At the moment, bitcoin is the most expensive and most popular cryptocurrency. However, in addition to bitcoin, other cryptocurrencies with expanded and more advanced functionality began to appear. Such crypto projects open up more opportunities for blockchain technologies for users. All alternative cryptocurrencies to bitcoin are called altcoins (alternative coins), among which the most recognizable is Ethereum. Ethereum is the second leader in the world ranking of cryptocurrencies by total market capitalization. To understand the stake and passive income from cryptos, you must first understand what Ethereum is and how it works.
Ethereum is both a cryptocurrency and a functional, decentralized environment that has revolutionized the entire IT industry. The creators of this crypto pursued the goal is improving bitcoin. However, these currencies are somewhat similar, but there are several conceptual differences between them.
Indeed, the cryptocurrency boom of 2016-2017 is associated with the launch and popularization of Ethereum. The new environment allowed to maximize the potential of the blockchain networks and gave impetus to the launch of new startups and projects that attracted huge investments. The launch of Ethereum has seriously revived the entire cryptocurrency process, showing the versatility and flexibility of the blockchain. The creator (the main ideological mastermind is Vitalik Buterin) implemented an environment with convenient tools and nodes. Miners can create a startup or an application without technical training.
Now you need to understand the stake and its risks. Miners need to know if they can make money on stake and how to do it. This article provides a detailed manual on how not to lose money on stake.
Proof of Stake (POS)
At the moment, Proof of Stake (POS) is an alternative proof-of-work mechanism. Such a method allows users to put coins on the card rather than allocate computing power. In general, the POS algorithm appeared in 2012. The main idea of Proof of Stake is the share of coins available to the nodes. The stake determines which network will get the right to open a new block during the mining process. In the process of mining on the algorithm of POS, the network nodes perform hashing operations. However, the complexity of the calculations is distributed across each node in proportion to the share of virtual coins. Thus, the more currency tokens users have, the higher their chance of opening new blocks.
Through Proof of Stake, the blockchain is usually updated in a decentralized way without the need for powerful mining hardware and electricity costs. For more information about Proof of Stake, validators, and consensus mechanisms, see the article below. Read the content carefully to understand Proof of Stake as well as possible:
- Proof of work (POW) and mining power
- Proof of Stake (POS)
- Staking Ethereum
- Staking mining pools and blockchains
- Final words
If you are new to the bitcoin field, do not know about “proof of work,” first study the following questions:
- What is Bitcoin?
- What is Bitcoin mining?
These topics will open up your knowledge and skills in cryptocurrencies and become a solid foundation for your mining activities.
Proof of work and mining
Before studying the process of staking, it is necessary to understand what problem staking solves. Any digital coins, including bitcoin, are intangible and beyond the control of the central government. Initially, the so-called balance book blockchain appeared as a result of mining.
Mining means that a lot of computers are not connected to solve mathematical computational issues through a system (miner). Such solutions are necessary for the functioning of the network blockchains (one page). As a result, bitcoins and altcoins are created, which are received by miners as a reward for the work done by crediting to the account.
Mining is a kind of competition when powerful mechanism competes with each other and calculates issues. The person who first finds a solution may record the following transactions in the block. Thus, no one can gain control over digital currencies that continue to be decentralized. The technical term proof of work refers to mining. Thanks to “proof of work,” (POW) miners prove that they have invested an effort and work to get specific solutions. With the “proof of work” mechanism, they prove that there are no other ways than the computational method.
For the network participants, “proof of work” (POW) is a consensus mechanism since its purpose is to create a consensus on who will update the blockchains. As a rule, people do not know each other and do not work together. However, thanks to the “proof of work” methods, the trust and relationship of the network participants are established. Although the “proof of work” version is the most reliable and secure way, it is also resource-intensive. Running heavy-duty computers requires energy efficiency and spending.
To sum up, the “proof of work” system is a consensus algorithm for the functioning of cryptocurrencies, based on the “proof of work” performed. Miners solve the problem of forming blocks and confirm transactions on the network. The main criterion is the power indicator of the computer device used. Security means that the hash of the blocks contains the hash of the previous one. This block makes it impossible to break the order of creation. The main goal of “proof of work” is to protect the system from various attacks, spam. The consensus algorithm is reduced to full transparency of the network to easily and quickly check the result.
Proof of Stake Defined (POS)
Like any other way, the “proof of work” system (POW) has its drawbacks. In this regard, alternative methods of consensus appeared and developed, acting according to their rules. This consensus mechanism “proof of stake” (POS) appeared in 2011. In this case, users stake real coins.
“Proof of stake” means proof of ownership. Unlike “proof of work,” such a concept does not need power. In “proof of stake,” the blockchain depends on the majority stake owned by the miner. The probability of solving an issue is directly proportional to the number of user tokens. Thus, the more cryptocurrency is in the account, the higher the receiving a reward. In the blockchains of some cryptocurrencies based on” proof of stake,” there is no reward for solving the problem. The miner gets a reward for transaction fees.
If the concept of “proof of work” appeared in 1999 as the protection of email from spam, POS has a more modern implication. The idea of POS appeared in 2011 for digital money as a solution to the main problem of “proof of work” – the consumption of electricity.
Now let’s understand the rules of “proof of stake” and the functioning of the blockchain. You block the number of funds on the network computer. In a technical sense, your device is a node, and your blocked money is a stake. As soon as you stake money, you become a participant in such a competition for receiving a reward. You get the opportunity to forge the next block. Thus, thanks to the staking, new blocks appear.
