Staking: A New Wave of Mining in the PoS Era

Has the era of PoS arrived?

On March 1, 2019, according to Etherscan, the Ethereum block height exceeded 7,280,000, and the Constantinople upgrade has been fully launched. This hard fork upgrade, which was tested in July last year, was ill-fated, and it took several times to start After bouncing tickets, I finally got online. This means that after 5 years of development, Ethereum has come to the last moment of its third phase "Metropolis", and is about to move towards the final phase of its white paper plan "Serenity", which also means that the world's second largest cryptocurrency The network and public blockchain platform will switch from the PoW consensus mechanism to the PoS consensus mechanism. This change will be the most important issue of Ethereum this year.

Ethereum is not the origin of the PoS consensus mechanism. As early as 2012, the first PoS consensus-based project PPcoin (PPcoin) was born. During this period, it has experienced mixed consensus, pure PoS, BFT+PoS and other development stages, and derived DPoS, LPoS and other variants, the development history and evolution trends here are very interesting, we will elaborate on it next time. Seven years have passed, and looking at the top 50 major currencies by market capitalization, 16 have adopted PoS or PoS hybrid consensus, accounting for about 32%, among which EOS, Cardano, Tron, etc. are among the top ten by market capitalization There are old public chains such as DASH, Bitshares, NEO, and QTUM, as well as popular newcomers such as Tezos and Cosmos. Looking ahead, Polkadot, Algorand, IoTeX, V system, IRISnet and other new projects with great attention With one exception, PoS consensus is also adopted.

Data source: https://coinmarketcap.com/

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The PoS consensus technology is becoming more and more perfect, and the derivative types are flourishing, with excellent performance in terms of throughput, delay, speed, energy consumption, etc. The public chains using PoS are catching up with PoW in terms of quantity and quality, and Ethereum is in The key point in the transformation of PoS. This reassures us that we are fortunate enough to witness the beginning of a new era of consensus.

What is PoS?

PoS is the abbreviation of Proof of Stake, which is the consensus mechanism of Proof of Stake. As we all know, the essence of the blockchain is a decentralized account book. How to realize the unification of all bookkeeping nodes without a central manager requires the use of a consensus mechanism.

In the world of PoW, miners complete random selection by playing elusive puzzles such as hash functions, but in the world of PoS, if such a corresponding summary is made, random selection is done by the same elusive human behavior! Under the PoS mechanism, all nodes are also producing blocks, and token holders select blocks through verification and voting. Big, this is the origin of the PoS name. Of course, after years of development, the PoS random selection method has produced many variants. The Uroboros algorithm proposed by Cardano uses the method of directly generating random numbers to randomly select block nodes through the system, while the DPoS mechanism of EOS allows currency holders to The method of super nodes voting instead of each block reduces the difficulty of token holders' voting verification and also increases the participation rate of voting. The LPoS used by Tezos and the Tendermint used by Cosmos are also innovations to the existing PoS mechanism. They have developed an additional reward mechanism, a mortgage mechanism, and a slash mechanism to deal with the "Nothing at Stake" and long-term attacks etc. For the current PoS public chain, the process of token holders participating in voting, verification, and reward distribution is more complete and standardized, the ratio of public chains participating in voting verification has been greatly improved, and the stability of the main network based on the PoS mechanism has been improved. verified.

Significance of Staking in PoS consensus algorithm

The word Staking is transformed from the stake (equity) in Proof of stake, and its meaning refers to the action of token holders pledge digital currency to vote during the generation of the above-mentioned PoS consensus. Since verifying the content of each block and voting is an operation that requires a certain threshold, it requires not only better computer configuration, but also 24h online full connection, which is not a simple and sustainable thing for the public currency holders.

Therefore, the current mainstream PoS public chains consider the two roles of verification full nodes and token holders, and set high thresholds and high requirements for nodes, while token holders can participate in verification by voting for nodes and receive dividends from verification rewards. For example, EOS and Tron set a fixed number of supernodes/representatives to vote for ranking; Tezos, Cosmos, etc. require nodes to pay deposits without limiting the number of nodes.

