For people who are amateurs in the crypto sphere mining is usually associated with large data centers with thousands of ASICs or GPU rigs being noisy on the balcony. But there is also an alternative way, i.e. Proof of Stake algorithm that was introduced in 2012.
What is Proof of Stake (PoS)?
PoS mining is based on the fundamental principle of capitalism: “Money makes money.” The trusted nodes in the networks based on Proof of Stake blockchain are involved in confirming transactions and generating new blocks. They must have a certain number of tokens on the balance sheet and receive remuneration for their work. This is a common consensus algorithm, and it has several subspecies, differing in the schemes for assigning validators and calculating payment for services.
Who created Proof of Stake?
For the first time, Proof of Stake technology was described by the programmer Sunny King, who tried to solve the problem of excessive consumption of the classical blockchain electricity. It happened in 2011 and at that time it cost about USD 150 thousand to maintain the Bitcoin network. In the next 2012 halving was coming, which further motivated Sunny and his colleagues to create an alternative blockchain proof of stake algorithm.
Peercoin was the first Proof of Stake cryptocurrency. It was released in 2013 and it used not only PoS, but also elements of PoW. This algorithm was developed as an alternative to Proof-of-Work (PoW), which has important drawbacks. Vitalik Buterin, joined the development of this technology and set a goal to completely transfer Ethereum platform to Proof of Stake, as a result of which this technology soon became dominant in the world of cryptocurrencies.
The first modification of the algorithm, i.e. the DPoS (Delegated Proof of Stake) was presented by Dan Larimer. He has been at the origins of the Bitcoin community since 2009 and was the first to implement the BTC USD currency token concept for his company Bitshares in 2013. The community reacted positively to the idea, as the share proof model reduced the probability of an attack by 51%.
How does cryptocurrency staking work?
How Proof of Stake works? It needs a way to identify a valid block in the blockchain database. Focusing solely on the account balance, the developers will make the system centralized, because the coins will be mined by users who store the cryptocurrency on their wallets. To prevent wealthy users from having a clear advantage, the developers have created additional selection methods.
Proof of Stake type:
Random selection of blocks (Nxt, BlackCoin)
Block generation randomization is based on a special formula that provides the search for the minimum hash rate in combination with the size of the bet. The rates are publicly available, which makes the Proof- Of -Stake mining be more predictable. You d better analyze the situation to determine the node that has the right to create the block.
Selection of coins by “age” (Peercoin)
This is a combined method of randomness, taking into account the “age of the cryptocurrency”. The duration of the stay of coins on the balance is multiplied by the number of tokens. Only those coins that have been on the wallet balance for 30 days or more can take part in the block generation. The longer the cryptocurrency has been on the account, the higher are the chances of success and getting a reward. If the coin rate has signed the block, then it is automatically assigned a zero value. The maximum probability of block generation occurs after 90 days. This minimizes the dominance of overly old rates.
Each of these types of Proof of Stake is aimed at ensuring maximum network security. For example, the creator of the Peercoin cryptocurrency is sure that the algorithm he has implemented creates additional difficulties for carrying out an attack on the network, because there is no need for centralized associations to mine the coins. The purchase of more than half of the coins will cost more money than the purchase of 51% hashing on a PoW network.
How are staking rewards calculated?
Unfortunately, the PoS miners earn less than their PoW-oriented counterparts. At the same time, it is important to take into account that for staking you do not need to purchase additional equipment, connect it to the network and regularly carry out diagnostics.
The wallet provides automatic staking. You place coins at the address and they immediately start generating profit. The income from staking cryptocurrencies can differ depending on the chosen coin. In most cases, payments are 2–15% per annum of the amount of assets on the account. Here are the profitability indicators for popular staking cryptocurrencies:
What is a staking pool?
Users who have blocked their tokens (holders) can unite and form a staking pool. By joining forces, users can profit from staking without complex organizational preparation for the role of a validator.
In the Ethereum 2.0 blockchain, the minimum input amount to participate in PoS validation is 32 ETH. FreeTON provides up to 1,000 validators, and each of them has a minimum balance of 500,000 Crystals.
Thanks to the staking pool, anyone can connect to one of the validators and give him even a small amount of cryptocurrency to work, receiving income minus a small commission for his services. The mining pooling system is familiar to many users in terms of Bitcoin, where computing power is combined and increases the likelihood of mining a block, then dividing the coins according to the efficiency of each participant. The Proof of Stake algorithm allows the same technique, only instead of processors or video cards, coins are collected in one pool.
The entrance threshold is the main plus. It is not necessary to have dozens of ETH coins or thousands of crystals. In just a few clicks of the mouse, you place a cryptocurrency, and it starts generating income. This is very convenient if you plan to invest in it for years to come, thus you will get additional growth. Since the pool always monitors the state of its servers and the validation process, its members can safely count on stable, 24/7 profits.
What is Cold Staking Cryptocurrency?
Staking looks very attractive as it carries much lower financial risks than mining. You do not need to purchase expensive equipment in large quantities and take on the associated difficulties. However, in the case of PoS, the risks exist. In addition to the fact that the coin that you mine may sink in price, there are cybersecurity threats that can lead to the loss of coins if they are stored on a crypto exchange or in an online wallet. Since most storages are hot, i.e., connected to the network, attackers can take advantage of this. To avoid this, investors use cold staking, i.e., they store their PoS coins on hardware devices such as hard drives. This type of mining is characterized by a high level of security and is especially relevant for purchase holders. However, as soon as the coin holder transfers them to another address, cold staking terminates.
What are the advantages of staking?
Passive earnings having a cryptocurrency wallet is quite an attractive prospect for many users.
There are many advantages of this type of income:
A simplified form of system management, which is much more convenient than standard mining;
No need to purchase expensive equipment for earning money, which also consumes a large amount of electricity;
This type of content minimizes the risks of attacks and hacks by 2 times;
With this type of earnings on cryptocurrency, heat is not generated;
Capital does not decrease over time, since it completely depends on the rate of the cryptocurrency.
Among the main disadvantages of staking on the exchange are the following:
Coins that have already been staked cannot be spent by the user at any time, because they are blocked on the wallet;
Almost all earnings depend on trends and market changes, which is not always justified.
Which cryptos can be staked?
All staking cryptocurrencies work on the basis of the PoS mining algorithm. This approach to the mining of digital assets is more environmentally friendly than the alternatives, since a large amount of computing equipment does not need to be connected to the asset network to operate.
Proof of Stake cryptocurrencies
It is a payment transaction platform. The cryptocurrency blew up the market in 2019 and interested banks.
It is a network for vertical and horizontal scaling. This platform is designed to create decentralized applications. It is similar in architecture to the operating system.
It is another platform for building decentralized applications. It is included in the TOP-5 of the most popular cryptocurrencies today. Every user knows how to mine Ether. Ethereum (ETH), will soon also switch to the PoS. Initially, the Ethereum network began to function through the classic Proof-of-Work, gradually moving to Proof of Stake through a series of hard forks.
The main task of the network is to create a system for the free distribution of entertainment content based on the blockchain. Some people compare this platform to social media.
It is a duplicate of the popular Ethereum cryptocurrency created by Chinese developers.
It is a system with a self-management option and a smart contract control function.
USD Coin (USDC)
It is a coin, the value of which is tied to the current USD price.
The ever-increasing complexity of cryptocurrency networks, according to most analysts, will accelerate the transition from PoW mining to PoS, despite all its shortcomings. Most new projects operate on a pre-mining scheme, so PoS and its variants will provide more and more competition to PoW in the coin mining market.