Tagged: PoS

What is Crypto Staking?

Blockchain / Cryptocurrency / DeFi
December 30, 2021
5

Staking has lately gained popularity in the crypto world, and like many things in crypto, staking may be a difficult or easy concept, depending on how many layers of understanding you want to access.

Before delving into crypto staking, it is natural to ponder if it is worthwhile to stake cryptocurrencies. Indeed, crypto staking has seen a rapid growth in recent years, with intermittent surges in the number of people staking cryptocurrencies for yield farming prizes or fixed interest.

In reality, big exchanges such as Coinbase and Binance that offer staking services to consumers might earn APYs of up to 30%. As a result, you can plainly see a significant increase in the demand for staking cryptocurrencies, which generates numerous talks about staking.

Staking is a way of earning rewards for holding certain cryptocurrencies

Crypto staking is the process of locking up crypto holdings in order to receive rewards or interest. Cryptocurrencies are built on blockchain technology, which verifies crypto transactions and stores the resulting data on the blockchain. Staking is another term for confirming transactions on a blockchain.

These validation methods are referred to as proof-of-stake (PoS) or proof-of-work (PoW) depending on the kind of cryptocurrency and its accompanying technology. Each of these procedures contributes to crypto network consensus, or confirmation that all transaction data adds up to what it should.

However, attaining that consensus necessitates the participation of others. That is what staking is—investors that actively retain or lock up their crypto assets in their crypto wallet are participating in the consensus-taking procedures of these networks. Stakers are essentially the people that approve and verify transactions on the blockchain.

The networks reward those investors for doing so. The particular prizes will vary according to the network. It may be useful to think about crypto staking as equivalent to putting money in a savings account. As a reward from the bank, the depositor gains interest on their money while it is with the bank, which utilizes the money for other reasons (lending, etc.). Staking coins is therefore analogous to earning interest.

How does Crypto Staking work?

Staking is how new transactions are added to the blockchain in cryptocurrencies that follow the proof-of-stake concept.

Participants must first pledge their currencies to the cryptocurrency protocol. The protocol selects validators from among these individuals to confirm blocks of transactions. The more coins you commit, the more probable it is that you will be selected as a validator.

When a new block is added to the blockchain, new cryptocurrency coins are created and given as staking rewards to the validator of that block. Most of the time, the payouts are the same cryptocurrency that the members are staking. Some blockchains, however, employ a different form of coin for incentives.

To stake cryptocurrency, you must first acquire a cryptocurrency that employs the proof-of-stake concept. Then you may decide how much you wish to bet. Many prominent exchanges allow you to do so.

When you stake your coins, they remain in your ownership. You’re basically putting them to work, and you may unstake them later if you wish to exchange them. The unstaking process may take some time, and some cryptocurrencies require you to stake coins for a set period of time.

Staking is not available for all forms of cryptocurrencies. It is only accessible for coins that employ the proof-of-stake methodology.

To add blocks to their blockchains, several cryptocurrencies employ the proof-of-work concept. The issue with proof of work is that it needs a significant amount of computational power. As a result, cryptocurrencies that employ proof-of-work consume a lot of energy. Because of environmental issues, Bitcoin in particular has been chastised.

Proof-of-stake, on the other hand, does not need quite the same amount of effort.

Which cryptocurrencies are capable to be staked?

This also makes it a more scalable solution capable of handling larger volumes of transactions.

Here are a few of the major cryptocurrencies you can stake:

Ethereum: was the first cryptocurrency with a programmable blockchain that developers can use to create apps. Ethereum started out using proof of work, but it’s transitioning to a proof-of-stake model.
Cardano: is an eco-friendly cryptocurrency. It was founded on peer-reviewed research and developed through evidence-based methods.
Polkadot: is a protocol that allows different blockchains to connect and work with one another.
Solana: is a blockchain designed for scalability since it offers fast transactions with low fees.

Is Crypto Staking a Good Investment?

Anyone may earn crypto by staking it. However, unless someone has a large cache of proof-of-stake coins, staking is unlikely to make them wealthy.

