Staking by ChangeHero

In the world of Blockchain, Trading and Mining are often considered to be the major sources of income for the crypto-lovers. As the interest around crypto grew, competition for finding blocks has intensified. With the increased demand for electricity and soaring prices of extensive computing power, it became cumbersome for enthusiasts to invest in mining. This barrier gave rise to a new consensus protocol called Proof-of-Staking to ease up things. PoS has been gaining traction in the crypto sphere as an alternative to mining and a source of passive income.

In this post, ChangeHero will give you a brief outline of staking and how it evolved over time.

The evolution

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Source: Tenor

In 2012, Sunny King and Scott Nadal came up with the Proof of Stake and staking as a replacement to the PoW protocol. The major difference of PoS from the former is that there is no competition for the block creation and the algorithm is based on the user’s stake. Instead of miners solving the problem, PoS decides block producer on the number of coins that were held in the wallet. But it falls short in terms of maintaining decentralized governance as the power is vested in the hands of token holders with large amounts of cryptocurrency.

Later in 2014, Daniel Larimer developed the Delegated Proof of Stake (DPoS) mechanism. It was aimed to overcome the limitations of both the PoW and PoS systems and ensure the decentralized nature of the blockchain. DPoS protocol involves a voting system in which the token holders vote for a representative. These delegates are responsible for the confirmations of the transactions and achieving consensus. Rewards are collected by the delegate and then proportionally distributed to the voters. If the selected node is not efficient then it will be expelled and replaced with another one.

Staking

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Photo by Keenan Constance on Unsplash

Staking is derived from the concept of PoS and any user holding crypto can stake their funds to create a block or elect the delegates depending on the blockchain. In return, they will be able to receive rewards. Also, staking enables the user to contribute to the governance of the platform and participate in important decision making events. In staking, a user has to lock their funds in a wallet for a fixed period of time. The more coins held and longer the duration, the higher the rewards a user will gain. User will not be able to spend those coins as long as he/she is participating in the staking.

The locked funds will act as collateral and any malicious actors will be losing their funds and kicked out of the chain if an attempt to breach the system takes place. A deterministic algorithm selects the validators usually considering the staking size and how long the coins are being held through a randomization mechanism.

There is another phenomenon called Cold Staking which can be seen where the amount of funds held for staking is huge. In this case, these tokens are held in a hardware wallet and the user receives rewards as long as the funds are not moved from the wallet.

The Pool

Perks

  • Reduces power consumption and energy-efficient than mining.
  • Ensures a constant flow of rewards and acts as a reliable source of passive income.
  • Value of the assets doesn’t depreciate with time unlike the computing hardware in the mining.

Pitfalls

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Photo by Maria Freyenbacher on Unsplash

In staking, a user has to lock the funds in a wallet and hence it is vulnerable to the volatility. Locked tokens cannot be spent and in a bearish run, it’s price depreciates. Besides, the rewards earned from Staking are small and takes longer duration for maximum returns.

An Alternative

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1 9NKiVb0WyrCiUYhxlSUcxQ 300x169 - The Story of Staking: Perks and Pitfalls
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The Story of Staking: Perks and Pitfalls
Description
Derived from Proof-of-Stake, Staking is a viable alternative to mining and a passive source of income. Though it sounds good, it does have some pitfalls.
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ChangeHero
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