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What is staking?

There are multiple methods to verify transactions on a blockchain and avoid double-spending, called consensus algorithms. The most popular two are: Proof-of-Work (PoW) used by Bitcoin and the more efficient and scalable one; Proof-of-Stake (PoS). The latter requires less computational power and can hence process more information (throughput) in a shorter amount of time (latency).

Proof-of Stake was first introduced in 2012 by Sunny King and the blockchain he developed, Peercoin (PPC). Staking requires a user to hold a certain amount of a coin or token for a long period of time during which they’ll receive voting power over the blocks to be produced. In POS, there are validators not miners, these will use their voting rights provided by the protocol to determine which transactions shall be approved to add in the next block. Each validator gets rewarded in proportion to their stake.

We are moving towards a more efficient world with technological advances. Nonetheless, as cryptocurrencies increase the financial system’s efficiency, they cannot be a causing factor of global warming. Proof-of-Work (PoW) may be more secure as a protocol but has a large energy expenditure, a study estimates that the Bitcoin network could be using as much electricity as Denmark to validate transaction.

Founders of the second largest cryptocurrency by market capitalisation, Ethereum, are taking into account the multiple problems posed by PoW, the consensus algorithm on which it was built. Consequently, Ethereum will move from PoW to PoS.

A particular problem of Proof-of-Stake was unveiled by Peercoin, which unfortunately turned it to become a long-lost memory. The “nothing-at-stake” problem was first seen when malicious nodes on Peercoin would get away with corruption with no consequence. Back then, in order to stake, one only needed to hold tokens in their wallet. Therefore, when a validator attacked a node, their tokens will remain in their possession. Whereas the proposed PoS by Ethereum would require validators to place a deposit that would be deleted if they acted maliciously through a process called slashing.

The purpose of a consensus algorithm is not to make a blockchain fast, the purpose of a consensus algorithm is to make a blockchain safe” Vitalik Buterin

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