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Staking is a process in which people or companies called “validators” are rewarded for providing computing power and storage space to a blockchain. Validators use their own cryptocurrency as a “pledge” to show that they believe in the network and are willing to participate in validating transactions and creating new blocks.
If validators are successful, they are paid out with a reward in the form of cryptocurrency and transaction fees. Staking is often used in Proof-of-Stake (PoS) blockchains, where validators are selected by considering the amount of their pledge.
Proof of Stake (PoS) is a consensus process used to validate transactions in a blockchain and create new blocks. Unlike Proof of Work (PoW), where miners compete with their computing power to confirm transactions and create new blocks, PoS selects validators based on their pledges.
When was proof of stake introduced and by whom?
The term “Proof of Stake” was first introduced in 2011 by Bitcoin developer Sunny King and Bitcoin enthusiast Scott Nadal in a whitepaper. The whitepaper introduced the concept of PoS as an alternative to Proof of Work (PoW), the consensus method used by Bitcoin.
Since then, PoS has been used as a consensus method by many other blockchains, including Ethereum, EOS, and Cosmos. The idea behind PoS is to develop a consensus method that is less energy-intensive than PoW and also less susceptible to the phenomenon of “mining centralization”, where a few miners have a very large share of the network power.
The original PoS whitepaper by Sunny King and Scott Nadal introduced the concept of PoS as an alternative to Proof of Work (PoW), the consensus method used by Bitcoin.
The whitepaper describes how PoS works and why it could be considered a better alternative to PoW. It explains how validators are selected based on their pledge, how transactions are validated and new blocks are created, and how validators are rewarded.
The whitepaper also addresses potential attack vectors and security concerns with PoS and offers proposed solutions to address these issues. The PoS whitepaper introduces the concept of PoS as a possible alternative to PoW and provides a technical description of how PoS could work in practice.
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Proof of stake (PoS) is a consensus mechanism used in cryptocurrencies such as Ethereum. The PoS mechanism was developed to solve some of the problems associated with the Proof of Work (PoW) consensus mechanism used in Bitcoin.
Some advantages of PoS compared to PoW are:
- Energy efficiency: PoS is more energy efficient than PoW as it does not require expensive mining hardware or power bills.
- Decentralization: PoW systems tend to be controlled by a few large mining pools, making the network less decentralized. PoS systems, on the other hand, encourage users to set up their own nodes, which can help decentralize the network.
- Security: PoS systems can be just as secure as PoW systems, as they still require some kind of bet or “proof” to confirm transactions.
One disadvantage of PoS compared to PoW is:
- Resistance to change: PoS systems can be more difficult to change than PoW systems because those who control the network (usually those with the largest stakes) have a greater interest in the network remaining unchanged.
- Difficulty joining the network. In Proof of Work systems, users can simply buy mining hardware and start participating in the network and earning rewards. In Proof of Stake systems, on the other hand, users usually need to own a certain amount of cryptocurrency to participate. This can be a hurdle for new users who do not yet own cryptocurrency.
- Vulnerability to Denial of Service (DoS) attacks. In PoS systems, those who hold the most cryptocurrency are usually the ones who control the network the most. If someone buys a large amount of cryptocurrency and then decides to attack the network by deliberately causing its nodes to fail, this could cripple the network. In PoW systems, on the other hand, it would be more difficult to carry out such an attack because there is much more mining hardware participating in the network.
Overall, there are both advantages and disadvantages to PoS compared to PoW. Which consensus mechanism is best depends on the specific requirements of a cryptocurrency network.
How PoS works technically?
Here is a brief explanation of how PoS technically works:
- Validators put up their cryptocurrency as a pledge to show that they believe in the network and are willing to participate in validating transactions and creating new blocks.
- The network then selects a validator to create a new block based on the amount of the pledge they have put in. The higher the pledge, the more likely they are to be selected.
- The selected validator adds the new transactions to a new block and performs a series of checks to ensure they are valid.
- If the block is valid, it is submitted to the network and checked by the other validators. If the majority of validators confirm the block as valid, it is added to the blockchain.
- The validator who created the block is then paid a reward in the form of cryptocurrency and transaction fees.
The PoS process is often considered a more energy-efficient alternative to PoW, as it does not require a large amount of computing power to create new blocks.
There are different types of staking used in different blockchains:
Delegated Proof of Stake (DPoS): This is a type of PoS where validators are voted for by the users of the network. Users can cast their votes for the validators of their choice and those with the most votes are selected to participate in validating transactions and creating new blocks.
Leased Proof of Stake (LPoS): This is a type of PoS where users can rent their staking resources to other users, who then use them to validate transactions and create new blocks. The users who rent out the resources receive a portion of the rewards achieved for staking.
Bonded Proof of Stake (BPoS): This is a type of PoS where validators must deposit a pledge to participate in validating transactions and creating new blocks. If a validator creates an invalid block or otherwise harms the network, their pledge is forfeited.
