What is Staking?
Proof-of-Stake, also known as Staking, is the next revolution of blockchain consensus mechanisms. It improves several of the key issues of the currently dominating Proof-of-Work consensus mechanism.
In simple terms, Proof-of-Stake is a new standard (consensus algorithm) for running the decentralized blockchain infrastructure. It is a set of rules according to which the distribution of responsibilities for validating and recording transactions on the blockchain occurs and rewards are allocated.
Different Proof-of-Stake have slightly different set of rules, but in its core they are all about two questions:
• Who receives the right to validate and record transactions?
• What are the rewards for miners (operators) for validating and recording transactions
The right to validate transactions under Proof-of-Stake depends on different criteria. The most important criteria is the amount of the tokens the miner owns (the stake).
Proof-of-Work vs Proof-of-Stake
Different from Proof-of-Work, where the right to record transactions goes to those who runs the most powerful machines, under the Proof-of-Stake, the right goes to those with the biggest stake in the blockchain. This means that if a miner holds 5% of all coins, theoretically he can mine up to 5% of all blocks. This is not always the case and depends on the specifics of the protocol (blockchain) but illustrates the general principle.
The biggest coin holders also lock a certain amount of coins in a wallet as a collateral before they are allowed to validate the transactions of the network. During the time their coins are locked as a stake, they cannot sell or convert them. Therefore, they have the incentive to conduct the transaction’s validation in the best way possible so the value of their stake will not depreciate; and they will receive a coin reward for their service similar to miners in Proof-of-Work e.g. working as protectors of the network. The Stakeholders that own a relatively big share of the tokens have the tools to authorise the addition of new blocks once the miners discover them using the computational power of their hardware.
Apart from the size of the stake, there are other criteria that define the rule to validate and record transactions. There are two common methods for this, the Randomized Block Selection method and Coin Age Selection method.
The first method selects miners by taking the nodes with the highest stake and lowest hash values for consensus creation. Due to the public nature of the blockchain, the next miner can be predicted by the value of his stake.
The second method uses time as a factor for miner selection therefore the name Coin Age. This is done by multiplying the number of coins someone stakes and the time, usually in days, of staking. After being selected as a miner and validating the block. The coin age is set back to zero. This is done to prevent validation by only nodes with a high stake in the network.
This all goes with the low energy consumption for validation of blocks, since no mathematical quiz has to be solved. The stakeholders are motivated to work for the benefit of the protocol they use and earn a passive income for doing so.
Combining Proof-of-Work consensus with staking elements
Next to pure Proof-of-Stake protocols, there are other innovative approaches of combining Proof-of-Work consensus with staking elements. For instance, with Dash utilizes Proof-of -Work consensus where miners validate and sort transactions, write blocks and compete in mathematical quizzes in order to receive mining rewards. On a second layer, services are provided by Masternodes. They are an integral part of the governance and voting system of the Dash protocol and also contribute to the validation of special types of transactions like InstantSend. For these services the Masternodes also receive block rewards. In order to run a Masternode one has to stake 1000 Dash (current market value of 73’000 USD, 08.10.2019).
Staking is taken up by savvy crypto investors and funds. More and more service providers are offering technical staking services for a fee. Recently 6.5 billion USD crypto assets were staked on different blockchain networks.
Source: Circle Research: https://research.circle.com/crypto-reports/2q19-crypto-retrospective
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