake and those you cannot.
How Do Crypto Networks Work?
To understand the staking concept well, you must know how cryptocurrency networks operate. For example, Bitcoin’s network’s basis is a decentralized architecture spread in various locations. The operation begins when you create a transaction and send the request for processing. In a traditional financial setup, an intermediary financial institution such as a bank would review your transaction details before approving it.
On the other side, Bitcoin transactions work a little differently. Instead of government-controlled intermediaries, independent validators (miners) review and approve your transaction request. These people receive payment in block rewards, partly from the transaction fees and new coin supply from the Bitcoin core system.
As a result, crypto networks can attain high-end security standards, which ensure that your funds and assets are always intact. However, the transaction processing mechanism is where Bitcoin differs from some cryptocurrencies such as Ethereum. Bitcoin uses a Proof-of-work (PoW) mechanism.
Bitcoin’s Proof-of-Work Consensus Mechanism Doesn’t Allow Staking
A proof-of-work consensus mechanism requires validators to perform two crucial tasks before they can add a transaction block to the blockchain. First, they must compete to earn the contract. Next, miners must solve complex transaction algorithms before they can eventually record a transaction on the blockchain. PoW differs from the Proof-of-Stake (PoS) mechanism, which some other blockchain networks use. In this case, a validator must deposit some funds before allocation of the transaction requests to process. But like in PoW, PoS validators earn block rewards after work.
Both Proof-of-Work and Proof-of-Stake consensus mechanisms have some advantages and disadvantages. PoW requires no prior deposits but consumes a lot of power. In addition, PoW validators compete for transaction blocks, so they need incredible computing power to survive. On the other hand, there is no competition to win transaction blocks to process in a PoS mechanism. Instead, you are assigned blocks based on your stake amount. However, one must deposit some funds in advance, which they cannot access throughout the staking contract. And this makes PoS a little more restrictive to aspiring validators.
Final Thoughts!
Bitcoin does not allow staking because its consensus mechanism’s basis is the Proof-of-Work. Only cryptos whose consensus mechanisms are on the Proof-of-Stake can allow staking. The PoW consensus mechanism is highly energy intensive. Fortunately, the aspiring validator doesn’t have to make any initial deposits before they can participate. Bitcoin may allow staking in the future, but all its significant validators must agree first. PoS is more energy efficient, thus encouraging environmental conservation. A PoS consensus mechanism also boosts transaction speeds and lowers service fees.
This article is not intended as financial advice. Educational purposes only.
