This article will discuss staking in cryptocurrency and how it differs from the proof of work consensus model. The proof of work model tracks bitcoin transactions and how much money everyone has. It is a bit complex. So, let’s discuss the proof of stake model, which is similar but much easier to understand. We would simplify staking and discuss platforms like the Ultron Foundation, where you can stake your coin.
What Is the Proof of Stake?
First, staking is when you lock your crypto asset for some time to support blockchain operations. Proof of stake is a blockchain verification procedure that is more efficient, conserves energy, and is less risky than the more popular “proof of work” method. Only one miner is selected to validate the blockchain in proof of stake. However, that miner must lock up part of their crypto assets as collateral to be selected. The miner is punished for creating any fraudulent transactions by losing their collateral. They are rewarded for good transactions by creating new coins and possibly with the transaction fees the sender paid. This summary is all that proof-of-stake is about. Let’s explain this further; you will fully understand what proof-of-stake is.
Why Does Proof of Work Suck?
To understand proof of stake better and the need for this, let’s discuss why proof of work sucks and why we need proof of stake to fix the things that proof of work sucks at.
Let’s explain it like this: assuming you have ten runners lining up for a race, and all ten racers are racing to the finish line. Then, you have some racers that have an advantage given the number of resources they have, like having stronger legs or weighing less. Even though all the racers eventually get to the finish line, only one person wins. They get the reward, which might be a shiny bitcoin. In contrast, the other runners still had to run down the track to complete their race. Those who didn’t win wasted their energy running for no reward. This explains how proof-of-work operates. However, with proof of stake, all the runners would line up; after that, only a single racer would be selected based on a few factors. This way, nobody runs without getting a reward, and we don’t waste electricity or energy.
When it comes to coins that use proof of work like bitcoin, many large mining companies compete to solve a block and reward the fastest proof of work. This isn’t fair to the DIY (Do it yourself) miners who don’t have access to very powerful machines or supercomputers that can quickly solve the puzzle-solving task. With cryptocurrency, we want there to be many miners so that the coin is truly decentralized and the blockchain is safe. If those large mining companies join, they could monopolize things and start making fake transactions.
How Does Proof of Stake Solve This Problem?
Proof of stake tries to fix this by only selecting one validator, which is the word that proof-of-stake cryptocurrencies call miners. This validator, or miner, then gets to solve the puzzle and earn the reward while other validators double-check them. It is a lot fairer this way, and one key thing when it comes to proof of stake is that since only one validator is selected, they must solve it correctly; otherwise, they will have to select someone else and wait for them to solve it correctly. It just takes a lot of time. Remember that in the crypto space, time is money. Therefore, to solve this problem, we ensure that those participants lock up some of their coins. Then other validators can double-check their work, and if those validators are wrong, they are penalized, and some of the coins they locked up are taken. This process of locking up their coins as collateral is called staking.
To participate in a proof of work coin, you must own some of that coin and then lock it up so you can’t use it. You wait so that the network will pick you to mine, and when you get picked, if you mine correctly, you get what is called a staking reward, which is usually some of the coins, and if you mine incorrectly, you get penalized and lose some of the coins that you initially locked up.
The way that validators are selected is very important because, in many cases, proof-of-take coins will bias those who are staking the most coins because they have the most to lose. However, sometimes we calculate how long they have been locking up those coins because they have them and they haven’t lost them. If they were only selected based on the age of their stake or who has the most stake, this would be secretly biasing the big and rich mining facilities again.
To solve this bias, there is the Ultron Foundation method, where a bit of a random number picker is added, and this is a complex procedure we won’t discuss in detail. However, it is a factor in the validator process to eliminate bias. Furthermore, validators have a good incentive to verify the blockchain correctly.
The Risks and Rewards
There are certain risks involved in staking your cryptocurrency. However, you are assured of minimal risk when you stake with reputable platforms like the Ultron Foundation.
The first risk is the locking period; when you go to stake your coin, it will be moved into a “locked state,” and during this time, you will be unable to carry out any transactions with your coins. You can’t send them, and you can’t cash them out. You will be required to lock them up for a certain amount of time, which could be a month at a minimum or up to a year at times.
The second risk is technical knowledge. Staking is not as easy as just downloading software and then pushing a button; you usually have to know how to code and set up your computer to validate and accept rewards into a wallet. You are responsible for fixing any issues you encounter when and if they arise.
The third risk is the validator commission. If you don’t want to set up the validation process yourself, you can give your coins to someone else with the knowledge and equipment to do it. These platforms usually require a validator commission to use their computers, and this commission could cut your profit, or they could run away with your deposit at any time. Another risk is that the reward duration takes time, depending on your chosen network. It could take minutes, days, or even weeks to see the payout of your staking position. It is crucial to see the network’s reward payout time.
Lastly, we have risk number five, which is bad behavior. Since proof of stake is built on validators, you will lose some of that stake if the validation is bad. There are low chances that you have good validation, but the network reports that you are wrong; nobody mentions this because the likelihood is very low, but it is still a risk.
You can mitigate this risk by using reputable staking platforms like the Ultron Foundation. This gives you a fair chance of getting rewarded when you stake your coin.
Although there is a reward for your staking depending on your chosen platform, proof-of-stake has certain limitations: it can invalidate do-it-yourself miners who want to participate without owning a whole bunch of coins. Ultimately, the proof-of-stake methodology is generally better than the proof-of-work methodology.
