The year 2018 and the first half of 2019 have witnessed a steep fluctuation in the prices of Bitcoin and other cryptocurrencies. Market has been bearish even there are many surge development on blockchain technology. Traders or investors loss their faith in holding or selling their coins off. That makes market demand about new investment method that ensure stable and passive future income.
Another reason to consider a new investment method is that mining Bitcoin is going to be more costly. In the first wake of cryptocurrency, Bitcoin which is built on Proof of Work (PoW) consensus has quickly gained its fame, dignity and became the most powerful and popular cryptocurrency up to now. In the history of mankind, PoW is the first consensus algorithm to solve the issue of inequality of centralization, making a dream of decentralized technology come true. As strong as PoW is, it still has it own shortcomings and the player quickly realized the severe expense for energy and causing fundamental environmental impact. At that point, alternative consensus is born to solve PoW’s issues, namely Proof of Stake (PoS) gradually gaining its momentum and leaving PoW behind.
PoS with the core of staking investment concept is now being considered as the most efficient alternative and the best way to earn passive income in the delimah of crypto market. In this article, we will help you understand everything about PoS and staking process. Let’s dig deep into it.
What is Stake and Proof of Stake?
In securities, stake refers to the amount of security that owned or owed by an investor or a dealer. Originated from above definition about stake, Proof of Stake was first suggested in the forum in 2011, naturally focusing on the idea of requiring a certain amount of cryptocurrency to validate a new block in the chain. In PoS, when a new block is created and added to the blockchain, there is only one individual can validate a new transaction. This person has to stake some coins and is chosen by the random PoS algorithm. The more coins you stake, the higher chance you will have to validate transactions.
So, what is the reward for the forger? In most of PoS cases, the forger receives whole transaction fee from validating the new transaction paid by users. In some few cases, if new currency units can be created, the forger can receive new currency units as the reward rather than the transaction fee.
How does it work?
PoW and PoS share a common similarity in the goal of any consensus, i.e they are all aimed at reaching consensus in decentralized network and motivating users to validate transactions in a secure network. However, the 2 consensus are different in their own process.
In PoW, all miners are equally to validate a new block, only the first to solve a complex hash algorithm can receive the mining rewards as a new cryptocurrency unit. This validation has no relation with other investors who just hold the coins. In PoS, things turn out differently.
- To be able to validate new block, a validator is required to hold coins in the system wallet. That amount of staking will be locked.
- With that staking, they have a possibility of to be chosen as the next block validator. The more coins they stake, the higher opportunity they can be selected.
- PoS protocol will randomly assign the right to create a block among selected validators, based upon the value of their stakes.
- The chosen validator is rewarded by part of or the whole of the transaction fees paid by users.
Benefit of staking
- Being economical – The biggest advantage of Staking is that you do not need to purchase expensive devices and consume big expense for energy power. PoS does not require intensive mining process like PoW.
- Security – If hackers want to attack the blockchain, they need to acquire at least 51% of total coins which is highly unlikely to happen.
- Stable & Passive Income – In PoW, a miner potentially receive no coins for validating the transaction as the number of cryptocurrency in supply was fixed during creating. However with PoS, forger always receive the cryptocurrency which is incurred from transaction fee paid by users. This is similar to how we will receive interest rate from our savings in a bank.
Risk of staking
The only risk issue with staking is that the coins will be locked up for a certain time. It will not cause any issue if the price of the coin increase. However, if the price is going down, the coin reward may not cover fully your loss with price’s chaging. So, you’d better choose a good and potential project to start staking.
The rises of staking
Since its birth, PoS is a hot topic in many cryptocurrency and blockchain forum and gradually adopted by several cryptocurrencies. It was suggested in a forum in 2011 and Peercoin is the first coin to adopt this consensus in 2012. The next successful adoption belongs to Nxt, then more names to come like Blackcoin, Bitshares, Qtum, TomoChain, PIVX, Lisk,EOS, DASH, TRON, etc. According to Cointelegraph and Diar.co, stake funds now is worth of 4 millions USD up to 18 March 2019
And more big names will join the game
Popular coins to stake
More and more cryptocurrencies with their platform will be created or swapped to PoS consensus algorithm the the recent few years. They are also vary a bit in modeling stake or rewards in order to match with investors’ favour. Here are some of PoS cryptocurrency that you can put on your list.
TomoChain relies on the work of 150 Masternodes under Proof of Stake Voting consensus that can support nearly zero fees and instant transaction speed. Under its PoSV, in order to validate the transaction, firstly, masternodes need to deposit at least 50,000 TOMO ( a TomoChain’s native coin) in to the system wallet. Then delegators who hold Tomo in Tomo wallet can vote for their favourite masternode candidates by any certain amount of coins. Only top 150 most voted candidate can be selected as the masternode to produce and maintain the blockchain.
TomoChain staking annual rate is expected at 33%.
Cosmos is aimed at becoming “the internet of blockchain” which can connect all blockchain together under the implementation of PoS. Cosmos Hub is the first cross-chain hub of Cosmos ecosystem and using ATOM as its native staking token. This PoS is a bit more aggressive than other staking project because it applies “hard slashing” mechanism, which means you will lose part of your investment due to poor node performance. The annual staking interest is expected around 7%-20%.
Tezos is an open-source blockchain platform and application that all stakers can govern and update by themselves. Its ICO raised $232 million USD, then under some legal issue and internal management scandals in the media, its first mainnet is published in 2018.
Worked under same PoS projects, to stake Tezos, validator candidate needs to own at least 10,000 XTZ then the algorithm will choose the validator randomly (It is called “baking” process). The annual interest for staking is 7%.
The list of PoS cryptocurrency is growing in 2019 with other big players such as Cardano, Omesigo, Ethereum, etc. Beside trading and mining as we all know, holding, staking and running a masternode become trending of earning passive income in the dilemah world of cryptocurrencies. If you can not afford to meet minimum threshold of coins stake for participant, you also can have alternative ways to join staking pool services which we will explain in another post. Follow us and keep updated!