13. PoS (Proof Of Stake)

As we know there are several protocols under which various cryptocurrencies are “made” to work in a particular blockchain; which are nothing more than derivations of the base protocol of Proof of Work under which Satoshi Nakamoto was based on his whitepaper for Bitcoin.

Proof of Stake is one of the alternatives of agreement or decentralized consensus. It was proposed in 2012 by a member of the Bitcointalk forum, arguing that the Proof of Work (PoW) needed too much power and energy.

The miners considered that mining a single block was a waste of resources. Some studies have shown that the operation and maintenance of PoW networks, such as Bitcoin, are as expensive as supplying power to homes throughout a country.

In this sense, PoS is presented as a much more favorable alternative for the user, and for the environment, than the PoW.

For the PoS, they are the platform’s own currencies. Proof of Stake systems allow users to “lease” their coin balance to miners, thereby playing an important role in network security and getting some of the rewards without the overhead of having to run a full node by themselves.

This concept indicates that a person can extract or validate block transactions according to how many coins he has. This means that the more Cryptocurrency is owned by a miner, the more mining power it has.

Basically it would be a way to encourage the owners of the different altcoins to help blockchain network of that cryptocurrency, that is, the more coins you have on your wallet of an altcoin that uses Proof of Stake (PoS) the more it helps the network and more rewards you will have. Miners are often called intermediaries in systems like this.

Nowadays there are many cryptocurrencies that use this system, because in that way they also maintain the market capital of that currency, and the more people are interested in the Proof of Stake (PoS), the more investment and market capital will enter that currency, and therefore the value of this currency will rise more and more in time.

However, this still does not guarantee high levels of participation. Many holders of these cryptocurrencies may not feel comfortable with the technical side of setting up a node or having their computer connected a lot of hours, or it may be impossible to access the necessary infrastructure they require for one reason or another.

Moreover, small owners can simply find it unprofitable: there are fixed costs for mining, and if your balance is not enough to overcome them even with the rewards it will not be attractive.

Requisites for staking

As a general rule, to be able to stake, these conditions must be met:

• Your wallet is unlocked. You can check the blocking status by placing the mouse over the Block icon that is usually in each wallet. If your client is blocked, click on the icon and enter your password (you chose this password when you digitized your wallet).

• Your coins are mature. As strange as it sounds, your coins must mature first. When you withdraw coins from the exchange or receive some from a friend / buyer, you must wait at least X hours (depends on the project) to mature. Only then, these coins will be staking.

• Have a considerable amount of coins, if you have few coins, you will not see stake rewards too often. Larger amounts reward statistically more often.

• Your portfolio is ideally open 24/7. Staking does not use a lot of electricity (like mining in PoW), but it does take some time. If your client is open only a few hours a day, you may not see many staking rewards.

Staking Pools

Like Bitcoin and other cryptocurrencies based on PoW protocols, they have mining groups (pools) to share the Hashrate and receive small regular payments for the processing power they bring to the network; in PoS systems, currencies can also share resources.

In this case, however, small coin owners can lease their balance to a complete node, and correspondingly receive rewards in proportion to the number of coins contributed. When renting a balance, the coins are blocked but remain in full control of the owner. They are not transferred to the pool, but remain in the same direction — only they cannot be spent until the lease is canceled.

Coins exposition

With PoS the probability of finding a block of transactions is directly proportional to the number of currencies that one has accumulated, which in the first instance implies that the wallet is connected to the network, which in turn implies that the wallet is exposed to possible security problems. To try to avoid this problem, a variant of the protocol has been developed, which is called the delegated participation test, also known by the acronym DPoS (from the English Delegated Proof of Stake). In this variant it is allowed that the nodes owners of currencies delegate their privileges to build new blocks in a new type of nodes called representatives.

In conclusion, this method is somewhat different from mining because it does not require the use of special hardware, plus all that that entails. This form of generating passive income, is based on keeping in possession the cryptocurrency in your official purse usually and set it in staking mode, with this action, you will receive a reward for being a node in the network and support the cryptocurrency with your purchase and maintenance.

With PoS there are some advantages and disadvantages. For example, if at any time you wish to sell your cryptocurrencies, you can do so without any problem, in addition to that its value will not be reduced in stacking mode, which would not imply a recovery of losses when maintaining it, unless there is a variable in the market that reduces its price considerably.

Despite this advantage some cryptocurrencies may require a large investment to be able to use the stacking mode regularly.