MINING VS STAKING
Let’s come to mining or staking. As we already know that the person who writes the new entry gets reward, it is natural that everyone wants to write new entry but how to decide who writes next.
There are two ways of solving this problem and these two solutions in crypto world are called mining (Proof Of Work) and minting/staking (Proof Of Stake).
Problems in this method are:-
1. It is not fast enough (can only perform few transactions per second).
2. The race to find solution first has resulted in using more and more resources which consumes too much electricity.
3. A person with large number of resources stands greater chance of winning the race and everyone does not have similar chances of winning.
4. Mining is more profitable in countries having cheaper electricity cost (mostly in developed countries), so people in developing countries do not have equal participation leading to the problem of geographic exclusion.
What is a Stake Pool?
Here, a stake pool comes in, which helps everyone to come together and delegate their stake (ADA) to pool. Pool does the work on their behalf and will return the rewards to delegators by subtracting pool's cost. The proportion of reward received by a delegator is decided by the number of ADA delegated.
In simple terms:- A person delegating twice amount than other person will receive twice the rewards (amount of reward is directly proportional to the ADA delegated to pool)
This is used by 1st and 2nd generation crypto (Bitcoin, Ethereum). In this method the network broadcasts a complex mathematical problem to everyone who holds the copy of blockchain (book in sky). The person who solves the problem first (using computing/silicon power) is given permission to write next entry, thereafter a new problem is sent to everyone on network to solve again and the process continues.
This method is used by 3rd generation cryptos like Cardano (ADA). In this a virtual lottery is done by network itself, randomly selecting 1 Lovelace (1 ADA = 1 million Lovelace) and whomsoever owned that Lovelace at the moment will be given permission to write next block (entry) and gets rewards in return.
In this method the person who holds more ADA has more probability of winning lottery but 1-person alone cannot own large number of ADA. So, his probability of winning remains very low. Not everyone has time and skills to run a node (hardware) by himself as doing this requires infrastructure, technical knowledge, keeping node online 24/7 etc.