Cryptolife Highlights April edition: Types of Crypto Staking

It’s time for another edition of Crypto Life Highlights!

And, this month, we want to turn our focus to staking — something we launched on the CL Platform earlier this month.

Let’s start by showing you the different ways you can stake your crypto and the benefits it can bring you.

But first, what is staking?

Staking is a popular mechanism investors use to earn passive income on their digital assets without selling them. Your crypto is locked for a set period of time to help support the operation of a blockchain. In return for staking, you earn cryptocurrency rewards for staking your assets. Popular blockchains that offer staking include Ethereum, Tezos, Cardano, and Solana.

There are two types of staking — proof-of-stake (PoS) and delegated proof-of-stake (DPoS).

Proof-of-stake (PoS)

A popular way to stake crypto is through a proof-of-stake (PoS) consensus.

Through this system, staking helps to validate transactions executed on the blockchain and ensure they are legitimate and add new blocks to the blockchain. The more staked tokens, the greater the chance of a user being chosen to validate a transaction and earn rewards.

Delegated proof-of-stake (DPoS)

A delegated proof-of-stake (DPoS) is when users vote for delegates (AKA witnesses or block producers) to stake their tokens on their behalf.

From there, elected delegates are chosen for each new block created on the blockchain. Once the block is validated, delegates and users who staked their tokens are rewarded with a portion of the transaction fees collected.

The rewards you receive depend on how much you stake. So in this instance, the more tokens you stake, the higher your share of the reward.

What’s the Difference?

The main difference between PoS and DPoS is how blocks are created. PoS depends on validators, which are selected according to their stakes in the network, whereas delegates on a DPoS system are chosen through a voting process.

Additionally, PoS and DPoS are different in terms of their governance. PoS governance completely depends on the encoding rules and parameters, and any changes to these rules would result in a fork of the protocol.

On the other hand, DPoS is democratic, meaning that delegates are in control of governance and can propose new changes to the protocol, with approval from users to implement them.

Which is better — PoS or DPoS?

Like all things, PoS and DPoS staking both have their upsides and downsides.

PoS was created as a greener alternative to the proof-of-work (PoW) mechanism, which is notorious for the amount of computational power that it consumes. PoS also uses a unique mechanism to prevent malicious or fraudulent transactions on the blockchain. Specifically, validators have to stake more value in their tokens than the transaction fees they can earn. So if any fraudulent activity is detected, they will lose their stake and be banned from participating in future validation processes.

While PoS is the most popular choice for staking, many are turning more to DPoS systems. While PoS has good advantages, it is often criticised for favouring validators that have more staked tokens in the network. Therefore, variants of this — such as DPoS — were created to tackle this and follow a different approach to selecting validators.

DPoS can also process more transactions per second than PoS and doesn’t require as much hardware. Moreover, its democratic approach allows users to choose who validates and creates new blocks, as well as vote out anyone who isn’t carrying out their duties properly.

That being said, DPoS doesn’t come without its drawbacks. A typical DPoS system runs with a 51% risk of attack, where delegates can act maliciously toward the network. DPoS projects also tend to have lower decentralisation.

For example, some projects have around 26% of the total token supply going to venture capitalists (VCs) and insiders, and those with less than 30 delegates are not seen as being truly decentralised.

That’s a wrap! 👏

All good things must end, but don’t worry — we’ll see you again in a month!