In the world of blockchain technology there are two main types of consensus mechanisms used to validate and confirm transactions on the network.
Bitcoin, Ethereum (1.0), Litecoin and Bitcoin Cash are all examples of networks that use proof-of-work. With the consensus of proof-of-work, miners compete against each other to solve a mathematical puzzle. They have to solve it with evidence. Generally this requires specialized equipment that uses a large amount of energy.
The one who completes the puzzle first creates the next block in the chain and publishes it on the network. The other miners involved in the process transform the validators and check if the solution is correct. The miner who successfully solved the puzzle receives rewards in tokens (Bitcoin or Litecoin for example).
Unlike proof-of-work, with proof of bet any person can validate block transactions based on the number of tokens held, rather than computing power. Owning more tokens implies more validation power. To be considered, a validator must target or block a certain number of tokens native to that network to be considered. The network randomly chooses one of these validators to create blocks and confirm those created by others.
In exchange for securing the network, the validator, along with any delegating (more on that later) receives a payment in the form of assets that they are betting in proportion to the amount held. Some stake test networks require a minimum amount to wager, either as a delegator or as a validator, while others do not. For example, you need at least 8 ADAs to delegate on Cardano, but there is no minimum to become a validator, while on Ethereum you need 32 ETH to be a validator.
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What are the advantages of the betting test?
The proof of stake consensus model offers many benefits, including:
Palo (as delegator)
The main advantage of proven consensus cryptocurrencies is the ability to bet on that asset and in return receive a payment in that asset in proportion to your stake. For most users, this means that they will delegate their participation to a stake pool validator or operator, rather than learning the technicalities and purchasing the hardware needed to manage a pool. Staking is a great way to earn a high annual return on interest on your assets, with many paying around 5% per year.
When users delegate their resources to a pool, the resources don’t leave their wallet, but you’re transferring the power of your vote to the operator, who in turn validates or votes on your behalf. Even if the assets don’t leave your custody, it’s important to choose a reliable validator, as there can be negative implications if you choose one that isn’t (see negatives of the bet proof).
Staking (as a stake pool validator/operator)
A validator or betting pool operator receives even more benefits than a delegator, as they generally receive more of a payment than the delegator in exchange for doing more work (running the node, keeping it online, verifying transactions).
Depending on the network, a validator may need to bet a certain amount of an asset to participate, and most of them have fees they charge that vary by pool. Users can delegate to a validator who has a zero percent fee, but can feel more comfortable delegating to a pool with a small fee and better payment history.
Throughput/Network Speed
Part of the problem with Bitcoin and Ethereum is the high transaction costs due to network congestion, which is related to network throughput or speed. Both of these networks have very low transactions per second, which means it doesn’t take long for the network to become congested and create a situation where you have to pay a high fee to complete the transaction in a reasonable amount of time.
With proof of bet, each validator or pool becomes a node through which transactions can be processed, effectively increasing network throughput and speed the more validators are on the network and creating blockchains capable of processing thousands of transactions per second at a much lower cost.
Environment
One of the biggest advantages of a proof-of-stake blockchain is the reduced environmental impact they generate compared to proof-of-work. It takes much less processing power to validate transactions, which means that for something that has a lot of transactions like NFT sales, a proof-of-stake blockchain is much more efficient for cost and speed.
The negative aspects of the proof of interest
It should be noted that the proof of the
stakes is not without criticism, and many Bitcoin maximalists believe that it is simply not as secure as the proven proof-of-work consensus method. Here are some of the potential downsides of the betting test:
Minimum thresholds
While staking and validation on a proof of stake network can be extremely beneficial, it is important to keep in mind that many networks require a minimum bet for delegates and/or validators. In some cases, it is quite negligible (such as the need for 8 ADA to bet on Cardano), but in some cases it can mean a high barrier to entry for most (such as the need to bet 32 ETH to be a validator on Ethereum 2.0). There are criticisms that this could lead to a more centralized crypto environment with large companies earning most of the rewards from staking.
Blocks
While not necessarily a bad thing for network security, many proof-of-stake blockchains have a freeze period after picketing. This means that once you have wagered your assets there is a minimum of time that you have to wait before you can access them if you choose to bet. For example, staking on Polkadot (DOT) has a 28-day block once delegation ends, while Terra (LUNA) has a 21-day period after choosing delegation.
Bad actors/Loss of rewards
As mentioned above, if you choose an unreliable validator (bad actor), it can mean negatives for you as a delegator. Depending on the protocol, you can lose rewards or even your staked resources if the validator performs incorrect actions such as not being online, not validating correctly, or some sort of collusion.
Less secure than proof-of-work
Although it does not intend to discourage anyone from buying a proof of stake cryptocurrency, it is undoubtedly less secure than a proof of work cryptocurrency. This is because it requires much less energy to affect the network, however, it is still extremely expensive financially to attempt a proof-of-stake network attack, and while less secure than proof-of-work, it is still extremely secure.
Current Proof of Stake Cryptocurrencies
While not an exhaustive list, here are some examples of the best crypto assets that use proof of bet and their current rewards:
Cardano (ADA)
The minimum delegation requirement is 8 ADA, 0 for the pool to operate (although it is less likely to attract delegates if you have nothing at stake). Pool operators can charge variable fees. The current payment is about 5% per year depending on the pool and there is no block of your ADA.
Solana (SOL)
Solana is one of the newest cryptocurrencies, but it has gained surprisingly large market share thanks to its insanely fast transactions (50,000 tps) and low fees. It’s relatively easy to bet on SOL, and you can do it directly from wallets like Exodus or exchanges like Kraken. You just need .01 SOL to get started. On the other hand, aiming for SOL as a validator is one of the most difficult proposals in staking as expensive equipment and a large amount of SOL are required to get started. The current payment for stakers is about 5-6%.
Polkadot (DOT)
No minimum proxy, but you must be in the top 16 of your pool to receive a payment, which means there is a small barrier to entry as a delegator (called nominators for DOT). To be a validator you need to bet 350 DOT. Block of 28 days once the episode ends. The current payment is about 13% per year, but payments are not guaranteed as with other networks.
Tezos (XTZ)
No minimum proxy and payout amounts occur regardless of your stake compared to others delegating to the same pool. Barrier large enough for entry as a validator (called Bakers), as it requires 8,000 XTZ to be a baker. There is no block to delegate, but cooking has a block period of 14 days. The current payment is about 5% per year.
Earth (MOON)
No minimum delegation amount or minimum amount to be a validator, but being a validator takes a lot of work and time that most people don’t have. Validators can charge a fee between 0 and 100%, and bad activity can result in the loss of rewards or resources for delegates and validator. There is a 21-day holding period for both delegation and validation, with current payments of around 5% per year.
Cosmos (ATOMO)
No minimum delegation amount and requires only 1 ATOM to be a validator, although it is extremely complex from a technical point of view. Validators can charge a variable fee as with Cardano and Terra, and there is a 21-day block period for both delegators and validators. The current payment is about 9% per year.
