If you have been closely following the cryptocurrency market, you must have come across the term ‘staking.’ But this concept just doesn’t seem to be easy to understand, doesn’t it?
So, what exactly is staking? What is proof of stake (PoS)? Let’s find out!
What does staking actually mean?
Staking basically means mining of PoS coins. Proof of stake happens when a miner holding (not spending) or placing a stake of certain amount of his cryptocurrencies validates a block of transactions.
Unlike proof of work, the creator of next block in the proof of stake system is selected in a pseudo-random way. The math is pretty simple. The higher the amount of coins you stake, the higher your chances are of getting rewarded.
But between staking and getting rewarded, there are a lot of other things to take care of.
First, you must have a PoS based cryptocurrency for mining PoS. Some of the cryptocurrencies based on PoS are Skycoin, Bitbean and plenty of others. However, bitcoin doesn’t follow this mechanism as it is a PoW based cryptocurrency.
Second, you must have your coins in your wallet for a certain period of time so that they become eligible to be staked. This time period varies greatly with different cryptocurrencies. Some require 24 hours whereas others become ready in 8 hours only. Further, the longer the cryptocurrencies remain in your wallet the greater will be the reward due to its compounding nature.
What are the differences between PoW and PoS?
PoW involves solving tough mathematical problems with the help of specialized computers known as mining rigs. When you get the solution, the reward is a certain amount of the respective cryptocurrency. Presently, it is 12.5 bitcoins for bitcoin mining.
High computational power and enormous consumption of electricity are both needed for PoW. And as time passé, the problems become tougher which will require more computational power and at the same time rewards also decreases.
Meanwhile, this is not the case with PoS. It requires the miners to hold a certain amount of their cryptocurrencies in their wallet or as required to solve those problems. It’s easy for the computers this way and enormous consumption of energy is not necessary.
As of now, PoS looks more economic and environment-friendly whereas PoW wins the race in terms of security.
Moving on, you should know that proof of stake has 4 main types. Below are the 4 types you should consider when you decide to do staking.
Simply speaking, masternodes are the computers/nodes in the cryptocurrency network. They are quite different from the ordinary nodes as they perform certain important functions rather than just relaying the transactions through them. In Dash’s case, they perform functions such as locking transactions with InstantSend as well as PrivateSend, coordinating mixing of coins and voting on budget funding.
Through the use of masternodes, complete privacy of transactions entered into through its network and a quick completion of transactions are guaranteed. Unlike bitcoins where the transactions are not only public and traceable but also takes about 10 minutes to confirm a payment, masternodes ensure complete privacy and quick completion of transactions entered into through its network.
Though it was pioneered by Dash, many other cryptocurrencies like Bitsend, Bata and Block have adopted the use masternodes. In masternode staking, masternodes act as the validator.
Since the masternodes perform certain functions and it costs money and effort to do so, the hosts are incentivized by a portion of block rewards in their respective cryptocurrencies. The payout time for different cryptocurrencies will also be different. For example, if you host a CROWN masternode, you will receive the reward in terms of CROWN and the payout time for which is several times a day.
Remember that anyone, including you, can host masternodes. You only have to stake a certain portion of your cryptocurrencies (lock or put them in certain way) to be able to receive rewards. All you need is a minimum amount of cryptocurrencies (1000 in case of Dash), a server or a VPS installed with Linux, a dedicated IP address and of course a little bit of time to settle in to get started with masternode staking.
With the ‘proof of ownership’ system, the control of majority of masternodes by an individual is prevented making masternode staking a safe bet. With the increasing number of cryptocurrencies, the use of masternodes is definitely gaining some heights as it’s one of the most used, secure forms of staking.
Delegated Proof of Stake
The delegated proof of stake is more like a technological demography or you can call it a system with controlled centralization.
In this system of PoS, ‘N’ number of delegates signs the block. And these delegates are selected on the basis of votes by the users of the network with every transaction made. The voting power of the users is directly proportional with the number of tokens they hold/stake. The number of delegates is to be decided by the users of the network. But there must be a minimum of 11 delegates. The delegates are incentivized by paying them a small token.
DPOS allows its network to gain some of centralization’s major advantages, while still maintaining the calculated measure of decentralization. Anyone can become a delegate in the network provided that he gets votes. This system eliminates the potential negative impacts of centralization with the help of these delegates. This methodology of the system ensures that the delegates have done their job correctly and its quite time efficient as DPOS removes the need to wait until a specific number of untrusted nodes have verified a transaction before it can be confirmed.
As the power of signing blocks vests in the delegates, there is no need of artificial interventions to slow down the signing process. At the same time, it is more reliable, secure, economic and time-efficient. DPOS allows much more transactions to be included in a block than the PoW.
The following are the advantages of DPOS:
- Gives shareholder a way to delegate their vote to a key
- Increases dividends shareholders earn
- Increases amount paid to further secure the network
- Maximizes performance of the network
- Minimizes cost of running the network (bandwidth, CPU, etc.)
Open Wallet Staking
Open wallet staking is as simple as the title.
In this type of staking, you are required to purchase PoS based cryptocurrency and transfer it your wallet, sync your wallet with the network and leave your wallet unencrypted.
After a certain period of time, your cryptocurrencies become eligible for staking. Remember that you must not spend the coins if you want to stake them. Payout time of the rewards depend on the cryptocurrency. Pivx, Rain and Hold are the examples of open wallet.
Closed Wallet Staking
As the name suggests, you receive rewards by holding your cryptocurrencies in your wallet either online or offline.
Unlike, in open wallet staking, you can get the rewards even when you are offline. Other rules are pretty much the same as in the case of open wallet staking. Neo and Skycoin are some of the examples of closed wallet.
So, that’s pretty much everything about staking in cryptocurrency. If all your doubts about staking have already been cleared, maybe consider staking over mining next time? Great!