Most people consider Bitcoin and Ethereum to be the first and second generation blockchains, respectively. Cardano is a third generation blockchain platform. This distinction is made because they use different protocols to operate their networks: proof-of-work and proof-of-stake.
Bitcoin and mining
Bitcoin uses a “proof-of-work” protocol for blockchain maintenance: all members participate in a regular block generation ceremony and compete against each other by doing some computational work on their devices. These devices (usually computers) are also referred to as “worker nodes”. The network protocol chooses a winner based on the amount of work done (and some other minor factors). The winner node will create new blocks in the upcoming cycle, and these blocks will be validated by the network majority consensus. For doing maintenance work, the node’s wallet address will be rewarded in coins by the network protocol. This process is also referred to as “mining”. Proof-of-work protocols, although providing a lot of security, have some negative sides. Primarily, a lot of computing power is consumed (think: electricity), and it is not very profitable for an average user, especially if they work on their own.
Staking
In crypto-currency context, “staking” means allowing the blockchain network to hold (or keep) some of your coins for a set period of time, with the main goal of supporting the operations of the network. You don’t lose ownership of the coins, but you’re usually unable to make transactions using these coins until you stop staking them. Sometimes it’s also said that the coins are “delegated” to the network for staking.
Network members who choose to delegate their coins to the network are called “stakeholders”. These users have a stake in the network, and they participate in block creation, validation and reward ceremonies. Usually there is no minimum number of coins required to participate. In order to create new blocks and complete transactions, a proof-of-stake protocol will choose some of its stakeholders to do the maintenance work. This choice is made based on the number of coins each stakeholder has staked. More coins staked means more trust in the network and more reputation, in a sense.
Having this trust-like principle set up helps the network become more stable and keeps it functioning properly.
As a reward for participation, stakeholders who were chosen to do the work are given a number of crypto-currency coins by the protocol, proportional to their stake. Simply put, the more coins you stake, the higher the chances are that you will be picked for network maintainance, and the chances are higher that you will win some coins as a reward.
In comparison to proof-of-work platforms, this kind of mechanism requires much less electricity (computing power), and grants more winning chances to each member. A proof-of-stake protocol is used by many networks today, but we consider that the Cardano platform the best one there is.
