Staking is the process of confirming blocks and generating new coins on blockchains, similar to mining, based on Proof-of-Stake consensus. Compared to mining, it is architecturally more complex and has long been considered less reliable, but it has a number of advantages. Used in most blockchains launched after 2018.
Staking was first used in the Peercoin (PPC) cryptocurrency, launched in 2011. However, the first versions of the PoS consensus were unreliable, so projects based on classical mining remained more popular. In addition, several hybrid consensus blockchains have been launched, combining mining and staking on the same chain. One of the first “hybrid” blockchains is Emercoin.
The turning point in the attitude towards staking came in 2016-2017, when the “delegated staking” (dPoS) algorithm appeared and the development of Ethereum 2.0 began. At this time, new, more reliable consensus technologies were proposed – Tendermint and Casper.
In some projects, the staking process has its own name, for example, baking (baking) in Tezos or forging (forging) in NXT and several other blockchains.
The role and capabilities of a staker may vary depending on the type of PoS consensus used. In the “classic” PoS and in blockchains like Ethereum 2.0, anyone with the minimum required deposit (for example, 32 ETH) can become a staker. Staking nodes in blockchains based on delegated PoS are called validators and their number is strictly limited. Other participants can “connect” their wallets to validators, receiving a share of the income. This process is called delegation.
How staking differs from mining
Technically, staking in the process of creating blocks and forming a blockchain is in many ways similar to mining, but there are significant differences:
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The candidate for generating each next block is determined pseudo-randomly depending on the share of the staker, and not by competitive calculations of the block header hash. Therefore, the probability of creating a block by a specific node (staker) is determined not by computing power, but by the amount of coins in the wallet involved in staking, as well as the time they have been at the address.
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The start and end of staking occur with a significant delay, depending on the rules of a particular blockchain, while the coins on the balance of the wallet are not available. As a rule, the blocking period of coins is from several hours to several weeks. Therefore, staking is for long-term holders.
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It is not possible to “switch” to staking another cryptocurrency. To do this, you need to sell coins and buy new ones.
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Operating costs for staking consist only in the purchase of the required number of coins and are almost independent of external factors.
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The main risks of staking are the depreciation of the coin, in which you can lose the entire deposit, as well as the theft of coins from the wallet, which can be done remotely. A long unlock period significantly reduces the risk of theft. On the other hand, mining hardware is harder to steal and has a residual value.
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On one computer (server), you can start staking multiple blockchains without mutual impact on performance.
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Staking has extremely low power consumption and can run on a PC and even a mini computer. Most of the new versions of PoS algorithms require more significant hardware resources, but not comparable to mining.
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Staking allows for faster block generation (down to 1 second or less), as well as a block confirmation structure in multiple parallel chains (sharding). This greatly increases the throughput of the blockchain.
For a user (staker), starting the process is much easier than purchasing and setting up mining equipment. In fact, to start staking, you need to buy coins, transfer them to the wallet and give a command to start staking or delegation (depending on the blockchain and wallet interface). As in mining, a staker’s wallet only works when it is online and connected to other network nodes.
Staking yield
The profitability of staking depends on the specific blockchain and, like mining, consists of two parts: the emission of new coins and transaction fees. It can range from fractions of a percent to 15-20% per annum. Reliable projects designed for long-term work usually program a yield of several percent per annum, comparable to the yield of a bank deposit. Changing the yield mechanism is possible only with the help of a hard fork approved by the majority of stakers (validators).
The participation of the staker node in the creation of blocks depends on random factors, and the profitability becomes close to the reference value for the blockchain only over a long period. In blockchains where all coins were generated in the first block, staking income consists only of fees. The profitability of staking in fiat currencies in the absence of overhead costs is determined solely by the movement of the exchange rate of the extracted asset.
Not real staking
Many exchanges and collaborative mining pools refer to staking coins in their deposit wallets as “staking”, often promising higher returns than staking on their own. Including these offers may apply to coins and tokens that are not actually generated using blockchain staking.
It should be understood that this is not true staking in a decentralized network, where you have full control over your assets and can unstake them at your discretion. When placed on a third-party service, you entrust your coins to an intermediary, therefore, they can be used for other purposes or even stolen.
Source: Bits
I’m James Harper, a highly experienced and accomplished news writer for World Stock Market. I have been writing in the Politics section of the website for over five years, providing readers with up-to-date and insightful information about current events in politics. My work is widely read and respected by many industry professionals as well as laymen.
