What you need to know! 🕵️♂️
Staking can be understood as a new type of cryptocurrency mining and investment approach. It is the most popular alternative to Proof of Work and allows for a more fair system where anyone can take part in processing transactions and earn rewards.
To take part in a Proof of Stake network, the participant must purchase and stake a certain amount of the cryptocurrency used in the network. Network participants (called validators in a Proof of Stake blockchain) are then rewarded based on their stake in the network and the amount of work that they do within the blockchain.
Proof of Stake vs Proof of Work 🦾
Both Proof of Work and Proof of Stake are blockchain consensus protocols. Proof of Work was the first consensus protocol implemented in a blockchain when Bitcoin was introduced to the general public in 2009.
How Each of Them Work🤔
In a nutshell, Proof of Work involves miners in the network competing with each other to solve a difficult mathematical puzzle. The miner who solves the puzzle first is rewarded in cryptocurrency coins native to the blockchain. However, a problem started to arise as the adoption of blockchains that use Proof of Work grew: the collective energy demand of all of the miners in the ecosystem started putting strain on the global energy supply. This strain has led to a large criticism of Proof of Work blockchains. Also these protocols are limited in scalability. In order for blockchains to scale, it became clear that a new consensus protocol was required.
A Solution To the High Energy Demand 🌎
This is where the Proof of Stake consensus protocol comes in as a less energy-intensive consensus protocol. Instead of the miners in the network using large amounts of electricity to take part in the competition to solve the mathematical puzzle to earn a reward, the miners (called validators in Proof of Stake) each receive a portion of the unprocessed transactions to process. Subsequently, the validators are rewarded based on the amount of work that they do. which is taking part in the consensus. Validators are only eligible to participate in consensus with fully staked nodes and a large sum of coins staked to each node is required. So it can be said that a validator is rewarded in proportion to the amount of the circulating supply of a cryptocurrency that they stake.
One reason that validators with larger staking amounts are allowed to run more nodes that process more transactions is because by staking more cryptocurrency in an ecosystem, they have more to lose if they jeopardize the network in any way.
A More Fair System ⚖️
Blockchain was created with the purpose of creating software that has no reliance on a central authority or institution to run, resulting in a distributed system that anyone can take part and have a say in.
However, one facet of blockchain technology that is most at risk of being centralised and monopolised by large institutions is its mining. As you may recall, mining is the process whereby network participants process and verify transactions, receiving a reward for their work within the ecosystem. Mining in Proof of Work involves using computer hardware to solve the blockchain’s mathematical puzzle. As mining popularity grew, so too did the cost of the machines used to mine. This has created a somewhat high barrier to entry for anyone that wants to mine on a Proof of Work blockchain. This is mainly due to the fact that large institutions and high networth individuals purchase all of the available mining hardware, inflating the cost of a single unit of mining hardware. Mining on your own is also no longer feasible, this is because the collective computing power used in cryptocurrency mining is so large. So, any computing power that you have will most likely not be able to compete with the rest of the network. A miner can always join a mining pool, but either way your realised returns are diminished.
Proof of Stake removes the risk of monopolisation by introducing a consensus where work is distributed amongst all of the validators. This allows anyone to take part in validating transactions.
An Example of Proof of Stake👇
A well-established cryptocurrency project that makes use of the Proof of Stake consensus protocol is Elrond.
The Elrond network is a public blockchain developed to provide more scalability, interoperability, and high throughput. The primary goal was to create a decentralized network that can provide better performance than other competitors like Bitcoin and Ethereum while putting the high standard of user privacy into practice.
For the rest of this article, we will take a look at certain aspects of the Elrond project to explain some need-to-know concepts of Proof of Stake blockchains and cryptocurrencies.
Staking on a Proof of Stake blockchain such as Elrond can be done in one of two ways. You can either be a validator or a delegator. Let’s take a look at both of these methods.
Staking and Delegating: What you need to know!
