Contents
Entrance
Proof of Stake (PoS) Nedir?
Who created Proof of Stake?
What is Delegated Proof of Stake (DPoS)?
How does the staking process work?
How are staking rewards calculated?
What is a staking pool?
What is cold staking?
How to do staking on Binance?
final thoughts
Entrance
You can think of staking as a less resource-intensive alternative to mining. It involves holding funds in a cryptocurrency wallet to support the security and operations of a blockchain network. In a nutshell, staking means locking up cryptocurrencies to earn rewards.
Most of the time you can stake your coins directly from a crypto wallet like Trust Wallet. On the other hand, many exchanges also offer staking services to their users. Binance Staking allows you to earn rewards in a very simple way. All you have to do is keep your coins on the exchange. We will talk about this in more detail later.
To better understand what staking is, you first need to know how Proof of Stake (PoS) works. PoS is a consensus algorithm that allows blockchains to operate more energy efficiently while maintaining a reasonable level of decentralization (at least in theory). Let's take a deeper look at what PoS is and how staking works.
Proof of Stake (PoS) Nedir?
Proof of Work has proven to be a very powerful mechanism for achieving consensus in a decentralized manner. The problem is that it requires a lot of artificial calculations. The puzzle that miners compete to solve serves no purpose other than keeping the network secure. It could be argued that this in itself justifies overestimation. At this point, you may wonder if there is another way to achieve decentralized consensus without such a high computational cost.
This way, which participants create a block does not depend on their ability to solve hash problems, as in Proof of Work. Instead, the amount of coins staked by participants becomes the determining criterion.
Some argue that producing blocks through staking enables higher levels of scalability for blockchains. This is one of the reasons why the Ethereum network as a whole will be moving from PoW to PoS in a bunch of technical upgrades called ETH 2.0.
Who created Proof of Stake?
The first example of Proof of Stake is the 2012 article written by Sunny King and Scott Nadal for Peercoin. They describe this mechanism as “a peer-to-peer cryptocurrency design derived from Satoshi Nakamoto's Bitcoin.”
The Peercoin network is launched with a hybrid PoW/PoS mechanism where the primary use of PoW is to issue initial supply. However, PoW was not needed for the long-term sustainability of the network and its importance in the network was gradually reduced. In fact, PoS was used for much of the security of the network.
What is Delegated Proof of Stake (DPoS)?
An alternative version of this mechanism was created by Daniel Larimer in 2014 and is called Delegated Proof of Stake (DPoS). It was first used as part of the BitShares blockchain, but soon the model was adopted by other networks. These networks include Steem and EOS, also created by Larimer.
DPoS allows users to cast their coin balances as votes, and voting power is directly proportional to the number of coins held. These votes are then used to elect a group of delegates. Delegates govern the blockchain, ensuring security and consensus on behalf of the users who vote for them. Staking rewards are usually distributed to these selected delegates. Delegates then distribute a portion of the awards among those who voted for them, in proportion to their individual participation.
The DPoS model makes it possible to reach consensus with a smaller number of validator nodes. Hence it tends to improve the performance of the network. On the other hand, having the network be small and dependent on a specific group of validator nodes may reduce the level of decentralization. These validator nodes handle the operations and overall administration of the blockchain. They contribute to the process of consensus and setting of important administrative parameters.
In short, DPoS allows users to project their influence through participants in the network.
How does the staking process work?
As we mentioned before, Proof of Work blockchains use mining to add new blocks to the blockchain. In contrast, Proof of Stake chains use the process of staking to produce and verify blocks. Staking involves validators locking up their coins so that they can be randomly selected by the protocol to validate blocks at regular intervals. Generally, users who stake higher amounts have a higher chance of being selected as the next block validator.
Thus, there is no need for special mining hardware such as ASICs to create blocks. While ASIC mining requires a significant investment in hardware, staking requires a direct investment in the cryptocurrency itself. That means PoS validators are selected based on the number of coins they stake, rather than competing with computing power for the next block. What encourages validators to keep the network safe is “stake”, that is, the coins they put up. If they fail to do this, their stakes are at risk.
Although each Proof of Stake blockchain has its own staking currency, some networks use a dual-token system where rewards are paid with a second token.
App-by-app staking simply means keeping funds in a suitable wallet. Thus, almost anyone can perform various network functions in exchange for staking rewards. This includes adding funds to a staking pool, which we'll talk about in a moment.
How are staking rewards calculated?
There is no short answer to this. Each blockchain network may use a different way to calculate staking rewards.
Some are determined per block and take into account many different factors. These factors may include:
How many coins the validator staked
How long the validator has been actively staking
How many coins are staked in the network in total
Inflation rate
Other factors
In some other networks, staking rewards are set as a fixed percentage. These rewards are distributed to validators to compensate for inflation. Inflation drives users to spend coins instead of holding them, which increases the use of coins as cryptocurrencies. But in this model, validators can calculate in advance how much staking reward they will receive.
Some people may prefer a predictable reward amount structure over a probability-based block reward structure. And since this information is public, it can encourage more participants to take up staking.
What is a staking pool?
Setting up and managing a staking pool usually takes a lot of time and expertise. Staking pools tend to be more effective in networks where the barrier to entry (technical or financial) is relatively high. Therefore, most pool providers charge a fee on the staking rewards distributed to participants.
Apart from this, pools can provide extra flexibility to individual staking individuals. Usually the stake must be locked for a fixed period of time, and the time period after which funds can be withdrawn or unlocked is determined by the protocol. Moreover, a high minimum balance is almost always required to prevent damaging behavior.
In most staking pools, the minimum balance amount is lower and withdrawal times are not added. Therefore, for newer users, it may be more ideal to join a staking pool rather than staking individually.
What is cold staking?
Cold staking is the name given to the process of staking through a wallet that is not connected to the internet. Hardware wallets can be used to do this, but cold staking can also be done with a completely isolated software wallet.
Networks that support cold staking allow users to benefit from staking while keeping their funds safe offline. However, users who move their coins out of cold storage cannot continue to receive staking rewards.
Cold staking is particularly useful for people with large balances who want to protect their funds with maximum security while supporting the network.
Do you want to enter the world of cryptocurrency? You can buy Bitcoin via Binance!
How to do staking on Binance?
All you need to do is hold your PoS coins on Binance and all the remaining technical requirements will be taken care of for you. Staking rewards are generally distributed at the beginning of each month.
You can check the distributed rewards for a particular coin in the Historical Returns tab on each project's staking page.
final thoughts
But it should not be forgotten that staking may also involve risks. Locking funds in a smart contract carries risks of software vulnerabilities. That's why you should always do your own research and use high quality wallets like Trust Wallet.
You can check our staking page to see which coins are supported for staking and start earning rewards right away!
