What Is Staking Cryptocurrency Coins?

Leave cash in a savings account for a while, and you should generate more money in the form of interest. Stake cryptocurrency by locking it in a crypto wallet, and you could end up with more coins.

Staking coins could be the answer to crypto’s emerging environmental, security, and centralization problems. Let’s take a look at how staking coins works, and what implications it could have for the world of crypto.

Achieving Consensus

Cryptocurrency transactions derive their legitimacy from consensus. As cryptocurrencies are anonymous and decentralized, users need to know that their crypto balances are accurate and their transactions are valid.

Crypto transactions are bundled up in blocks that form part of a blockchain. A block is only valid if users on the chain agree that it is. A block’s validity, donc, depends on a consensus among users.

The method used to reach a consensus is called a “consensus protocol” (or “consensus algorithm”). A consensus protocol is designed to reduce the possibility of double-spending, fraudulent activity, and other security issues. It is a way for users to ensure they can trust that no bad actor has influenced the blockchain.

The original type of consensus protocol in crypto, used by Bitcoin, is known as the “proof-of-work” protocol. Staking coins is done on a different type of protocol, known as “proof-of-stake”.

To understand how staking works, it’s important to understand the difference between the proof-of-work and proof-of-stake protocols.

Proof-of-Work

New blocks in a blockchain must be validated. The proof-of-work protocol validates the transactions in a new block through the solving of mathematical puzzles.

The users solving these puzzles are known as “miners”. Miners earn cryptocurrency, and they also create new coins.

The puzzles used to verify crypto transactions are very difficult to solve. Finding a solution is a matter of trial-and-error. This inevitably takes a lot of attempts, and usually involves powerful computers undertaking a huge number of calculations.

The greater the number of attempts a miner makes at a puzzle, the more likely they are to be able to solve it. But the puzzles get increasingly difficult as the blockchain grows, and so miners are motivated to dedicate more and more resources to solving them. This process is very power-hungry and can require enormous expense.

Once a miner solves a problem, they must show the solution to their peers. This is proof of their work.

Checking whether a solution is correct is much easier than discovering it. A consensus is achieved once all network nodes (utilisateurs) agree on the validity of a block. When the new block is verified, the successful miner is rewarded — in newly-minted cryptocurrency or transaction fees.

Everyone has a copy of the public transaction ledger and can check proof-of-work. There is no need for two parties transacting in crypto to trust one another in the conventional sense, and thus no need for a trusted third-party, such as a bank, to facilitate transactions.

Proof-of-Stake

To earn crypto using proof-of-stake, you don’t need to solve any complex math problems.

Under the proof-of-stake model, users involved in validating blocks are sometimes called “forgers” rather than miners. Forgers stake some of their cryptocurrency by locking it up in a smart contract. This means that they are unable to use it for a certain period.

When a new block of transactions requires validation, any forger could be chosen as the block’svalidator”.

Validators earn coins in the form of a transaction fee associated with the block they validate. They do not earn newly-minted coins, because this would be inflationary. The total number of coins in a proof-of-stake system is predetermined.

Obviously, the higher a forger’s stake, the more likely they are to become a validator. Donc, validators are chosen “pseudo-randomly”, in order that users with a lower stake still have some chance of being selected.

Along with an element of randomness, another factor that might be included in the selection algorithm is coin age — the period of time for which a forger’s coins have been staked. When a forger is selected as a validator, the age of the coin associated with their node returns to “zero”. They are, donc, less likely to be selected next time.

Byzantine Fault Tolerance Proof-of-Stake

Implementations of a proof-of-stake protocol such as the one described above are “chain-based. An alternative implementation exists, known as Byzantine fault tolerance (BFT) proof-of-stake.

The BFT proof-of-stake protocol exists to solve a problem known as the “Byzantine Generals’ Problem. Without going into detail, this type of problem can lead to a system failure because a given component of the system cannot know whether other components have failed.