Cold Staking: This is a type of staking where the staking resources are kept offline to protect them from hackers and other threats. Cold Staking allows users to participate in validating transactions without storing their private keys online.
There may also be other types of staking used in certain blockchains. It is important to note that each blockchain has its own staking system, which may differ from those mentioned above.
For example, Cardano uses a consensus process called “Ouroboros”, which is based on the proof-of-stake concept. Unlike other proof-of-stake blockchains, Ouroboros does not require a deposit from validators. Instead, validators are selected based on their share of the total amount of Cardano coins they hold.
Cardano’s Ouroboros protocol consists of several algorithms that ensure the network is secure and fairer. For example, Ouroboros uses an algorithm called “Luck by Weight”, which ensures that validators who hold a larger amount of Cardano coins have a higher probability of being selected to validate transactions and create new blocks.
Overall, Cardano has implemented the proof-of-stake concept in its Ouroboros protocol to develop a more secure and fair consensus process for its blockchain.
In addition to Proof of Work (PoW) and the various types of Proof of Stake (PoS), there is also the
Proof of Authority (PoA): This is a consensus mechanism where validators are selected based on their identity. PoA is usually suitable for blockchains operated by centralized organizations that disclose their identities.
It is conceivable that there are other consensus mechanisms. However, we are not currently aware of these.
Which blockchains have implemented this concept?
Since the Proof of Stake concept was introduced in 2011, it has been implemented as a consensus method by a number of blockchains, including:
Ethereum: Ethereum plans to move from Proof of Work (PoW) to Proof of Stake (PoS) to make the network more energy efficient. The transition to PoS, referred to as Ethereum 2.0, was completed in December 2020.
EOS: EOS uses a Delegated Proof of Stake (DPoS) process where validators are chosen by the users of the network.
Cosmos: Cosmos uses a Delegated Proof of Stake (DPoS) process where the validators are elected by the users of the network.
Tezos: Tezos uses a Delegated Proof of Stake (DPoS) process where the validators are chosen by the users of the network.
There are many other blockchains that use PoS as a consensus process, including NavCoin, Decred, and Algorand. It is important to note that each blockchain has its own staking system, which may differ from those mentioned above.
How can I participate in the Staking?
To participate in Staking, there are usually a few steps you need to follow:
- Look for a blockchain that supports Staking. There are many blockchains that support Staking, including Ethereum, EOS, Cosmos and Cardano.
- Buy an appropriate amount of cryptocurrency. To participate in Staking, you usually need to own a certain amount of cryptocurrency, which is used as a pledge.
- Find a staking platform or wallet. There are many platforms and wallets that support staking, both online and offline. Look for a platform or wallet that is suitable for the blockchain you want to stake on.
- Follow the instructions of the platform or wallet to stake your cryptocurrency. The exact steps depend on the platform or wallet you use. However, you usually need to send your cryptocurrency to the platform or wallet and then specify how much you want to stake.
- Wait for rewards. If you successfully participate in staking, you will usually be paid regularly with rewards in the form of cryptocurrency and transaction fees. The amount of rewards depends on the amount of your pledge and the total amount of cryptocurrency on the network.
It is important to note that each blockchain has its own staking system and therefore the steps to participate in staking may differ from the above. Make sure you find out about the specific staking system of the blockchain you want to participate in before you start staking.
How can I stake via Binance or other exchanges and can I do that at all?
Yes, many crypto exchanges, including Binance, offer their users the opportunity to participate in staking programs. To participate in a staking program through Binance or another exchange, there are usually a few steps you need to follow:
- Make sure the exchange supports Staking. Not all exchanges support staking, so make sure the exchange you use offers this feature.
- Buy an appropriate amount of cryptocurrency. To participate in Staking, you usually need to own a certain amount of cryptocurrency that will be used as a pledge.
- Send your cryptocurrency to the exchange. Follow the exchange’s instructions to send your cryptocurrency to their platform.
- Follow the exchange’s instructions to stake your cryptocurrency. The exact steps depend on the exchange you use. However, you usually need to choose a staking program and then use your cryptocurrency for it. It is important that you learn about the staking program offered by the exchange and understand how it works before you choose it. You may also need to hold your cryptocurrency in a special staking wallet in order to participate in the program. Make sure you follow all the exchange’s instructions carefully to ensure you can participate in the Staking Programme.
The type of staking Binance offers depends on the cryptocurrency you want to stake in. Some cryptocurrencies that Binance offers for staking use Delegated Proof of Stake (DPoS), while others use Proof of Stake (PoS) or another consensus method.
In general, Binance offers staking programs for a variety of cryptocurrencies, including Cosmos (ATOM), Tezos (XTZ), Tron (TRX), and Algorand (ALGO). If you wish to participate in a Binance staking program, you should find out about the specific staking system of the cryptocurrency you wish to stake in to ensure you follow all the required steps.
