How to Stake on Proof-of-Stake Blockchains
Many people feel that Proof of Stake algorithms will become increasingly important as blockchain technology grows in scale and complexity. Find out why.
To participate in the verification and generation of blocks on a blockchain network that uses Proof-of-Stake (PoS) consensus procedures, you must stake tokens.
Staking on a Proof-of-Stake blockchain network could give away to receive passive income from digital assets in the form of block rewards while also contributing to the protocol’s governance.
PoS has exploded in popularity as developers and consumers seek quicker, more efficient, and more democratic blockchain networks than Proof-of-Work (PoW) networks, which are slower, more expensive, and more energy-intensive.
The consensus algorithm is a critical component of any blockchain network since it is the process through which all network stakeholders agree on the validity of the network’s shared data and subsequently protect it on the blockchain.
Before moving on to a new block of data, a blockchain network must reach a consensus.
Proof of Stake (PoS) is an evolution in consensus algorithms that is gaining traction across many blockchain networks, including Tezos, Cosmos, and the upcoming Ethereum 2.0. It is an update to the energy-intensive and limited Proof-of-Work (PoW) consensus mechanism that has been a standard in the blockchain industry since the launch of Bitcoin.
PoS networks provide significant speed and efficiency advantages over PoW networks, which require energy-intensive data mining via expensive hardware to confirm blocks.
In a Proof-of-Stake blockchain, an individual or group is picked at random to verify transactions by an algorithm that considers the number of tokens they have staked, or locked up, on the network as collateral. Those who are chosen to confirm a block in the past have been rewarded with the transaction fees associated with that block.
Because those responsible for the block lose their tokens if fraudulent conduct is uncovered, the stake functions as a deterrent against harmful behavior.
Peercoin was the first to use PoS in 2013. PoS and Delegated Proof of Stake (DPoS), an iteration of the PoS model in which you pool coins toward staking delegates, have subsequently taken hold with numerous high-profile blockchain projects implementing the concept. Users stake tokens on a network and assign them to their chosen delegates on DPoS blockchains.
Delegates on some blockchains can influence blockchain governance based on the amount of support they receive in the form of staked tokens.
Tezos, Cosmos, Cardano, EOS, Algorand, and Synthetix Network are some notable blockchains that use PoS or DPoS.
The most widely awaited PoS implementation is Ethereum’s move from PoW to PoS, dubbed Ethereum 2.0, which is expected to launch in 2021.
How To Stake Tokens in a PoS Network
Holding the blockchain’s native cryptocurrency is the first step toward staking in a PoS network. For example, if you want to stake Tezos, you’ll need XTZ; if you want to stake Cardano, you’ll need ADA, and so on.
While there are changes in how you engage in different PoS blockchain networks, the following is the typical order of operations:
- Download a wallet that allows you to stake the coin you own.
- Some protocols demand that a certain quantity of tokens be staked. To stake on Tezos, for example, you’ll need at least 8,000 XTZ. The PoS iteration of Ethereum 2.0 will require 32 ether.
- Validators must be online 24 hours a day, seven days a week, which necessitates the use of devices with constant internet access. Basic installations with Raspberry Pi or desktop computers are available, however virtual private servers can also be used to conduct staking in the cloud.
- Your wallet serves as a node, staking your money in the hopes of validating and forming a new block. Your staked tokens can help a delegate validate and construct a new block with DPoS.
The more your stake in a PoS protocol, the more likely you are to be chosen to build the next block and collect staking rewards. A specific number of delegates are chosen in DPoS protocols based on staked tokens backing them. If the delegate you backed creates the block, the block rewards are distributed proportionally to the people who contributed to their stake.
Staking on PoS blockchains may provide a way to earn money from crypto-assets. It’s vital to consider token dilution, or the inflation of the token while choosing a staking blockchain to join.
The minting of additional tokens reduces the value of a single cryptocurrency or the market capitalization of a cryptocurrency system, resulting in dilution. In the absence of any other external forces, the more tokens issued, the less valuable existing tokens become.
Staking on PoS networks offers a relatively stable way to make passive income on your digital assets while also enabling a faster, more scalable, and energy-efficient blockchain infrastructure.
Many Proof-of-Stake blockchains also allow you to participate in the protocol’s governance by staking tokens as a vote for certain protocol upgrades or roadmap revisions, allowing for decentralized governance in the protocol’s future.
Experimentation and iteration continue to improve PoS algorithms, balancing speed, efficiency, and security while also aligning incentives and decentralizing governance.
PoS is seen as critical by many as blockchain technology grows in scale and complexity, aiming for applications in sophisticated markets and industries. PoS algorithms are quickly becoming a fundamental part of the blockchain ecosystem, despite their status as an experimental and iterative technology.