In this lesson
- find out who decides which block comes next
- understand the difference between mining (proof of work) and staking (proof of stake)
- see why both cost money – and why that is actually a good thing
In the previous lessons we said that "the network" writes new payments into blocks. But the network is thousands of computers that do not know each other and do not have to trust each other. Which of them may write the next block? If anyone could, any time, George from the blockchain lesson would write himself as many chickens as he liked.
The solution is simple and a little harsh: writing a block has to cost something. Whoever wants to cheat must pay a lot first – and loses what they paid.
Proof of work: a guessing race#
Bitcoin uses proof of work. So-called miners compete to be the first to find a number that makes the fingerprint (hash) of the new block start with enough zeros. There is no clever shortcut – you can only guess. Fast, and a lot.
Whoever guesses first adds the block and gets a reward: newly created bitcoins plus the fees from the payments in the block. Since April 2024 that is 3.125 BTC per block. That is why it is called mining – new coins are "mined" from work, not from the ground.
To keep blocks coming roughly every 10 minutes, the network keeps adjusting how hard the guessing is. More miners join, guessing gets harder; fewer miners, it gets easier.
Why this stops fraud: anyone who wanted to rewrite an old block would have to "guess" its number again, plus the numbers of all blocks after it – faster than all other miners combined. They would need most of the computing power of the whole network. For Bitcoin, that would cost an astronomical amount.
The price for this is electricity. Bitcoin mining uses as much energy as a whole mid-sized country – one of the most common criticisms of cryptocurrencies.
Proof of stake: a deposit instead of electricity#
The second approach is called proof of stake. Instead of a race of computers, validators lock up their own cryptocurrency as a deposit. The network picks who writes the next block by lottery – the bigger the deposit, the bigger the chance.
A validator who cheats loses part of the deposit (this is called slashing). So cheating still does not pay – you just risk your own money instead of electricity.
Ethereum switched from mining to proof of stake on 15 September 2022, and according to ethereum.org its energy use dropped by about 99.95%. Running your own Ethereum validator requires locking up at least 32 ETH.
| Comparison | Proof of work | Proof of stake |
|---|---|---|
| Who writes blocks | miners | validators |
| What is at stake | electricity and hardware | their own cryptocurrency |
| Penalty for cheating | wasted energy | losing part of the deposit |
| Example | Bitcoin | Ethereum (since 2022) |
Staking for ordinary people#
When an exchange or app talks about "staking", it usually means you hand your cryptocurrency to a validator (or the platform) that stakes it for you, and get part of the reward in return. It sounds like interest at a bank. It is not interest at a bank.
Staking is not a savings account
The reward is paid in a cryptocurrency whose price can drop sharply – a few percent a year will not save you if the price falls by a third. Deposits are often locked for some time, and the platform you stake through can go bust. Nobody guarantees you anything.
Common myths#
- "Miners dig up bitcoin out of nothing, for free." They pay for electricity and special hardware – and when the price drops, mining stops paying off.
- "Proof of stake is less secure because it costs nothing." It does cost – validators risk their own deposit instead of electricity.
- "Staking is risk-free interest." See the box above.
Summary
- Writing a new block has to cost something, otherwise cheating would pay.
- Proof of work (Bitcoin): miners guess, the winner gets new coins and fees; it uses a lot of electricity.
- Proof of stake (Ethereum): validators lock up a deposit and lose it for cheating; energy use is a tiny fraction.
- Staking in an app means lending your cryptocurrency to validators – with a reward, but also with risks.