Staking is the first (and currently only) widely accepted alternative to Bitcoin’s Proof of Work method to create the individual blocks that contain the transactions which make up a blockchain. Proof of Work often requires specialized equipment such as multiple high-end graphics cards or dedicated Application Specific Integrated Circuit (ASIC) modules, both of which can cost a considerable amount of money to be invested before a person can even begin mining. Additionally, a miner also needs access to cheap electricity in order to keep operational costs to a minimum, as this method of mining is extremely power hungry. Because of these costs, a miner often will not make a profit until after a lengthy amount of time, often exceeding 1 full year. There is also the constant risk of hardware manufacturers releasing newer, much more efficient devices which can make previous hardware obsolete very quickly.
In order to address these concerns, the idea of staking was born. Instead of sacrificing computational power to prove that a miner is acting honestly, Proof of Stake (PoS) aims to virtualize the mining process by requiring that miners instead own coins representing a monetary value of the network itself. In effect, when a miner owns a certain percentage of the entire supply of coins, they are able to mine the same percent of all blocks on the network. This makes a miner who chooses to act unfaithfully to negatively impact the value of their own coins, if not forfeit them entirely depending on the exact rules of the particular network.
Shifting to this method of consensus also removes the high upfront and operational costs of traditional mining, allowing for a greater number of people to participate which increases the overall decentralization of the network. While the underlying methods are quite different, the end result is the same: Transactions are securely recorded to a public ledger.
Proof of Stake has gained a considerable amount of attention as a viable alternative to Proof of Work as a means to assemble a blockchain due to the minimal hardware and power requirements. It is a method of consensus used by both large and small projects alike, with the first notable use being Peercoin in 2012. The idea of Proof of Stake is so compelling that even projects as large as Ethereum, currently the second largest cryptocurrency network according to market cap, intend on switching from Proof of Work to Proof of Stake.
The increasing popularity has also inspired various flavors of PoS methods due to its inherent flexibility. Some projects might require a minimum amount of coins to begin staking while others allow staking any amount, however small it may be. More recently there has also been the development of non-custodial pooling methods such as Delegated Proof of Stake (DPoS) and Leased Proof of Stake (LPoS) which removes the need for individual stakers to run and maintain an actively staking wallet, allowing this method of consensus to be even more efficient in terms of hardware requirements and power consumption.
Delegated Proof of Stake (DPoS), pioneered by BitShares, is a method of staking whereby the amount of coins a user holds represents a total amount of votes. These votes are then used to choose a limited number of nodes on the network to be responsible for creating new blocks, with the intended focus to be higher scalability and relatively faster transactions. Also known as Cold Staking, this additionally allows coin holders to receive and share rewards without ever exposing their wallet and funds to the outside world.
Another version of Cold Staking, Leased Proof of Stake (LPoS) is similar to DPoS in that coin holders can participate in securing the network without having to actively stake themselves, but the similarities mostly end there.
In the case of NIX Platform, who utilize their own customized version of LPoS in addition to allowing individuals to stake directly, users are offered the ability to create a smart contract with any number of available providers to stake coins on their behalf in exchange for a low percentage of the reward. Leased coins remain in the possession of the individual and held in a locked and unspendable state while the contract is active. Rewards are seamlessly added to the total amount of coins in the contract, allowing your staked amount to grow without any additional input from the lessor.
LPoS can also be utilized privately whereby a staker creates a new wallet that remains empty and leases their coins to themselves while their actual staking funds are securely kept offline.
Any network that uses Proof of Stake as an available method of consensus will allow a user to do so directly in their respective native wallet. There may also be 3rd party wallets available that are able to stake coins on individual networks. While staking a selected amount of coins, those coins are locked and not able to be spent.
Additionally, there are services utilizing traditional staking pool methods and exchanges which will stake coins held in their custody, but this comes with certain risks, namely that you must trust the custodian with your coins. Remember, “not your keys, not your crypto”.
Because staking requires participants to hold an amount of coins, security is a valid concern, but with some basic precautions these issues can easily be avoided. Things you can and should do are:
– Keep your device or computer free of viruses and keyloggers
– Require a login password for your device/computer
– Use a trusted wallet, such as Flare Wallet.
– Encrypt your wallet with a strong password
– Stake via DpoS/LPoS if the option is available
– Avoid staking pools or exchanges that require you to give up custody of your coins
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