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Getting to know Staking

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1 year ago

What is Proof of Stake (PoS)

If you know how Bitcoin works, you are probably already familiar with Proof of Work (PoW), the mechanism that allows transactions to be aggregated into blocks. Then, these blocks are linked together to create a blockchain. More specifically, miners compete to solve complex mathematical puzzles, and whoever solves them first has the right to add the next block to the blockchain.

Proof of Work has proven to be a very powerful mechanism for facilitating consensus in a decentralized manner. The problem is, this process involves a lot of computation. Miners compete to solve puzzles, the goal is only one: to keep the network safe. You could argue, this excessive computation process is okay if it aims for network security. However, have you ever wondered: is there any other way to maintain decentralized consensus without high computing costs?

Proof of Stake also appeared. The main idea is that participants can lock coins (or “stake”), and at certain intervals, the protocol randomly assigns one of them the right to validate the next block. Usually, the probability of being chosen is proportional to the number of coins - the more coins that are locked, the higher the chance.

In this way, determining which participant will create a block is not based on the ability to solve the hash challenge as is the case on Proof of Work. Rather, it is determined by how many staking coins are stored.

Some might argue that block production through staking will increase the scalability of the blockchain. This is one of the reasons the Ethereum network is planning to migrate from PoW to PoS in a series of technical improvements collectively referred to as ETH 2.0.

Who created Proof of Stake

One of Proof of Stake's early appearances can be attributed to Sunny King and Scott Nadal in their 2012 paper for Peercoin. They describe it as “a peer-to-peer cryptocurrency design that originated with Bitcoin Satoshi Nakamoto”.

The Peercoin network is launched with a PoW / PoS hybrid mechanism, in which PoW is mainly used to issue initial supplies. However, PoW is not required for long-term network continuity, and its significance is gradually diminishing. In fact, most network security relies on PoS.

What is Delegated Proof of Stake (DPoS)

An alternative version of this mechanism was developed in 2014 by Daniel Larimer called Delegated Proof of Stake (DPoS). It was first used as part of the BitShares blockchain, but soon after, other networks adopted this model. Including Steem and EOS, which Larimer also made.

DPoS allows users to use their coin balance as voting rights, where the voting power is proportional to the number of coins held. These voting rights are then used to elect a number of delegates managing the blockchain on behalf of their voters, ensuring security and consensus. Usually, staking rewards are distributed to these elected delegates, who then distribute a portion to their voters proportionally according to their respective contributions.

The DPoS model reaches consensus with a smaller number of validation nodes, so network performance tends to increase. On the other hand, this can actually lower the level of decentralization, as the network relies on a small group of validating nodes. These nodes handle the operation and governance of the entire blockchain. Participate in the process of reaching consensus and establishing key governance parameters.

In short, DPoS allows users to show their influence through other participants on the network.

how does staking work?

As we discussed earlier, the Proof of Work blockchain relies on mining to add new blocks to the blockchain. In contrast, Proof of Stake generates and validates new blocks through a staking process. Staking requires that the validator locks coins, so they can be randomly selected by the protocol at certain intervals to create blocks. Typically, participants who stake a higher amount of staking have a higher chance of being selected as the validator of the next block.

This way, the blocks to be produced do not rely on specialized mining hardware, such as ASICs. While ASIC mining requires a large investment in hardware, staking requires direct investment in the cryptocurrency itself. So, instead of competing for the next block by computing, PoS validators are selected based on the number of staking coins they have staked. "Stakes" (coin hold) incentivize validators to keep the network secure. If they fail to do so, all of the staking assets they bet are put at risk.

While each Proof of Stake blockchain has a dedicated staking currency, some networks have adopted a two-token system, where rewards are paid out in a second token.

In very practical terms, staking means depositing funds in a suitable wallet. Basically, it allows anyone to perform various network functions in exchange for staking. This includes adding funds to the staking pool.

  • How are staking rewards calculated :

There is no short answer to this question. Each blockchain network can use a different way of calculating staking rewards.

Several mechanisms are adjusted on a block by block basis, taking into account a variety of different factors. This can include:

how many coins is staked the validator has staked how long has the validator been staking the total amount of staked coins is staked at the inflation rate network other factors

In certain networks, staking rewards are set at a fixed percentage. This reward is distributed to the validator as a kind of compensation for inflation. Inflation encourages users to spend their coins instead of storing them, which could increase their use as a cryptocurrency. But with this model, validators can calculate exactly how many staking rewards they will receive.

Predictable reward schedules and calculations may appear favorable to some, rather than probabilistic opportunities to receive block rewards. And because it is public information, it might encourage more participants to engage in staking.

  • Staking pool

A staking pool is a group of coin owners who pool their resources to increase the chances of validating blocks and receiving rewards. They combine the power of staking and share the rewards in proportion to their respective contributions to the pool.

Setting up and maintaining a staking pool takes a lot of time and skill. Inevitably, staking pools are the most effective on the network, despite relatively high barriers to entry (technical or financial). Because of this, many pool providers charge a fee, deducted from the staking rewards distributed to the participants.

In addition, the pool can provide additional flexibility to each participant who is staking. Staking assets must be locked for a fixed period and usually have a withdrawal or unbinding time set by the protocol. What's more, there is almost certainly a minimum balance needed to prevent malicious behavior.

Most staking pools require a low minimum balance and do not extend the withdrawal time. Because of this, joining a staking pool may be more ideal for new users than staking it yourself.

  • Cold staking

Cold staking refers to the process of staking from a wallet that is not connected to the Internet. This can be done using a hardware wallet, but also with an air-gapped software wallet.

Networks that support cold staking allow users to stake while securely depositing funds. It should be noted that if the staking coin owner moves coins from the cold storage, they will stop receiving rewards.

Cold staking is especially beneficial for large coin holders who want to ensure maximum protection of their funds while supporting the network.

Conclusion

Proof of stake and staking open up more avenues for anyone looking to participate in blockchain consensus and governance. What's more, it's a really easy way to get passive income just by saving coins. As it becomes easier to stake, the barriers to entry to the blockchain ecosystem are lower.

**source book of staking

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Avatar for Yanadya
Written by   12
1 year ago
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