What is Proof-of-Stake blockchain and what is in it for you?
If you think about current most talked about buzzword, “blockchain” definitely would be it. We see banks and governments, tech giants and entrepreneurs, scientists and students talking about blockchain and cryptocurrencies, all along with the fast growing international community of blockchain enthusiasts.
One of the emerging topics in the blockchain world is Proof-of-Stake and if you are interested in crypto developments you certainly have heard of it. Here we present a short non-technical overview of Proof-of-Stake blockchains and our view on the opportunities, risks and future of PoS.
Proof-of-Work vs Proof-of-Stake Blockchains
The core principle of blockchain is decentralisation meaning that the authenticity and correctness of the information in the system is ensured by consensus of the participating agents and not by a centralised entity (think of a Central Bank regulating the money supply as an example of centralised system management).
There are different ways to ensure such consensus, most used of which are Proof-of-Work (PoW) and Proof-of-Stake (PoS). According to Crypto Research Report, they enable 42% of the top 100 cryptocurrencies.
Probably the most famous Proof-of-Work cryptocurrency — Bitcoin — was created in 2008 by Satoshi Nakamoto and produced huge waves in the financial world. Bitcoin pioneers became millionaires and the successes (and failures) of Bitcoin paved the way to the rapid development of the blockchain industry.
Since the creation of Bitcoin Proof-of-Work has been the most common used consensus mechanism in public blockchains. In PoW, the consensus is ensured by the algorithm rewarding participants who solve cryptographic puzzles in order to validate transactions and create new blocks (so called “mining”).
The shortcomings of PoW, among which security issues, price volatility, high energy consumption, gave researchers and enthusiasts an incentive to develop alternative consensus algorithms. At the moment one of the most promising options is Proof-of-Stake (PoS) where incentives to the blockchain agents (who are playing the role of validators) to support information authenticity are based on the concepts of game theory.
The idea behind PoS blockchains is that consensus is ensured by the validators whose voting power depends on their economic stake in the network. In PoS-based blockchains, a node can become a validator by staking a deposit (i.e. blockchain currency). Validators’ role is to validate (confirm authenticity and correctness) of the new transactions in the network and creating new blocks. If a validator fails to participate, she is punished by losing part of the earnings.
The set of validators is dynamic and is overseen by the blockchain. The rules based on which validators are chosen to validate a new transaction can differ depending on a blockchain: random or pseudo-random processes based on the size of the stake, age of the node or other factors.
Besides PoW and PoS blockchains, the crypto landscape is offering hundreds of cryptoassets with different consensus algorithms and in our future posts we will look closer at some of them. Bitcoin, Ethereum at its current state are the biggest PoW blockchain (though Ethereum is planning to move to PoS during the next years). Tezos, Polkadot, Neo, ARK, Cardano are examples of the PoS blockchains in different stages of maturity.
Why we support Proof-of-Stake blockchains
At Validators, we believe in the bright future of PoS blockchains. One of the main reasons is their advantage of the energy efficiency comparing to PoW blockchains.
Mining PoW cryptocurrencies requires energy-intensive computer calculations. While estimating exact energy consumption is difficult, some researchers suggest that mining 1 dollar worth Bitcoin has the same energy intensity as mining gold.
In PoS blockchains there is no need to consume large quantities of electricity in order to secure a blockchain. Therefore, PoS blockchains are better for the environment.
Another advantage of PoS consensus is its flexibility and variativity. Using game theory incentives, blockchain can use different types of rules to ensure consensus and minimise the risk of collusions and malicious behaviour of the agents, i.e. getting closer to the ideal of self-regulation and complete decentralisation.
Finally, PoS consensus can implement financial penalties to prevent 51% attacks as they become too expensive. Hence, more safety.
How to earn money in PoS blockchains
Owning PoS cryptocurrency gives you an opportunity to earn stable income. This income is paid out by the blockchain in return for participating in the consensus algorithm. In a nutshell, if you perform the functions of a validator in the system you will be rewarded with its cryptocurrency.
In order to support blockchain infrastructure, you need to run a server which is always online (not to miss the moment when the network needs a new block) and stake your cryptocurrency (which means your money is locked and you cannot use it).
Such arrangements can be inconvenient for many users, and the market came up with a solution — Staking as a Service (SaaS).
Staking as a Service emerged as a new type of financial services for crypto owners of PoS blockchains. Delegating your assets to a SaaS provider is quite similar to depositing your money to a bank, with a fixed interest rate. New SaaS companies emerging in the crypto landscape offer different approaches to managing your assets: they can be custodial or non-custodial. The differences sometimes depend on the design of the underlying blockchain (Delegated PoS vs Pos). We will look at the variations in SaaS business models in our future posts.
When you stake your cryptoassets with a SaaS providers (like Validators), they perform the functions of supporting blockchain infrastructure and pay out the network reward to you, usually keeping a small percentage of it as a fee. As a result, you are receiving a stable income without having to do anything at all.
To read more on advantages of staking with Validators, we invite you to visit our website.
What are the risks?
As an owner of cryptoassets who decides to stake his/her cryptocurrency to earn income with a SaaS provider, you do not increase your risks of losing your assets compared to the inherent risks of owning cryptoassets, if you keep your ownership (i.e. non-custodial service).
Of course, there is a risk of not receiving all or part of your reward, for example due to infrastructure failure of a SaaS provider (though many services including Validators ensure that you get paid even in this case). To minimise such risk, we recommend choosing a trusted and transparent SaaS provider.
However, investing in cryptoassets bears significant risks (of course, as any kind of investments).
The blockchain industry is new, dynamic and exciting. The institutions and their functions are not well established yet, the relationships are sometimes chaotic and the regulation is almost non-existent and differ around the world.
At the same time, investing in cryptocurrencies gets you a chance to participate in a new disruptive wave in the financial world. To get a proof that the blockchain has arrived and is here to stay, you can look at the increasing interest in blockchain from the regulators (for instance, EC in Europe created a discussion forum for blockchain industry and regulators) and big business (for instance, according to Indeed.com, JP Morgan seems to be the number one employer in the blockchain sector).
Incidentally, we perceive regulatory uncertainty as one of the highest risks for crypto owners. The possibly hasty decisions of the regulators aimed at reducing money laundry risks with cryptoassets can also hinder the development of the blockchain applications that can benefit many ordinary people.
We believe in building transparent financial infrastructure around blockchain technology and support a constructive dialogue about its future. In our next posts we will look closer at the confrontation between crypto enthusiasts believing in self regulating nature of blockchains and the regulators.
Disclaimer
This content has been produced by Validators IVS for general information purposes only. While care has been taken in gathering the data and preparing the content, Validators IVS does not make any representations or warranties as to its accuracy or completeness and expressly excludes to the maximum extent permitted by law all those that might otherwise be implied. Validators IVS accepts no responsibility or liability for any loss or damage of any nature occasioned to any person as a result of acting or refraining from acting as a result of, or in reliance on, any statement, fact, figure or expression of opinion or belief contained in this content. This content does not constitute advice of any kind.
