Crypto Staking, Delegating, and Validating Explained
The cryptocurrency network requires a robust infrastructure built on blockchain technology to enable it to run smoothly. Users in these networks are essential in the provision of resources to maintain it.
Two processes are essential in the maintenance of cryptocurrency systems: mining and staking. The mining process requires equipment and attention to monitor. Staking, on the other hand, provides users with a chance to earn coins without the need to mine or the need for high computational power.
What is Crypto Staking?
Staking involves the purchase of cryptos, then holding them in a wallet and earning interest from it. How much benefit one can derive from staking depends on the period they hold their coins in their wallet. The longer you stake your coins, the more the profits you get from it.
Proof of Stake (PoS)
Proof of Stake works differently from Proof of Work (PoW), which involves miners solving mathematical equations to get the right to add a transaction to a blockchain. It is competitive since the first person to solve is the one who gets the right to validate a block.
However, Proof of Stake involves the network protocol selecting a coin-holder to validate a transaction and add it to the blockchain. The process is random and at specific intervals, but the holder of more coins has a higher chance of selection. Arguably, Proof of Stake increases the scalability of the networks compared to Proof of Work.
How Does Staking Work?
After you choose your favourite coin to stake, download a wallet to store the coins. Determine the requirements needed for staking by the network of choice. It is vital to ensure you have constant internet access at all times.
To begin staking, nodes in the PoS network have to validate your ownership of coins. Your staked amount makes you an investor on the network involving you in the block validation process. Eventually, you receive rewards depending on the time you are staking on the network.
In case of a node’s involvement in validating an illegal block, the network will reject it, and the node considered invalid. Besides, the node loses all its staked coins.
Delegating cryptocurrencies involves a coin holder transferring responsibilities of validating transactions and maintaining the blockchain. To achieve this, an alternative to the PoS consensus algorithm, the Delegated Proof of Stake (DPoS), applies ensuring proper representation of a coin user.
How the Delegated Proof of Stake Works
The DPoS consensus algorithm system depends mainly on voting and election while maintaining the validity of decentralization and eliminating security issues.
In this system, stakeholders (active users) need to vote for witnesses and delegates. Voting involves placing tokens on a candidate’s name as a stakeholder’s representation in the process. Stakeholders with more tokens have a higher voting strength and influence on the network. A stakeholder can place only one vote per witness, but they can vote for the number of witnesses they wish to. It is important to note that 50% of active users have to agree that the number of elected witnesses achieves substantial decentralization. Eventually, the witness with most votes wins the election.
Witnesses hold the responsibility of creating and validating blocks in the blockchain. There is competition in the network; therefore, a witness must be alert to ensure that their performance standards are high. An unavailable witness during transaction validation necessitates the transference of their task to the next witness in line. A witness consistently slacking on the job incites a bad reputation for them, resulting in a loss of votes and eventually getting sacked. Voting is a continuous process.
Delegates, on the other hand, are responsible for network maintenance. They have powers to propose useful changes that the network may require. These changes include block size, block intervals, transaction fees, and the amount of payment that witnesses get. It is up to stakeholders to decide whether the implementation of the changes proposed is necessary or not. Delegates are unpaid for their contributions since changes are not often.
DPoS vs PoS
The main difference between DPoS and PoS systems are:
- PoS depends on the random selection of block forgers, while DPoS depends on a voting system.
- DPoS offers a faster platform compared to the PoS.
- DPoS gives all stakeholders a chance to have governance power.
- The DPoS system is less susceptible to attacks.
- DPoS requires less hardware and energy compared to PoS, making it more environmentally friendly.
- DPoS incorporates two teams: witnesses and delegates.
It involves the verification of cryptocurrency transactions in a blockchain. It is crucial to note that validation and consensus are different. Validation requires block validators verifying the authenticity of transactions, while consensus consists of determining and agreeing on the ordering of events in a blockchain. Validation, thus, comes before consensus.
When one makes a transaction, it is relayed through all nodes in the network. Miners get notifications, verify the transactions, and add them to a block. The verification involves miners adding a hash unique to every transaction made. Other nodes in the network confirm that the hash is correct.
Since mining is a power-intensive process, miners require motivation to continue with the process. The blockchain would fail in case miners were absent since new blocks would not be formed. Hence, the network pays the miner, who adds the block to the chain.
Consensus comes in at this point to assess who gets paid. Through Proof of Work, the miner who solves the mathematical equation first receives the right to add the block to the chain, thus getting the reward. In Proof of Stake, the network selects stakeholders randomly to validate a transaction.
As miners get notifications at different times, the two processes create harmony between nodes in the network.
Crypto staking provides coin users with a chance to earn more without the need for high computational energy. The development of the staking system to introduce DPoS produces added advantages. Some of them include giving the users a chance to have a say in the network and providing a more secure network.
Overall, DPoS and PoS are proving to be better sustenance methods of crypto networks compared to PoW. In the coming days, there will be more advancements in the PoS systems to usher in higher performances by cryptocurrency networks.