If you have been in the cryptocurrency ecosystem for a while, terms like Work test (pow) Y proof of stake (point of sale) should not be strange to you, or at least you should have heard of them.
In this article, I will try to explain, in plain and simple language, what are these terms Y What are the main differences between Proof of Work and Proof of Stake.
Also in this article, I will try to answer questions like:
- What is gambling?
- How is staking different from mining?
- Can it potentially generate passive income for crypto traders? Y
- What and how do you start betting coins?
First, let’s talk about Mining
Before addressing what staking is, it is essential understand why staking is createdAnd what is its purpose, that is, what does staking intend to solve?
For ease of explanation, let’s use the example of Bitcoin.
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Bitcoin and some of the above cryptocurrencies (decentralized), allow money to be sentt from one part to another, digitally, without any central agency or authority.
Initially, the solution to the management of a chain of blocks was done through mining. Bitcoin mining simply means that miners compete against each other using powerful computers trying to guess the solution to some mathematical question. Whoever finds the solution first gets the right to write the transaction (also known as the Block) to the ledger.
Mining favors miners with a powerful computer system; with more computing power, one will be able to make more guesses per second, thus increasing their chances of getting the solution, which then gives them the right to write to the ledger.
Mining is also known as proof of work (PoW)
As mentioned above, mining is the process where miners use their computing power and put a lot of work to try Solve mathematical problemsso they get to write to ledger/blockchain.
In more technical terms, it is also known as Proof of Work (pow).
Proof of work is a consensus mechanism where the design is to create an agreement on who can update the ledger between groups of people/miners (who don’t know each other).
drawbacks of mining
While Proof of Work seems like a reliable, secure and legitimate solution for managing a decentralized ledger, it is also a very resource intensive a.
As you can see, acquiring high performance computers can easily break the bank. Also, keeping them running 24/7 just to solve the math problems of mining can accumulate electricity bills from miners.
Stake is here to solve mining problems
Because of the Mining disadvantages mentioned above, a alternative consensus mechanism – Stakeout – has been introduced.
Unlike the Mining method, where miners mine with computers to win the contest, Staking allows users (who are no longer miners) bet your real coins in order to win the contest.
Staking is also known as Proof of Stake (PoS)
So how does staking work?
basically you lock a certain amount of your coins (or funds) on a Node (your everyday computer that is connected to the Internet). Tea locked funds are considered your stakeand with your bet in place, you are now part of the contest in which the node will get to forge the next Block.
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Randomization is taken into account. when it comes to forging, this is to eliminate the chance of favoring a single node or entity. Other factors that are also taken into account (of who is going to win the contest) are how much funds are stakedplus How long will they be staked?.
Well, if we were to summarize Mining vs Stake in a simple sentence:
In Mining, users mine with their computers for rewards; and in Staking, users stake their coins to get rewards.
Ethereum Proof of Stake
A lots of newly introduced coins there is already embracing proof of stake. Among them are coins like Cardano, Solana, Polkadot, Tezos, Harmony, etc.
It is important to note that each coin has different rules when it comes to calculating and distributing rewards.
Ethereum 1.0 and Ethereum 2.0
Ethereum was purely based on Proof of work only until December 2020 when their blockchain, based on Proof of Stake, called “Chain Beacon” was created. Ethereum based on Proof of Work and Proof of Stake is known as Ethereum 1.0 Y ethereal 2.0 respectively.
And since Ethereum 2.0 is based on betsyour no longer mine to earn rewards. To earn rewards on Ethereum 2.0:
- You need be a validator.
- You need lock 32 ETH like bets.
- You may only locks (max) 32 ETH on a single node. To increase the chances of winning, you will need several nodes.
At the time of writing this article, Ethereum 2.0 runs alongside your original Ethereum 1.0 and we will continue with this until “Coupling” occurs.
What is coupling?
Coupling is the process by which both Ethereum 1.0 and Ethereum 2.0 will be merged and Ethereum becomes a purely proof-of-stake network.
The Docking event (aka The Merge) is scheduled for June 2022 (but may be delayed). And only after the coupling happens, you will be able to collect both your staked ETH and your rewards.
Rewards for staking Ethereum
This is to give you an idea of how much you can potentially be rewarded if you choose to stake Ethereum.
In Ethereum 2.0, each participating validator gets a percentage of the newly minted ETH when it is created.
So if you stake 1 million ETH, the maximum annual reward could be as high as 18.1%. However, if 3 million ETH is staked, the reward can be reduced to 10.45%.
You can think of the annual reward as a fixed pie where the more validators want the pie, the less they each get.
Check out this link if you want to learn more about Ethereum 2.0 staking rewards.
Ethereum staking limitation
All things considered (so far), staking on Ethereum may sound tempting, but it does come with some limitations that can set one back.
Here to list a few:
- Tea registration process as a validator can be Complicated.
- Configuring your own validator requires a lot of technical knowledge.
- you will too you need a dedicated computer and 32 ETHwhich is not something that everyone is willing to pay for.
- If you make a mistake with the setup process, or get disconnected or disruptive to the network, may be subject to sanctions or cut where a portion of your bets will be removed, or worse, you may be kicked out of the network.
- Only Every day 900 new validators are accepted, the rest will have to wait in line. At the time of writing this post, there are around 5,000 validators pending and waiting to join. See the latest validator updates here.
Alternative ways for Ethereum staking
Do you want to have a skin in the game but are concerned about some of the limitations mentioned above? Well no, there are some alternative ways to stake Ethereum and earn rewards without having to run your own nodes or shell out 32 ETH.
Let’s take a look at some of the most common alternatives to staking on Ethereum.
1. Staking Ethereum on exchanges
This is the the easiest way for anyone who is not tech savvy bet on Ethereum. You can stake Ethereum through supported crypto exchanges. Some of the exchanges allow you stake your coins through their validators (for a fee). This means even with a small amountyou can participate in Ethereum staking.
Some exchanges even allow you Claim your betting rewards immediately instead of waiting until the docking phase. While this removes the hassle of running our own validators and all the other perks mentioned above, staking with exchanges means you’re lose control over your coinsleaving them to the mercy of fate.
Here are some exchanges that provide Ethereum staking:
2. Staking Ethereum in staking pools
Another option is to join a participation group. While Proof-of-Work mining pools consist of people joining together for better computing power to gain an advantage over winning a contest, joining the staking pool shares a similar concept.
The participation pools are Groups of people joining each other depositing the desired bet amountGet better chances of forging the next block. To follow this approach, it’s also important to do your due diligence on the particular pool.
The things you need to worry about are: “Are pool validators reliable?“, “What are the pool fees?“, “Do you have good customer service?”, “What is the size of the pool?“, Y “Do I need to hand over my private keys?” etc.
Here are some of the best Ethereum staking pools out there:
3. Ethereum staking via Validator-as-a-service
Lastly, you can also stake Ethereum through a third-party validator, also known as Validator-as-a-service. These companies will allow you run your own validator on their serversno need to worry about installation and maintenance technicalities.
The advantage of this approach is that you keep control over your coinsand it is relatively easy to start betting. However, since you’re running it as a personal validator, this means you’re required to deposit the 32 ETH for the node. you will also need pay an additional fee for using the service.
In short, staking is a way to participate in the process of updating a transaction ledger by putting your funds on the line and earning rewards for your contribution.
I hope you find this article useful and get a good understanding of what Proof of Work and Proof of Stake are. If you have any questions or comments, please mention them in the comments section below.