Staking payments are comparable to stock dividend payouts in that they both provide passive income. They don’t need the user to do anything other than keep the correct assets in the proper place for a defined period of time. Because of compound interest, the longer a user invests their coins, the bigger the overall profit potential.

However, unlike dividends, there are a few factors specific to proof-of-stake currencies that determine how much of a staking incentive users are likely to earn. When looking for the most successful staking coins, users should consider the following variables and more:

How big the block reward is
The size of the staking pool
The amount of supply locked

Furthermore, the fiat currency worth of the coin being staked must be considered. Assuming that this value remains stable or grows, staking might be advantageous. However, if the coin’s value declines, earnings may be swiftly depleted.

What exactly is a stake pool?

A staking pool is a collection of coin holders that pool their resources in order to improve their chances of validating blocks and getting rewards. They pool their staking power and split the benefits in accordance to their contributions to the pool.

Setting up and managing a staking pool may take a significant amount of effort and expertise. Staking pools are best successful on networks if the entrance barrier (technical or financial) is reasonably high. As a result, many pool operators deduct a fee from the staking incentives provided to players.

Aside from that, pools may offer further freedom to individual stakeholders. Typically, the stake must be locked for a specific length of time, and the protocol specifies a withdrawal or unbinding time. Furthermore, there is probably definitely a significant minimum amount necessary to stake in order to disincentivize malevolent action.

The majority of staking pools have a minimal minimum balance and no extra withdrawal delays. As a result, joining a staking pool rather than staking alone may be preferable for beginning players.

The Advantages of Crypto Staking

Here are some of the advantages of staking cryptocurrency:

It is an easy way to earn interest on your cryptocurrency holdings
You do not need any equipment for crypto staking like you would for crypto mining.
You are helping to maintain the security and efficiency of the blockchain
It is more environmentally friendly than crypto mining

The major advantage of staking is that you earn more cryptocurrency, and interest rates may be quite high. In rare circumstances, you may be able to make more than 10% or 20% every year. It has the potential to be a highly rewarding method to invest your money.

And all you need is crypto that operates on the proof-of-stake mechanism.

Staking is another technique to support the blockchain of a cryptocurrency in which you have an investment. These cryptocurrencies rely on staking by holders to authenticate transactions and keep things operating smoothly.

The Dangers of Crypto Staking

There are a few risks of staking crypto to understand:

Crypto prices are volatile and can drop quickly. If your staked assets suffer a large price drop, that could outweigh any interest you earn on them.
Staking can require that you lock up your coins for a minimum amount of time. During that period, you’re unable to do anything with your staked assets such as selling them.
When you want to unstake your crypto, there may be an unstaking period of seven days or longer.

The most significant danger of crypto staking is that the price will fall. Remember this if you come across coins with unusually high staking reward rates.

Many lesser crypto companies, for example, promise high returns to tempt investors, but their prices later plummet. If you want to add cryptocurrencies to your portfolio but want less risk, cryptocurrency stocks may be a better option.

Although the crypto you stake is yours, you must unstake it before you may trade it again. To avoid unpleasant surprises, ask out if there is a minimum lockup time and how long the unstaking procedure takes.

Closing thoughts

Staking is a method of earning additional benefits by using your crypto holdings or coins. It might be beneficial to conceive of it in terms of earning interest on cash deposits or dividends on stock assets.

Essentially, coin holders enable their crypto to be utilized in the blockchain validation process and are paid by the network for doing so. Staking might provide another possible revenue stream for cryptocurrency investors.

What is Cardano?

Blockchain
December 28, 2021
1

Cardano is a decentralized public blockchain platform that uses proof-of-stake (PoS) and aims to be a highly scalable and energy-efficient decentralized application (dApp) development platform with a multi-asset ledger and verifiable smart contracts.

Cardano blockchain platform powers the Cardano cryptocurrency — which trades under the symbol ADA.

Cardano is a third-generation blockchain. Bitcoin was the first of its kind. Ethereum came in second place. Ethereum led the pack, but its technology was basic because it was fundamentally new. To improve and expand, Ethereum must now rely on its governance system. Third-generation blockchains, such as Cardano, benefit from hindsight. They may identify past initiatives’ shortcomings and restrictions and evolve accordingly.

