The term “staking” is constantly mentioned these days, both in the crypto press and on Twitter, especially with Ethereum’s desire to move from Proof-of-Work to Proof-of-Stake.
If you want to have a better understanding of this topic, you have come to the right place. In this article, we’ll explain how staking works and why it’s interesting for investors.
What is staking?
staking refers to the fact of immobilizing funds in a crypto wallet to participate in the operation of a blockchain.
It allows cryptocurrency holders to earn rewards passively by simply forgoing moving their digital assets for a period of time.
Staking is an alternative to mining , which consists in solving complex mathematical equations using computer resources (CPU, GPU, ASIC).
While the dynamics of mining revolve around computing power, staking, for its part, values the quantity of cryptocurrencies locked on the network. Therefore, the higher the bet, the greater the associated winnings.
We are talking about staking for cryptocurrencies backed by a blockchain implementing the consensus mechanism Proof-of-Stake (PoS) or proof of stake. In the same way, mining is associated with Proof-of-Work (PoW) or proof of work.
? For a blockchain, a consensus protocol governs how transactions are validated. In addition, a consensus represents the decision taken collectively by the nodes of the network concerning the validity or not of a given operation.
How does staking work?
How staking works varies from one blockchain to another. However, some basic foundations remain common to the different implementations.
First of all, it should be noted that staking can only be practiced for corners compatible with this approach.
? Staking Rewards provides a comprehensive list of "stakable" assets and service providers. It is also a great tool to calculate an estimate of your earnings within a specified time frame.
Depending on the project, a minimum number of tokens to block is required to be eligible for staking.
In reality, the network associates the level of trust granted to it with the quantity of tokens that one is ready to immobilize.
By reciprocity, it considers the validators with the most stakes as being the most reliable. This can be justified insofar as, having a lot to lose in the event of default, the latter will ensure that transactions are made more secure.
However, the validators are designated randomly using an algorithm, to avoid centralization of activity around the same operators.
? A person carrying out staking is called a minter or staker.
What are the advantages and disadvantages of staking?
Cryptocurrency staking has several advantages:
- no need for big capital to start as with mining, where huge sums have to be invested in the purchase of computer infrastructures;
- electricity consumption is reduced;
- staking rewards entice community members to hodge their digital assets. The drop in supply leads to the scarcity of the token, which can encourage its price to rise if demand is constant;
- staking is an accessible offer, in particular thanks to an increasingly rich and varied value proposition and to the ergonomics of the services.
The major disadvantage of staking is that the tokens are locked. Since they can be stored – in a delegation context – on a wallet that does not belong to us, it becomes difficult to act proactively to limit losses in the event of a market collapse.
Some mechanisms derived from Proof-of-Stake
In order to optimize the decentralization, security and scalability of blockchain networks, many variants of PoS have emerged.
Delegated Proof-of-Stake (DPoS)
The DPoS applies a system of democracy according to which only a certain number of validators are authorized to secure the network.
The latter are elected by the token holders, the voting power of each being proportional to the quantity of locked tokens.
The validators who collect the most votes will become delegates . They will be responsible for validating transactions and distributing rewards.
Protocols such as Bitshares , EOS and Tron implement DPoS.
Liquid Proof-of-Stake (LPoS)
Under the LPoS, owners can delegate their voting rights without transferring their funds to a given validation node.
This amounts to keeping your cryptos in your wallet while transferring the decision-making power equivalent to the validator of your choice.
In this way, the token holder is excluded from any sanction in the event of a violation of the security rules and the delegate is the only one to bear the penalty.
In addition to being able to choose who will validate transactions (DPoS), cryptocurrency owners can vote on amendments to the protocol.
Tezos is often equated with a DPoS type blockchain when it is actually a ‘a network implementing LPoS.
Hybrid Proof-of-Stake (HPoS)
This is a compromise between Proof-of-Work and Proof-of-Stake. This model exploits the strengths of these two consensus mechanisms to increase the level of blockchain security.
Usually, in this type of configuration, the miners produce new blocks with the PoW, and the PoS validators then vote on the validity of these.
Among the blockchain projects operating in HPoS, we can cite Decred .
? To discover other ramifications of PoS, click here .
What are staking pools used for?
A staking pool allows minters to put in pool their resources in order to increase their chances of obtaining rewards .
Pools are useful when the barrier to entry into a network is relatively severe, either technically or financially.
The configuration, maintenance and development of these pools requires considerable effort. As a result, pool providers often impose fees, the value of which is proportional to the amount of rewards obtained by participants.
In addition, staking pools offer more flexibility in terms of commitment (small budgets, less restrictive withdrawals).
Proof-of-Stake is gradually establishing itself as a consensus protocol of choice, thanks in part to its low energy consumption and accessibility.
New versions of PoS could emerge in the future to improve the existing one.
In the same perspective, the practice of staking is set to become more widespread.
? We recommend that you read: ? What is finance decentralized or DeFi? ? What is a crypto Airdrop? < / a>