What is a Validator Node? 🤷♂️
A validator node in a Proof of Stake blockchain is like a miner in a Proof of Work blockchain. Both play similar roles in their respective blockchains.
In a Proof of Work blockchain, a miner would purchase mining hardware to take part in the mining process and become a miner. However, in a Proof of Stake blockchain, a person can become a validator by purchasing and locking the minimum amount of cryptocurrency required by the network, called the base-stake. The funds are then locked by a smart contract specifically set up for staking. A node is basically a server setup for the sole purpose of processing and validating transactions on a blockchain. Once the purchased funds are locked up in the node’s wallet, the node can then be used as a validator node.
To be a validator in the Elrond ecosystem, you must be able to run a node and stake 2,500 coins of its native cryptocurrency, called eGold.
Since 2,500 eGold is a large amount and also not everybody wants to run a validator node by themselves the Elrond Network has created a special purpose smart contract to enable pools that stake together. Those pools a run by a staking provider, who runs the nodes for the pool of people staking together and receives a share of the rewards the pool receives. The transactions are all done by a smart contract. So, if you don’t want to run a node by yourself you can delegate 1 eGold or more to a staking provider like ProCrypto.
What is a Staking Provider? 👨💼
A staking provider is a company that provides the support and infrastructure needed for you to run a validator node and start earning rewards. The provider simplifies the process of setting up a validator node significantly. They also make sure that your node runs consistently by having the infrastructure in place to minimize the downtime of a node, assuring you that you are constantly earning rewards and you don’t have to take on the hassle of maintaining your own node.
Apart from providing stable infrastructure for a person to run their own validator node, a staking provider also enables a person to become a delegator. Let’s take a look at what delegating on a Proof of Stake blockchain is, specifically looking at Elrond.
What is delegating 🤝compared to staking?
As mentioned, delegation is the second method in which a person can stake on Elrond. It is the process whereby a person delegates eGold to a Staking Provider. The staking provider then runs validator nodes for a pool of delegators.
The network automatically distributes validator rewards and subtracts the fee of the staking provider by means of a smart contract. Delegator rewards are claimable once per day, with no time limit for claims.
Choosing the Right Staking Provider 🔍
When researching the right staking provider there are two important things to keep in consideration before choosing the one that you will use. These main consideration is their infrastructure and their strategy. The better their infrastructure the better they serve the network overall and the more rewards the pool will receive in the long run. Their strategy will tell you where they put their energy to, does that fit to your plans?
You want to make sure that the staking provider that you’re thinking of using has good infrastructure in place to host your validator node. Any downtime of your validator node will negatively impact the realised returns of your staking venture. The same happens when their systems can not handle the networks load.
Be aware that a stake can be at risk if the validator gets slapped. You can learn more about slapping in one of our following posts.
At ProCrypto we aim to be great staking provider with stable, efficient infrastructure for the network and you.
What is slashing?
Slashing is a punishment mechanism to improve the networks security and availability. A validator will be slashed when he does not behave consistently or as expected on the network, e.g. when he tries to manipulate.
The penalty most times is a predefined percentage of the validator’s coins, which will be lost when punished.
Slashing is expected to be implemented into Elrond Network with Phase 4. Details are yet to become public.
What Is Top up 🚰
Topup refers to staking more eGold on a validator node in addition to the 2500 base-stake amount required by the Elrond network. A person can either top up a validator node directly by adding eGold to a validator node, or can top up indirectly through a staking pool.
Topping up the amount of eGold on a validator node will earn you more rewards as there is more equity that will be compounded by the Elrond network. However, your APR (Annual Percentage Rate) will gradually decrease. To avoid this gradual decrease in your APR it is recommended that you run more validator nodes instead of topping up the amount of eGold that you have on a single node. For example, instead of having 5000 eGold on one node, it will be more profitable to run 2 validator nodes each with 2500 eGold.