This is exactly the course Cardano took. The project began in 2014, not with a whitepaper, but with community study and collaboration aimed at addressing the shortcomings of existing blockchains. They then began coding from the ground up, seeking to address each of those constraints. Before being incorporated to the greater structure, each building component was presented to conferences and experts for assessment.

With this philosophy of methodical and peer reviewed development, Cardano is working towards addressing the problems of second generation blockchains.

The Cardano platform is based on the Ouroboros consensus protocol, which was developed by Cardano during its early stages. It was the first PoS system that was not only shown to be safe, but it was also the first to be informed by scholarly academic research.

Each development phase, or era, in the Cardano roadmap is anchored by the research-based framework, which combines peer-reviewed insights with evidence-based methods to progress toward and achieve milestones related to the future directions of the blockchain network.

ADA is the Cardano digital currency and is named after Ada Lovelace, a 19th-century countess and English mathematician who is recognized as the first computer programmer.

The Ada sub-unit is the Lovelace; one Ada = 1,000,000 Lovelaces.

There are three organizations that play an important role in the Cardano ecosystem. The network is maintained by the nonprofit Cardano Foundation, which is responsible for its governance and advancement. EMURGO is one of the founders of Cardano and is deemed the for-profit arm of the network involved in driving its commercial adoption. Blockchain infrastructure firm Input Output Hong Kong (IOHK) is the third partner, providing technology and engineering insights to the network.

Origin

Charles Hoskinson, the co-founder of Ethereum, began the development of Cardano in 2015 and launched the platform in 2017. The platform is named after Gerolamo Cardano, an Italian polymath, whose interests and proficiencies ranged through those of mathematician, physician, biologist, physicist, chemist, astrologer, astronomer, philosopher, writer, and gambler.

Roadmap

The Cardano roadmap is a summary of Cardano development, which has been organized into five eras:

Foundation (Byron era)
Decentralization era (Shelley era)
Smart contracts (Goguen era)
Scaling (Basho era)
Governance (Voltaire era)

Each era is centered on a collection of functionality that will be given over the course of several code releases. While the Cardano eras will be released chronologically, the work for each era is done in simultaneously, with research, prototyping, and development typically occurring concurrently across the many development streams.

Requirements

The algorithm used to build blocks and validate transactions is at the heart of every blockchain network. Cardano mines blocks with Ouroboros, an algorithm that employs the proof-of-stake (PoS) protocol. The protocol is intended to minimize energy consumption throughout the block creation process. It accomplishes this by reducing the requirement for hash power, or huge computational resources, which are essential to the operation of Bitcoin’s proof-of-work (PoW) algorithm. Staking determines a node’s ability to construct blocks in Cardano’s PoS system. A node’s stake is equivalent to the amount of ADA, Cardano’s cryptocurrency, that it holds over time.

How Ouroboros Works?

Ouroboros functions on a general level as follows.
It divides physical time into epochs, which are made up of set intervals of time called slots.
Slots are analogous to manufacturing shifts. An epoch now lasts five days, and a slot lasts one second, however these values are customizable and can be altered upon an update proposal. Epochs operate in a cyclical pattern, with one ending and another beginning. Each slot has a slot leader who is chosen using a “lottery” procedure. The larger the investment in this method, the better the odds of winning the lottery.

Slot leaders are in charge of the following duties:

Validating transactions
Creating transaction blocks
Adding newly-created blocks to the Cardano blockchain

Ouroboros requires a modest number of ADA holders to be online and connected to the network. The algorithm incorporates the notion of stake pools to further reduce energy usage.

ADA holders may organize themselves into stake pools and elect a few to represent the pool during protocol execution, making participation easy and assuring block production even if some are offline.

Layered Technology

There are two types of information involved in value exchanges. There is the straightforward, from, to whom, when, and how much — this is the only data Bitcoin can support. However, as we all know, value transfers are never this straightforward in our actual world. With each transaction, we might ask: what are the terms and circumstances of the transfer, why was the money transferred, and who was involved? This is referred to as metadata.

