In 2011, the Bitcointalk forum introduced the Proof of Stake consensus algorithm to solve issues of the most used algorithm before – Proof of Work. Although both algorithms share the same goal of arriving at a consensus in the blockchain, the series of actions and steps taken to reach the goal are distinct.
Proof of Work (PoW) is a mechanical term to what most people know as “mining.” The idea behind this PoW was conceptualized because of the need of miners to prove that they’ve exerted a lot of work by having powerful computers constantly work trying to get the solution using its computing power.
The issue with PoW was its huge requirement of energy, and miners are obliged to sell the coins they earn to handle the bill. So, although Proof of Work is a secure and reliable solution for handling decentralized ledgers, running supercomputers may be quite a problem because of the electricity consumption.
On the other hand, Proof of Stake (PoS) authorizes users to literally put their coins at stake instead of pledging computing power.
Proof of Stake was an alternative to clear up issues of PoW. Because of the POS, a blockchain can continue its updates in a decentralized manner without owning extremely powerful computers.
The consensus mechanism of Proof of Stake enables validating transactions or mining a block depending on the number of coins miners have under possession. If a coin owner has a lot of coins, he will have a lot of mining power. If the coin owner owns hardly any, the less mining power they will have.
This works by locking a definite amount of funds on a computer that is directly connected to your network. In technical terms, your computer is the “node,” and the funds you will lock are your “stake.”
Once your stake is already at its place, the node will forge the following block. In a nutshell, stakers are not working to mine blocks but to forge them.
After a node gets picked to forge the succeeding block, it will check if the transactions within the block are valid, then add it to the blockchain. As a reward for this work, the node gains transaction fees relative to the block transaction.
Presuming that a node no longer wants to be a forger, its stake and earned money will be released if the node didn’t add a fraudulent block to the blockchain.
Every cryptocurrency that is using Proof of Stake established its own methods and set of rules combined according to what they view as the best possible combination of their users.
Staking Ethereum
Ethereum was based on proof of work, but not until December 2020. Before hitting 2021, a new blockchain called “Beacon chain,” which uses proof of stake was set up. It was also called Ethereum 2.0 that currently runs alongside Ethereum 1.0.
You can earn by staking rewards after getting accepted as a validator for Ethereum 2.0, in addition to locking up 32 Ether as collateral. It is not possible to lock beyond 32 Ether on just a single node, so you need to put up multiple nodes if you want to increase your reward.
In Beacon chain, or Ethereum 2.0, every validator who will participate in forging blocks can get a fraction of the newly minted Ether after it gets created.
Try thinking of new Ethers as a pie. If more people would want to try and eat the pie, then the smaller the slice will be. This means that the larger the number of validators in the network, the smaller reward each one will get.
For instance, if a million ETH is staked, the maximum reward for every staker could extend up to 18.10%. Yet, if 3 million Ether is placed at stake, the annual reward could drop around 10.45%.
In the coming years, an event called “the docking” will occur wherein Ethereum 2.0 will ultimately merge with Ethereum 1.0. This is expected to happen around 2022 once Ethereum turns into a purely proof of state system.
The staked rewards and collateral Ether can just be withdrawn once the docking occurs, making staking mainly beneficial only for long-term Ethereum holders.
Aside from Ethereum, there are many coins out in the crypto market that can be used as proof of stake, including Cosmos, Cardano, Tezos, and a lot more. Every coin has its own fixed rules on the calculation and distribution of rewards.
If you want to sign-up, know that it will not be an easy process as there are limitations.
With thousands, or even millions, of people who want to sign up, only 900 new validators are accepted onboard every day so that you could imagine a rather long waiting list. To set up your own validator, you will also be required technical knowledge, 32 Ether, and a stable computer.
In addition, if something goes wrong while you’re setting up your validator, or it becomes harmful to the network in any possible way, you may be forced to pay penalties. The penalty may come in the form of “slashing,” where a portion of your stake will be subjected to deduction or even removal to the network.
Security
If the network notices a hint of fraudulent transaction, the forger computer will lose a fraction of its stake and even the right to participate as a forger. e
To control the network effectively and consent to a fraudulent transaction, a node or computer would be required to own the majority stake in the network. In order to manipulate the network, a node should put a big stake, perhaps around 51% of the entire circulating supply, which would be very impractical. This fraudulent activity is called a “51% attack.”
The algorithm of proof of stake is excellent given its security and efficiency.
Since it is quite an affordable and easy task to do, a great number of users are motivated to run nodes. And since there’s a reduced need to release new coins for a block reward, this would help the price of a coin become more stable.
How to Stake ETH?
The following are staking pools and other alternatives you could use to stake ETH and earn staking rewards without the need to run your own node.
Staking Pools
Just like mining pools where a group of people joins their computational resources for mining, there are staking pools where groups of stakers join together to have a bigger chance to forge the next block. Staking pools only ask for a lower deposit compared to the minimum staking requirement since funds of various people are pooled together.
If you plan to join a mining pool, you should be wary of certain aspects, including user reviews, pool fees, pool size, customer review, and reliability of validators.
Rocket Pool is a trusted staking pool.
Exchanges
Using exchanges to stake is the easiest possible way for a non-tech-savvy person to earn rewards. There are exchanges that permit the staking of coins with just a small amount of funds.
The hassle of running your own validator will be eliminated if you will stake through an exchange. However, you will have to give control over your coins to the exchange. There are exchanges that will grant you the staking rewards when Ethereum 2.0 hasn’t reached the docking phase yet.
You can stake on exchanges like Cex, Kraken, Binance, or Coinbase.
Preconfigured Validator
Purchasing a pre-configured validator might interest you since it already has an initial setup. However, its maintenance could also be a hassle.
Validator as a Service
Companies that will allow you to run your validator to their computers. The company would handle the setup and maintenance. However, since you are using their service, you will be asked to pay a certain fee along with a 32 ETH deposit.
You could try the service of Staked.US.