The token holders pledge their tokens, vote for the nodes, and share with the nodes the rewards for generating blocks or verifying blocks. This process is called staking. Due to the different processes that different projects focus on, it may also be translated into voting, pledge, verification, etc. in China, but the essence is to exercise voting rights and obtain benefits based on the amount of currency held. Staking is an indispensable and important link under the PoS mechanism, and it plays an important role in both the public chain and the holders:

2. For token holders, staking is the best way to maintain and increase the value of their rights and interests. In order to encourage token holders to participate in staking, public chains generally issue additional tokens as rewards for block generation. The token holders of staking can share the rewards, while the token holders who do not participate in staking are equivalent to wasting their income in vain. Inflation loss caused by currency issuance. The annual issuance rate of the existing mainstream PoS public chains is above 5% on average, and Cosmos’ additional issuance mechanism is particularly unique. When the staking ratio of the entire network is lower than 2/3, an additional 22% is issued, and when it is higher than 2/3, an additional 7% is issued, which is equivalent to Forcing non-staking token holders to envy the high inflation rate, keep the staking ratio of the entire network higher than 2/3 to maintain stability.

List of staking cryptocurrency value by each network

Chart source: https://stakingrewards.com/global-charts

As of June 11, 2019

Staking: A New Wave of Mining in the PoS Era

The mechanism of issuing additional tokens on the public chain to reward staking behavior is just like how Bitcoin rewards its miners with 25 bitcoins per block, and the latter has developed a huge mining industry in the past 10 years, giving birth to Giant mining pools such as AntPool and F2Pool, as well as big unicorns such as Bitmain with a valuation of over 10 billion US dollars. In the PoS era, staking will surely give birth to a new economic ecology that is not inferior to the mining machine mining industry.

For example, Etheruem, with the advent of the "quiet" phase of Ethereum. Switching from PoW consensus to PoS consensus will make the current scene of using mining machines to mine ETH gradually disappear. Instead, the existing holders of ETH will mine through "staking". The block reward of 3 ETH has been reduced to 2, and everything is preparing for the PoS transformation.

There are two most important roles in the staking economy: nodes and token holders. It can be foreseen that giant mining pools that will deploy nodes in major mainstream public chains will appear. They will be like computing power mining pools to attract miners to bring computing power to join , in the PoS era, many coin holders are encouraged to stake their voting rights in their own mining pools, compete for the right to generate blocks and share the benefits. From the model point of view, this is closer to the model of traditional funds absorbing funds for investment to obtain income and then dividends.

For individual investors, mining in the PoW era requires the purchase of a separate mining machine, and special consideration of the site and electricity consumption. The threshold is too high, which makes many investors who missed the CPU mining era regret it. and. However, in the PoS era, the roles of coin holders and miners overlap, coupled with the construction of the functional role of verification nodes, so that mining by coin holders no longer requires excessive computer hardware requirements, and everyone can truly mine , You can enter the market by buying coins. The mining process is like depositing coins to obtain interest. The more coins you deposit and the longer the time, the more interest you will get. The model is simple and easy to understand. At present, the average staking rate of return (coin-based) of major mainstream PoS projects is around 10% or even higher. High value yield.

Data source: https://coinmarketcap.com/

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The public chain is an important infrastructure of the blockchain industry, and its performance upgrades and changes in the consensus mechanism will widely affect the blockchain ecology. With the advent of the PoS era, Staking will replace the original computing power mining industry to create a new system, and new development opportunities will be derived around the two important roles of nodes and currency holders.

References

References

Sunny King, Scott Nadal. PPCoin:Peer-to-Peer Crypto-Currency with Proof-of-Stake[EB/OL]//https://peercoin.net/assets/paper/peercoin-paper.pdf,2012