In the “proof of stake” method, several factors affect the choice of the winner:
- Number of stake money
- Duration of money on the stake
This way, the winner can forge the next block of transactions and gets coins for their contribution.
As mentioned earlier, “proof of work” vs. “proof of stake” are two types of mining and blockchain algorithms. If you compare “proof of work” vs. “proof of stake,” the last system has clear advantages. Firstly, “proof of stake” does not require a lot of energy and device maintenance. In this case, the quality of the equipment does not matter. Secondly, “proof of stake” has no time and currency restrictions. All calculations are performed according to a different scheme, and there is no decreasing geometric progression, unlike POW.
By the way, it is worth noting that there are many coins within the “proof of stake” consensus:
In general, each coin operates according to its own rules for the distribution of rewards. It is necessary to understand how the “proof of stake” on Ethereum works.
Until 2020, the Ethereum blockchain functioned based on a “proof of work”consensus. However, the creator of this coin, together with other developers, improved the currency and created the Beacon chain blockchain. This technology works based on “proof of stake.” Many users know this Beacon chain called Ethereum 2.0, which works together with the original. To connect as a validator to Ethereum 2.0, you need to block 32 ETH, and it will bring you a win. To increase your winnings, you need to set up several nodes with 32 ETH in each.
Analysts suggest that by 2022, Ethereum 2.0 will merge with the original, after which the currency itself will become a proof of “proof of stake.” After such an event, each miner can withdraw their coins and rewards. The main question is how much a network member can get ETH. As a rule, each validator involved in the block forgery receives a percentage of the new ETH. Thus, the following rule applies: the more validators, the lower the share of rewards.
The action of the “proof of stake” puzzles takes place according to the following system. Suppose there is a block that needs to be signed and a chain added. There are four validators with a specific percentage share (40, 20, 25, and 15 percent of tokens). Since the first validator has the most coins (40 percent), this validator sign the block. Besides, this person receives a commission for all transactions contained in this block. To simplify your work and save time, use bet calculators to calculate the coins you may have earned.
Indeed, note that registering as a validator is not easy and takes time. Every day, about 900 new validators are launched, and the waiting list is long. At the moment, approximately 20,000 thousand validators are waiting for their moment to connect to the network. Just imagine the amount of time you need to wait. Moreover, setting up a validator requires technical knowledge and skills, which complicates the participation process. Remember, incorrect configuration of the validator and damage to the network leads to penalties. These penalties include a reduction in your participation rate. Therefore, carefully study all the subtleties of “proof of stake” before setting up validators.
Staking mining pools and blockchains
In addition to the advantages, there are also disadvantages of “proof of stake.” Some of them are mentioned above, and others are studied in the list:
- Start difficulty
- High login threshold for users
- High centralization
- The need to be online around the clock
All these disadvantages expose miners to risks. For this reason, there are so-called additional solutions. Such solutions allow people to place bets without fear and get benefits. You will benefit from transactions, create a new page with blocks, and not enter the debate. So, when analyzing “proof of work” vs. “proof of stake,” the second option wins.
To save time on betting, you should use the services of crypto exchanges. Some platforms allow people to place bets through their validators despite the small amount of the fee. Such services help you to get rid of the hassle and not lose money with incorrect calculations. You do not need to configure your validator because it is a function of exchanges. Your network will work properly, which will allow you to form blocks quickly.
2) Mining pool vs. proof of stake
Another option to join the network is to participate in mining. Staking pools is an association of people who work together and get more chances to forge new blocks. Such pools allow you to make a deposit less than the minimum amount of bets. To understand such services, learn the following points:
- Reliability of validators
- Payment amount
- Customer service support
- Pool size
- Feedback from users
3) Configured validator
As for validators, you can initially purchase a customized validator. Although the initial setup of the validators should be straightforward, you will have to maintain maintenance. It is an additional hassle.
4) Validators of the Beacon chain system
In addition to the above points, validators act as services. These are multi-functional companies that help you run your validator without the need for configuration. They provide their technical products (computers), but you pay the down payment. The advantage of this method is that you are in control of your coins and transactions.
Thus, the “proof of stake” consensus is a universal new idea that allows people to participate in the blockchain. Performing their functions, people get a prize for it. Ethereum recently switched to this technology, but it has already spread rapidly around the world. In general, since the appearance of the bitcoin protocol (creator Satoshi Nakamoto) and the white paper, many cryptos have appeared, which causes a digital boom. For more information, check out the Coindesk report. It contains all information about these processes, blocks, and validators.
Why is proof of stake bad?
There are several disadvantages of this algorithm. First, it is the complexity of the start since POS is not designed for the initial distribution. Secondly, to make a profit, you need to have good start-up capital. Finally, it is a process in which most of the currency is in one hand. Constant accumulation eventually leads to centralization.
How does proof of stake work?
Instead of solving a cryptographic problem, transactions are validated by freezing the miners’ coins as collateral. The coins are frozen until a transaction validity agreement is reached. Next, the networks are added to the blockchain (new blocks), and the coins are kept frozen for some time. It protects against an attack and avoids double-spending.
Is ETH proof of stake?
Since 2020, Ethereum has switched to the POS, which caused a boom in the bitcoin sphere. Ethereum 2.0 has appeared, which will support the possibility of staking passive income for using the currency.
When will Ethereum switch to proof of stake?
This currency will completely switch to POS by 2022 when it merges with the original. Many analysts predict this moment, but few are confident of success.