Byzantine faults present themselves in systems that rely on trust between three or more parties. In crypto, they can lead to a lack of consensus as to the validity of a block. This problem is solved by proof-of-work protocols, but it requires a new solution under proof-of-stake protocols.

A BFT proof-of-stake protocol first selects a validator from amongst its forgers to “propose” (rather than validate) a block. A group of validators then votes on the validity of the new block. The participation of a greater number of users in the validation process serves as a safeguard against Byzantine faults.

Advantages of Proof-of-Stake

Proof-of-work is the ingenious system that made Bitcoin so significant. It is integral to the functioning of most cryptocurrencies.

But there are flaws with the proof-of-work protocol. The main three — energy, security, and centralization — could, theoretically, all be solved by moving to a proof-of-stake protocol.

Better for the Environment

le Bitcoin hashrate as of August 2019 is over 71 billion GH/s (gigahashes per second). This means that Bitcoin miners are collectively attempting to solve the next block in the Bitcoin blockchain more than 71 quintillion times every second.

In August 2018, it was estimated that the mining of Bitcoin alone consumed around 1 percent of the world’s total energy use. Proof-of-work algorithms also produce huge quantities of e-waste (electronic waste). The physical junk left behind by burnt-out ASIC machines and GPUs produces around 10,000 kt/y (kilotonnes-per-year) of e-waste.

Given the climate catastrophe currently unfolding in front of us, this profligate use of energy is clearly unsustainable. Proof-of-work-backed cryptocurrencies, donc, could very soon be regulated by governments, rejected by the public, or simply unfeasible in a world of diminishing resources.

Under a proof-of-work protocol, the miner who consumes the most energy has the greatest chance of being rewarded. Participation in a proof-of-stake protocol merely requires a continuous network connection. This is far less energy-intensive.

Better Security

Cryptocurrencies are highly secure. toutefois, a potential vulnerability, known as a “51 percent attack, remains a theoretical possibility.

If a user (or group of users) gains control of the majority of computing power in a network, they can break the rules normally enforced by a consensus protocol. A successful 51 percent attack could result in the attackers blocking transactions and double-spending coins.

Such an attack would not be profitable in large networks backed by a proof-of-work protocol, such as Bitcoin. This would require an unfeasibly large amount of computing power. On other, smaller, networks, toutefois, a 51 percent attack remains a plausible (if hypothetical) possibility.

The only way to control 51 percent of a network backed by a proof-of-stake protocol is to acquire 51 percent of the currency, rather than 51 percent of the computing power.

A user who owns the majority of a cryptocurrency in a network has no incentive to attack it. En réalité, it is in their interest to maintain the validity of the blockchain so as to protect their investment.

Less Centralization

There are two opposing views on the issue of centralization in proof-of-stake protocols.

On one hand, those users with the largest stake in a proof-of-stake network have a greater chance of earning more cryptocurrency. This leads to “the rich getting richer” — merely by virtue of their wealth. The system of voting rights in BFT proof-of-stake systems, which are concentrated among those forgers with the highest stakes, certainly reinforces this conception.

D'autre part, miners on networks backed by proof-of-work protocols incur an exponential advantage when they successfully mine coins on the network. This currency can be reinvested into computing equipment and energy generation, thus further increasing the miner’s capability to generate new coins.

Ultimately, while both scenarios involve wealth-accumulation that could ultimately lead to centralization, the nature of the centralization threat under proof-of-work systems seems greater.

Examples of Proof-of-Stake Cryptocurrencies

Want to invest in a cryptocurrency backed by a proof-of-stake protocol? Here are some networks that will allow you to stake coins:

Probably the most exciting implementation of the proof-of-stake protocol is Ethereum’s Casper. This protocol is being released across Ethereum’s network in stages.

Given the environmental concerns and the increasingly centralized nature of coins backed by a proof-of-work protocol, you might expect more networks to begin turning to a proof-of-stake protocol in the near future.

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