When we talk about blockchains, an intrinsic characteristic of each one of them is how the transactions are validated. As a way of rewarding the work done in the validation process, the nodes (processing points) receive a reward from the network for each transaction validated successfully.
Currently the most common validation protocols used by the blockchains are: Proof-of-work, Proof-of-stake and Delegated Proof-of-stake.
The focus of this article is on the Proof-of-Stake (PoS) protocol, but here is a quick summary of the other validation protocols:
Proof-of-work (PoW)
This protocol that originated with the creation of Bitcoin consists of using computational power to decrypt and validate transactions. Basically the validation happens in a "raw" way, where the computers participating in the network try to "guess" through brute force how to decrypt the transmitted message.
Therefore, the greater the computational capacity of the node, the greater the probability that it will successfully validate a transaction.
Delegated Proof-of-Stake (DPoS)
As can be seen on the STEEM blockchain, and on the EOS blockchain, for a node to participate in the transaction validation process, they must receive votes from all those who have a stake in the network.
In the case of STEEM blockchain for example, all STEEM that is converted to STEEM POWER are considered valid votes, therefore 1 SP = 1 vote.
Quick reminder of the day: If you use STEEM and have not yet voted for witnesses you trust do it now! They are the key operational point of the blockchain
The blocks are processed alternately between the elected representatives, and each receives a reward for their work.
Proof-of-stake
Definition and Origin
The idea for the protocol came up in 2012, created by Sunny King and Scott Nadal with the aim of solving the energy consumption problem of the Proof-of-work protocol of Bitcoin.
The rationale is that, instead of the nodes chosen for the validation of the transactions were determined based on who had the greatest computing power (and consequently spent the most energy), the choice was based on those who had the largest participation in the network:
- The greater the number of staked coins in the wallet, the greater the probability that the node will be chosen to validate the transaction.
The first blockchain network to operate using the Proof-of-stake protocol was Peercoin.
This protocol has been gaining popularity, with many blockchains using it, including the Ethereum network, wich will have a Proof-of-stake protocol implemented in the near future.
How to join a proof-of-stake network and receive rewards for validating transactions
Each network presents its own way of allowing people to participate in the validation of transactions, but, basically, there are 2 ways:
- Staking coins on the wallet
Theoretically, on some networks like Peercoin, if you "lock" any amount of coins, you have a chance to participate in the validation of transactions.
However, as the chance of being chosen is the number of coins, in most blockchains a large number of coins is required to have a reasonable chance of receiving rewards.
This will vary greatly from project to project, and some of them have a minimum amount of coins that you need to have in order to participate.
- Implementing a masternode
Some networks allow participation in the validation only through the implementation of a masternode.
In addition to the need for a little technical knowledge, for a masternode to participate in the network, a minimum amount of coins is required, which makes "investment" even more expensive.
For example, to implement a masternode on the DASH network, 1000 DASHs are required, which at the current price of around 1140 USD.
Proof-of-stake pools
For those who do not have enough currencies to have a good chance of validating transactions or implementing a masternode, there is an alternative.
There are some sites that have created a "pool" in order to facilitate the process of participation in the proof-of-stake networks.
The idea is that several users place their coins in a single wallet, increasing the chances that that wallet will be chosen to process a transaction, and the prize pool is divided proportionally to the amount of coins that each person deposited, with a fee being paid for the controller of the pool, as payment for the service.
This method has advantages and disadvantages:
Advantages
- It is not necessary to have large amounts of coins to have a good chance of being chosen to validate transactions
- It is not necessary to have a computer connected to the blockchain 24 hours a day to participate in the validation
Disadvantages
- You must be confident that the owner of the pool will comply with the payment of the rewards, as he is the owner of the wallet private key
- Winnings are slightly reduced due to the fee charged by the pool
As you can see, there are risks, so if you decide to participate in a proof-of-stake pool, always check its reputation, and be comfortable with the possibility of losing your coins.
My recommended pool
There are several pools to choose from, but before sending your coins to any of them, research their reputation well to reduce your risks a little.
My research took me to the Stake Cube pool, which among those I searched for, seemed the most reliable.
Stake Cube presents the possibility of participating in 46 different cryptocurrencies staking (and new ones being added through voting), and some other very interesting features:
- There is an internal exchange, where you can trade any of the 46 currencies against the main cryptocurrencies: BTC, LTC, DASH and DOGE
- Due to the existence of the exchange, when depositing BTC, LTC, DASH or DOGE (which are not proof-of-stake), you provide liquidity for the platform, and therefore receive daily interest in each of these currencies
- The platform has an education section, where users can submit educational texts related to cryptocurrency and receive a reward for it
- You can "buy" a stake in a masternode for a fraction of what it would take to build your own masternode. For example, to participate in a DASH masternode you only need a minimum of 0.25 DASH.
- There are faucets for several different currencies, which helps a little in increasing your coin stack.
Conclusion
Cryptocurrencies have opened up the possibility of generating extra passive income in several different ways. However, it is always good to remember that no form of investment is 100% guaranteed that you get a real return.
So always seek concrete and solid information before putting your money anywhere, and always be aware that the possibility of losing your investment exists, especially in the world of cryptocurrencies.
But if you have an extra budget, which allows you to make some riskier investments, it is always worth keeping an eye on some opportunities, such as participating in a proof-of-stake pool.
Cheers!
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