Ethereum allowed for the integration of all of this data. The link between the actual value transfer and the related metadata is referred to as a smart contract.

Contracts that are programmable. However, because there is no split between accounting and computation in Ethereum, this information is saved simultaneously, with no thought given to whether the metadata is always required to be included. This is an issue. The more data contained with each transaction, the more gas it costs, the more difficult it is for the blockchain to keep that information, and the more difficult it is for nodes to maintain the blockchain’s history.

As a result, Cardano isolates the transfer from the why.
They achieve this by dividing the platform into two different layers:

The Cardano Settlement Layer (CSL) is a protocol that allows for the settlement of transactions on the Cardano network. This layer is in charge of token economics as well as the balances of all user accounts. This layer is used to trade Cardano’s native currency, ADA. In layman’s terms, this simply implies that this layer contains all code related to accounts and the ADA token.
The Cardano Control Layer (CCL) this layer contains all of the smart contract functionalities. This layer can also enable regulatory components such as digital identification.

This allows for easier upgrades and enhanced flexibility.

Governance

Cardano wishes to establish blockchain-based governance. That implies that choices about the blockchain’s future may be voted on by token holders and incorporated into protocol.

They foresee a type of library where ADA holders may submit and vote on enhancements and adjustments. For the protocol to be implemented, a particular percentage of votes must be received.

Off-chain governance systems, on the other hand, offer some semblance of voting, however there is no consistent voting procedure across all partners. Miners cast their votes by allocating their computational resources (or stake in the case of PoS) to the blockchain split (version) that they favor. Users vote on the chain they will use by using it. Exchanges also have a say in deciding which tokens to support. However, all of this voting takes place after the fork. As a result, on-chain governance establishes a system in which everyone votes in the same way, and voting occurs prior to implementation.

However, there are both pros and cons to this system.

Pros: This approach will most likely aid in the prevention of hard forks. Creating a mechanism for discussion and voting promotes fast network upgrades without the hassle of heated discussions and controversial forks. It essentially democratizes the process by granting equal voting rights based on token holdings. This system decentralizes government as well. Instead of just a few engineers being in charge of suggestions and updates, the entire community may become involved.
Cons: On-chain voting has several disadvantages as well. If there is a problem, each implemented feature becomes far more difficult to remove. Code-based governance is immutable. We also trust the community to make informed judgments on protocol updates. To avoid actions such as trolling, systems must be in place. Even apathy would be detrimental to this system.

None of this governance system is currently in place; it’s all still being developed. The details of the protocol and how it will address the above concerns remain to be seen.

Treasury

A portion of each block reward (25%) is put into a treasury. This fund is decentralized and only accessible via the voting process explained above. Assume the Cardano community want to hold a development competition. The specifics are offered to the community, and ADA holders vote on whether or not to participate in the tournament. The community can then vote on how to support the tournament using the treasury. With a unanimous decision, monies from the treasury can be used to finance network developments and improvements.

Perhaps researchers would like to obtain funds in the future to explore aspects of Cardano and offer changes. The treasury system may be able to facilitate this.

All of this contributes to resolving the question of how blockchains should pay themselves once their supporting corporations have gone out of business.

Remember that this concept has not yet been deployed.

Conclusion

The Cardano project is expected to introduce a number of advances to the smart contracts platform sector. It is collaborating with professors from colleges all around the globe to include peer-reviewed academic research into its architecture, which is more than any other platform we’ve looked at so far, including Ethereum. It attempts to address alleged weaknesses in Bitcoin and Ethereum governance while adopting governance concepts from other blockchains.

What is Proof of Stake (PoS)?

Blockchain
December 28, 2021
2

Proof of stake (PoS) is a consensus method that blockchain networks employ to reach distributed consensus and confirm transactions.

The fundamental tenets of blockchain technology are decentralization and distributed databases. However, one of the most important aspects of blockchain is the requirement for network nodes to reach consensus on the current state of the network.

