Proof of Stake (POS) is an alternative consensus mechanism to Proof of Work. It allows users to put their coins at stake instead of committing computing power. The network then randomly chooses users to help forge the next block of transactions. Through POS a blockchain can continue to be updated in a decentralized manner. Without the need for powerful computers and the waste of electricity.
1. Mining and Proof of Work
Before we dive into staking let’s take a moment to understand the problem that staking tries to solve. Bitcoin and other decentralized cryptocurrencies hold the promise of sending money digitally without any central authority.
Initially, the solution to managing a blockchain. Which is a fancy term for a ledger of balances that aren’t controlled by any one entity, was done through mining. Mining is sort of a competition where powerful computers try to guess the solution to a mathematical question.
Whoever finds the solution first, earns the right to write the next page of transactions, also known as a block, into the ledger. With mining, the more powerful the computer you use, the more guesses it can make in a second, increasing your chances of winning this contest.
Thanks to the laws of math and probability, it is highly unlikely. That any single person or group will gain a monopoly over updating. The ledger and that’s how decentralization is maintained. Mining’s technical term is “proof of work” – because by displaying the right solution, miners prove.
That they’ve put in a lot of work, as there is no other way to get to the solution aside from using computing power to constantly work at trying to guess it. Proof of work is, what is known as a consensus mechanism since. Its design is to create an agreement as to who gets to update the ledger amongst a group of people who don’t really know each other or have any other basis for working together.
2. Proof of Stake Explained
Because of these disadvantages, other alternative consensus mechanisms have been suggested throughout the years. One very popular alternative is proof of stake. This means that instead of committing electricity to run computers and try to win a contest, people will stake actual coins.
But how does this all work? Well, you basically lock a certain amount of funds on an everyday computer. That is connected to the network. Your computer is called a node in technical terms and your locked funds are your stake. Once your stake is in place you take part in the contest of which node will get to forge the next block. You see stakes forge blocks, they don’t mine them.
3. Staking Ethereum
It is important to note that there are many coins that use proof of stakes such as Tezos, Cosmos, and Cardano, and each coin has different rules as to how it calculates and distributes rewards. In this post, we will focus mainly on how Ethereum’s proof of stake model works.
Up until 2020, Ethereum’s blockchain was based purely on proof of work; but in December 2020 a new blockchain name “Beacon chain” was set up. That uses proof of stake: this is also known as Ethereum 2.0 and it runs alongside. The original Ethereum blockchain.
Ethereum 1.0. In order to join as a validator for Ethereum 2.0, you will need to lock up 32 Ether as collateral, which in turn will earn you staking rewards. There’s no way to lock up more than 32 Ether on a single node, so if you want to increase your reward you can just set up multiple nodes with 32 Ether each.
Ethereum 2.0 will deploy in full and will merge with Ethereum 1.0. This event, known as “the docking”, will happen somewhere around 2022, after which Ethereum will become purely a proof-of-stake network.
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Only after the docking occurs will you be able to withdraw your staked Ether and rewards, which means that staking is mainly beneficial for long-term Ethereum holders. Now you’re probably asking how much Ether is rewarded. In Ethereum 2.0 each validator. That participates in the forging of a block gets a percentage of the newly mint. Ether when it’s created.
4. Ethereum Staking Pools and Other Solutions
All of the risks I’ve just mentioned. Why some additional staking solutions were created? These alternatives allow for the everyday person to stake ETH and earn staking rewards – without the considerable effort or risk of running your own node.
Exchanges
The easiest way to stake for a non-tech-savvy person would be to use staking services supplied by exchanges. Certain exchanges allow you to stake your coins through their validators even if you only have a small amount for a fee.
This completely eliminates the hassle of running your own validator but requires you to forfeit control over your coins to the exchange. Some exchanges will also allow you to claim your staking rewards immediately and not wait until Ethereum 2.0 reaches the docking phase.
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Ethereum Staking Pools
Another option is to join a staking pool. Just like mining pools, staking pools are groups of people joined together in order to get a better chance. At forging the next block. Staking pools also allow you to deposit less. Then the minimum staking amount since all of the funds is pooled together.
If you decide to go with a staking pool. It’s important to research certain aspects of the pool: Reliability of its validators Pool fees Customer support Pool size User reviews. Whether or not you are required to give up your private keys to the pool
Preconfigured validator
Additionally, you can purchase a pre-configured validator. While the initial setup of these validators should be relatively easy. You will still be required to keep up with the ongoing maintenance. Which can be a hassle, depending on how tech-savvy you are.
Validator as a Service (Cloud Staking)
These are companies that will allow you to run your own validator on their computers without the need to set it up or maintain it. Since this is your own personal validator. You’ll still be required to deposit 32. ETH and pay a certain fee for this service. The great thing about this option is that it’s relatively easy to set up and you don’t need to give control over your coins to another company.
Conclusion
Proof of Stake is an exciting new concept that allows everyday users to participate in securing a certain blockchain while earning passive rewards. With the transition of Ethereum to POS. This consensus mechanism is gaining massive exposure.
But it’s still early to tell how successful this transition will be. If you want to read more about this topic you can browse this excellent report by Coindesk. And if you have any more questions feel free to leave them in the comment section below.
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