In the , the Proof-of-Work (PoW) protocol has completely dominated despite its obvious limitations and high cost of operation. It is because of that This new protocol has been developed.
The Proof of Stake (PoS) It has been gaining ground in the world of cryptocurrency mining for years, so no wonder that in the next few years it will be the new main protocol of the .
In this article You will know in detail what PoS is and how practically doing nothing more than providing liquidity to a cryptocurrency.
What is cryptocurrency staking?
It is a way to obtain new cryptocurrencies thanks to the Proof of Stake (PoS) protocol. This is a form of investment very similar to holding, with essentially two differences; the staked funds cannot be used freely since they are blocked for a certain amount of time, and while this happens the user is generating profits in the cryptocurrency that stake.
It is a very popular form of investment today that is gaining ground on the holding company due to the obvious economic benefits it offers in the long term. Today there are a huge number of cryptocurrencies that allow their users to lock their funds to achieve returns of more than 50% per year and even more depending on the project chosen.
How does cryptocurrency staking work?
To understand staking, you must first know how the PoS protocol works. This is a consensus protocol developed to ensure the security of a blockchain network by requesting proof of possession of the asset in question. for the create a new block. In other words, for a miner to verify a transaction, he must provide the system with proof that he has enough cryptocurrencies locked.
In this protocol, computational power is substituted for possession power, making the probability that the block will win and get the corresponding rewards, completely proportional to the amount of cryptocurrencies that it owns. When staking, what you are doing is simply providing liquidity to the cryptocurrency marketliquidity necessary to carry out operations, and in return we receive compensation, similar to what cryptocurrency miners do with the PoW protocol.
Treasury and cryptocurrency staking
The past July 11, 2021the Spanish Treasury launched the popular “Anti-fraud Law”in which, among other things, it is specified that from that moment the cryptocurrencies had to be declared like any other tribute, with fines of up to 5,000 euros against those who ignore these measures. However, for now the Spanish government only focuses on cryptocurrency mining and trading activities.
So they “forgot” about other modes of investment such as DEFI and also cryptocurrency stakingwhich makes for now there is no need to pay taxes or report any type of activity related to these two types of investment. Although it is not ruled out that in future decrees some coercive measure may be applied.
Differences between Proof of Work and Proof of Stake
Before the POS, the protocol used for mining cryptocurrencies such as Ethereum or Bitcoin is the PoW or Proof of Work protocol. With this you use a model in which the nodes or miners must provide communication power to the network to get the rewards for winning a block.
Some of the differences between the two are as follows:
Accessibility
The big problem with the PoW protocol it is that the competition becomes practically inaccessible for the small investor. Today it is almost impossible for a person with 10 miners in his house, compete against the huge existing mining farms in countries like Venezuela or El Salvador. So the mining business becomes something quite elitist, only used 100% by investors capable of creating large systems.
With staking things change, and anyone with any capital will be able to participate in the blockchain creation process no matter how much money they havealways receiving rewards proportional to the money they are investing.
maintenance costs
In addition to need a large investment to start mining with the PoW system, the maintenance of these miners is also expensive; they must be cleaned constantly and invest in powerful cooling systems due to the enormous amount of heat they emit. In addition, a specialized electrical installation must be created with voltage protectors that protect the equipment against any electrical failure.
When staking, the investor can forget about all these issues since he only has to put his funds in a wallet and block them to be used in the network and that’s ityou can completely forget about them and they will still make a profit.
network vulnerability
The reason why, despite its obvious disadvantages, PoW is still used is because of its enormous reliability as a network. The security that this protocol provides to the blockchain where it is implemented is simply spectacular, something that cannot be said of the PoS protocol.
One of The most dangerous problems is the fact that the miners themselves could attack the network for their benefits.. This is what is known as “The Nothing Stakes Problem”which is the probability that a node will try to create a fork of the blockchain without losing anything in return, since it does not need to invest work for it.
Proof of Stake Issues
Yes ok This protocol presents great facilities and economic benefits for its minersat the network level is far from perfect, which has greatly delayed its final adoptionthus managing to completely displace the PoW.
Some of the more serious problems are the following:
Nothing at stake problem
This issue poses a scenario where a miner might be tempted to fork the chain because there is virtually nothing stopping them from doing so, and because You really have nothing to lose but everything to gain. A fork in the blockchain world consists of the modification of the consensus rules within a network, which can end in a division of the original blockchain.
The reason this happens is because the probabilities of success in a block are given by the amount of funds staked. This means that a miner with large funds, say 20% of the total liquidity of the network, can continue mining without problem while trying to create a fork, since if it fails, they will not have lost anything.
This does not happen in the PoW protocol, where the miner must make a decision: mining to get the block or trying to create a fork which failing would mean you invested computing power that you could have used to continue mining.
To the be less likely to succeed when attempting to make such a fork, you will always end up deciding to continue mining. Of course, solutions have been proposed for this problem, such as the fact that apply sanctions to all those miners who try to fork the chainbut they are still in phase of Test.
Exposure of assets
The probability of winning a transaction with staking is directly proportional to the number of units that are locked in the system. This is a blessing, but at the same time a problem because means that coins will always be connected to the network while working on the networkwhich means that they will be constantly exposed to possible attacks.
Although this is considered a minor problem given the advanced security protocols that exist in the cryptographic world, it is still a possibility that worries many. For this, alternatives to direct staking have been created. One of the most popular is delegated staking or DPoS, in which the nodes that own the cryptocurrencies delegate their rights to other representative nodes that will be in charge of carrying out the process without having to expose the funds. One of the most popular networks that use this system is BitShare.
save to attack
Staking allows miners to reinvest their own earnings in order to increase mining power and in turn improve their rewards. The problem with this is that a miner could save for a certain amount of time until they get enough power of participation to perform an effective fork, which is not even possible to discourage even by implementing sanctions for such miners.
51% problem
Finally, there is the risk of a miner getting the 51% participation rate. If this happens the miner could start mining above their own blocks, which would gradually earn them enough rewards to gain 100% staking power, thus taking full control of the chain. This would happen even if a new miner with a high share entered the network.the 51% miner would eventually take over it and thus get the 100% participation.
In the mined with PoW this does not happen since a miner to earn participation rate must improve his computational power, And even if I get a 51%, a new miner with more computing power than this one can always emerge.
How to choose a coin to stake?
Staking should be viewed as a long-term investment in which you are betting on the revaluation of the assets in a period of at least six months.
For this reason, each analysis should be based primarily on the fundamentals of the cryptocurrencies you are going to choose to stake:
Project
The first thing you should analyze is the project behind the cryptocurrency in question. The detail is that To know if a project is worth it or not, you must learn enough about the crypto world. If what is behind a token is a chain link protocol, you should know about it, and how something like that can improve the market.
Do not get carried away by the first coin that has a small bullish rally. Projects like Cardano in 2020 or Solana in 2021 were successful because they presented an improvement that in turn represents an improvement for the cryptographic ecosystem in general. So when choosing your investments, do enough research and ask acquaintances or friends who really have knowledge about it instead of following the first youtuber to death that crosses your path.
growth potential
This is related to the level of the project you are on. For example, the token AXS had a fantastic 2021, but its growth potential has not yet been reached. This information is valuable because with it you will learn when it is the right time to enter a project.
Growth potential is measured taking into account several factors such as those mentioned below:
- Issued coins: the market circulation of a cryptoactive is essential to define the possible maximum price reached. If you have an asset with a high issuance, we can expect a low price below $100 unless its demand is too high, as in the case of BTC. While if you have a cryptocurrency…
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