As a result, the consensus mechanism is an important architectural idea in the blockchain ecosystem. Currently, the two most prevalent consensus techniques are Proof-of-Work (PoW) and Proof-of-Stake (PoS). While PoW has been the traditional method for obtaining consensus in blockchain networks, it has a number of drawbacks.

PoS tries to address the flaws that were visible in PoW.

How does PoS work?

Blockchain is a distributed ledger of transactions that is decentralized.

Because there is no one server overseeing the network, everyone must agree on which transactions are genuine. It would otherwise be feasible for anyone to make bogus transactions. The servers in a blockchain are referred to as “nodes.” Transactions are processed by nodes. Some nodes can add blocks of transactions to the chain, therefore maintaining and extending the ledger. These nodes are known as “miners” in PoW networks such as Bitcoin.

In PoS, nodes commit funds to the network — a process known as “staking” — in exchange for a chance to be chosen as the next block writer, as opposed to nodes vying to be paid for solving cryptographic problems, as in PoW. Nodes that may add blocks in PoS networks are known as “validators,” who are those who oversee validating transactions on a blockchain. Each validator has a chance of being chosen to write the next block and receiving the associated rewards. It’s like a lottery: the more the stake of tokens invested, the better the chances that node will be picked. The selection of the next block writer, the next validator, is a pseudo-random procedure dictated by the magnitude of the stake you have allocated to the network as a user.

Mining power in PoS

Mining power in PoS is determined by the number of coins staked by a validator.

Participants who stake more coins have a better chance of being picked to add additional blocks. Each PoS protocol picks validators in a different way. There is generally some randomness involved, and the selection process can also be influenced by other criteria like as the length of time validators have been staking their coins. Although anybody staking might be picked as a validator, the chances are slim if you’re staking a tiny amount.

If your coins account for 0.001% of the total amount staked, your chances of getting picked as a validator are around 0.001%. That is why the majority of players join staking pools. The validator node is put up by the owner of the staking pool, and a group of users pool their funds for a higher chance of winning fresh blocks. The pool’s participants share the rewards. A minor fee may also be charged by the pool owner.

PoS Vs. PoW

Both PoS and PoW techniques accomplish the same purpose, but in different ways.

The primary distinction between PoS and PoW networks is how the network obtains consensus for its blockchain. PoW achieves consensus by enabling a single member to write the next block in the blockchain and be compensated in the native coin of that blockchain for their work. Miners are basically consuming massive quantities of processing power and electricity while attempting to “solve an extremely difficult cryptographic puzzle”.

This technique has been criticized for needing excessive energy, having trouble expanding or developing the network, and failing to provide adequate throughput (the ability to process many transactions).

PoS can improve upon some of the biggest problems presented by PoW, namely:

Energy consumption: PoS requires less energy than PoW.
Transaction throughput: PoS networks can handle more transactions than PoW.
Scalability: PoS networks can scale more easily than PoW networks.

Security

A 51% attack is an effort by an individual or group to acquire control of a network by controlling the majority of hashing or staking power. It is unknown if PoS networks are more or less vulnerable to 51% attacks than PoW networks.

The issue is primarily theoretical, as 51% attacks have only happened a few times in actual life. Due to the vast amount of processing power required, conducting this sort of attack against a network as large as Bitcoin would be almost unfeasible.

In the case of PoS, attackers would have to purchase more than half of the tokens being staked. The attacker might then become the only validator and take control of the network. According to one argument, this may be impossible to do due to how high it would push the price of any single token. The objective is that individuals will prefer to engage honestly in the system by staking tokens rather than go to the hassle of attempting to attack the network, which could quickly become expensive.

Bottom Line

The promising advancements in PoS consensus algorithms have demonstrated their viability for use in current blockchain networks. PoS is an enticing idea, with significant value gains in terms of energy efficiency, blockchain protocol throughput, and transaction speed. As the discussion over cryptocurrency’s environmental effect heats up, PoS coins may be a viable option. It is crucial to remember, however, that PoS is still in its early phases of development. In the long term, a thorough knowledge of the fundamental logic for PoS as well as the inherent hazards is unavoidable.