What is Staking?
When a cryptocurrency P.O.S (Proof of Stake) wallet stakes a sum of coins, when broadcasting to the network that the transaction they are processing is true and not malicious, the process is known as staking.
The objective of staking is to provide security to the network of transactions. The more wallets staking, the more secure the network is. Since the reward associated with verifying a transaction is intended to work as a remuneration for works completed. The network now has an inherent 'economic value' due to the possibility of earning more of the underlying asset. Compounding interest allows for a single wallet to gain more coins at an increased rate year over year.
Staking is also seen as a very fruitful option in a long bear market. As Kyle Samani, managing partner at Multicoin Capital Management, stated to Bloomberg:
“Regardless of market conditions, staking provides returns denominated in the asset being staked. If you’re going to be long, you might as well stake."
Staking rewards are a byproduct of the proof-of-stake (PoS) consensus algorithm, first introduced by Sunny King and Scott Nadal in a white paper in 2012 for peer-to-peer cryptocurrency Peercoin (PPC).
What is PoS?
Most of the cryptocurrencies either use Proof-of-Work(PoW) or Proof-of-Stake to validate blocks in a network. While PoW relies on the proof that a certain amount of work has been done to verify transactions. PoS, requires network participants to hold a certain amount of the native cryptocurrency in a specific wallet for a certain period of time.
As of right now, Both Bitcoin and Ethereum use PoW to validate transactions, although Ethereum has been making it clear that they will be moving to a PoS system, called Casper, as part of the Serenity network update expected for later in 2019.
Ethereum Co-Founder Vitalik Buterin seems quite excited with the promise of PoS, stating:
“I am seriously looking forward to when the cryptocurrency community basically passes away with proof-of-work.”
Apart from this, PoW carries many disadvantages in comparison to PoS in the following ways:
PoW nodes are called “miners” while those on PoS are called “validators"
While PoW is highly energy intensive: Bitcoin network consumes the same amount of energy as the entire country of Singapore.
PoW is not only expensive but also bad for countries where nonrenewable fossil fuels (such as coal) is burned to generate electricity. As there is no need for specialized computer hardware requirement to become a node, it results in PoS being a cheaper, more eco-friendly option.
Specialized mining equipment requires a significant upfront investment, which can be risky, considering that rewards are not guaranteed. Which is not the case with PoS.
With the advent of large centralized mining pools, the risk of a 51 percent attack on PoW networks is a very real threat. With PoS, there’s no threat of centralized mining pools.
There’s no specialized computer hardware requirement to become a node, which means the burden on power resources is drastically reduced. This is not only cheaper but also more eco-friendly. In order to take control of a PoS network, an individual or entity would have to purchase 51 percent of the available tokens. Not only that but, if you owned 51 percent of the tokens, you would want to do everything in your power to see the network succeed and continue to turn a profit. That means you are less likely to do anything to defraud the blockchain.
Staking Making Moves
Past week, blockchain community has been buzzing with “Staking Protocols”, their implementations, analysis, goals, pros & cons etc. Staking, its use cases and its infrastructure are all expanding exponentially. Ethereum will bring ~$30B liquidity into the existing ~$20B staking marketcap. Also, taking into account the current prices and around 40% of of all funds being staked on average, it can bring us 271% growth, that is approximately $19 B.
Image Source: Julien Bouteloup (Stake Capital)
Ensuring Decentralized Staking Economy
Just like any other movement, Decentralization and Staking has many moving parts. The working in cohesion of all these is much needed for ensuring further decentralization in staking economy.
Protocol Design: First things first, there needs to be a very attractive incentive design of the protocol. Though experimentation is needed, some proposed ideas as follows:
Dynamic Lock Up time basis the size of the validator.
Fixed reward for every validator, making a level field for smaller validators also.
Increase individual yields if the user delegates to more than 1 validator
Lower the threshold requirements to become a validator
Algorithmic reward reduction (delegate to a big validator = smaller reward)
Education: High quality, widely available information on Staking for validators, and on-chain data for everyone else to truly understand the protocols and its workings. A strong community that actively engages in governance and development. Incentivize informed and reflected decision-making for delegations and stake distribution and to promote interest for Staking as a whole rather than for a particular project or a concept.
Participation: Participation from every one is needed if there is to be a chance for the growth and development of networks. Providers can contribute in many ways such as developing community tools, develop dApps and active governance participation. Not only this, the network management also need to heavily consider good incentivisation of the network providers, supporters and community.
User Experience: A pleasant on-boarding system with smooth control and workflows will go a long way. Blockchain based softwares are already deemed very complicated due to their developer-design-friendliness. But, this needs to change to Layman-Design-Friendliness if one is aiming for mass adoption.
Distribution: In most Proof of Stake (PoS) networks, the majority of tokens is held by very few early investors. A wider token distribution may be achieved e.g. via incentivized testnets or mechanisms like the Edgeware lockdrop. Initial distribution of tokens should be as equitable as possible while preventing sybil attacks.
So, these are some of the ways I believe we can broaden decentralization within the staking economy.
Selected Headlines: So that you don’t have to
Binance is launching a dollar backed stablecoin, Binance USD (BUSD) along with a partnership with New York Department of Financial Services (NYDFS).
Gemini now allows off-chain and OTC trade negotiations on its platform as part of Gemini Clearing, which allows Gemini account holders to negotiate trades that are cleared and settled by the exchange.
Apple exec. Jennifer Bailey, Vice President of Apple Pay quoted as saying “We’re watching cryptocurrency”.
Paxos, a new york based stable coin issuer has launched a has launched a gold-backed token trading as PAX Gold ($PAXG).
Facebook Inc. hired two more lobbyists to help win over lawmakers threatening to stymie its launch of a cryptocurrency, according to lobbying disclosures filed this week.
I’ve been saying this all along, Scarcity will also vanish once bitcoins are finished. PUN INTENDED
And the BIG crisis is just round the corner with increasing debts on world reserve currency. Believe me, HODL Now, Be Safe.
But, if someone is eligible for all this, Won’t he be clever enough not to show his true self. Anyway GO BITCOIN.
I started with “The Internet Of Money” though. LOL.
Rap Battle: Hamilton V/S Satoshi 🔥
My Week Summed Up
Last week was very exciting, I launched my own personal website, you can visit it at Hashanova.com. I will also be a part of Invest: Asia by CoinDesk, to personally interact with the best in blockchain and cryptocurrencies, and grow my network. Know More here: The best and most influential speakers to meet at CoinDesk ‘Invest: Asia’
Apart from this, I recorded two new episodes for my HashTalk podcast series. One of which is an interview with Sandeep Nailwal - COO of Matic Network in which he shared his blockchain journey, what motivates him to go forward and also tips on being a better person.
Curated Articles of Past Week: Best of the Best
The Fed Shouldn’t Enable Donald Trump - Bill Dudley
A conversation with Eric Tymoigne on MMT vs SMT - MacroMania
ETH is money (and why it matters) - The Defiant
Bitcoin in a deflationary age - Kevin Virgil
Information Asymmetry in Crypto - jonathanjoseph
Why the discrepancy? - JP Koning
Modeling Bitcoin's Value with Scarcity - PlanB
Top Listen: Best of the Best Podcast
Raoul Pal | The Fourth Turning: Generational Theory and the Future of Global Money
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Disclaimer: None of the content in this newsletter is meant to be financial advice. Please do your own due diligence before taking any action related to content within this article.