Hamburg, 19 November 2023 - To grasp the concept of staking, it’s essential to begin by defining some key terms. First and foremost, it’s crucial to understand the concept of Consensus mechanisms in the context of blockchain technology. These mechanisms essentially dictate how a blockchain network processes payments, verifies transactions, and integrates new blocks into the chain.
At its core, consensus mechanisms serve as the backbone of blockchain technology, responsible for validating and appending new data to the distributed ledger. They are designed to ensure the accuracy and unanimous agreement of data among all parties involved. Consensus mechanisms encompass various elements, including blockchain security protocols, network protocols, and blockchain consensus protocols. When combined, these protocols form the foundation of a blockchain framework.
PoS: Proof of Stake
Proof of stake is a method used by blockchains as their consensus mechanism to select honest participants & verify new blocks of data being added to the network. Validators, integral members of the network, either as active participants or committed stakers, pledge a portion of their capital known as a stake to vouch for the legitimacy of a given block.
In doing so, they acquire and securely lock away tokens, reinforcing their dedication to upholding the network’s integrity. The stake serves as a guarantee, compelling validators to operate transparently and with the network’s best interests in mind. Some validators choose to run Staking pools to gather additional resources for the network’s benefit.
Reliability is paramount for validators, as prolonged periods of offline activity can have adverse consequences. Additionally, it’s essential to note that each blockchain establishes its unique set of regulations and requirements for its validators.
The Proof of Stake (PoS) consensus mechanism incorporates economic incentive models to establish and safeguard the maintenance of the blockchain while deterring malicious actors from tampering with block data. In PoS, validators commit their cryptocurrencies as stakes and have the opportunity to be selected to propose a new block.
Subsequently, the proposed block undergoes attestation by a majority of other validators, ensuring its validity. Validators stand to gain profits by both proposing blocks and affirming the legitimacy of others’ proposed blocks. The fundamental principle here is that the stakes they hold must possess significant value to maintain the right crypto-economic incentives.
One of the risks of the PoS mechanism is slashing correlation penalties. PoS risk parameters that we should consider would be smart contracts, roadmap, tax tracking, compound yield, governance, cost, tokens and consensus attacks.
The business model of PoS validators centers on innovation and security in both hardware and software. This model is inherently efficiency-driven and holds the potential to generate highly skilled job opportunities.
Ethereum 2.0 is a prominent example of a cryptocurrency that operates under the PoS protocol. Additionally, you can stake various other cryptocurrencies, including Cardano Foundation, Solana Foundation, Avalanche and Polkadot.
Differences of PoS & PoW
Proof of Stake (PoS) represents a significant improvement for blockchain technology on several fronts. First and foremost, it requires significantly less energy compared to Proof of Work (PoW), where the security model consumes vast amounts of energy.
By eliminating the need for mining, PoS drastically reduces CO2 emissions and addresses the environmental concerns associated with PoW. Furthermore, PoS introduces economic incentives through improved game theory design, effectively deterring centralization cartels and making 51% attacks prohibitively expensive.
These characteristics are challenging to implement in PoW systems. PoS also offers faster transaction finality, enhancing the overall efficiency of the blockchain. Additionally, PoS systems facilitate upgradability and built-in governance, allowing stakeholders to participate in network upgrades through on-chain voting and adapt to evolving regulations.
PoS systems leverage validators’ staking, enabling faster transaction processing compared to PoW. For instance, while Ethereum 1 handled 15 transactions per second, Ethereum 2 can manage a staggering 100,000 transactions per second, significantly enhancing scalability and transaction speed.
PoS systems are designed to be upgradable and scalable. They often include features like Shard Chains, which enhance the network’s capacity and efficiency by allowing parallel processing of transactions.
In PoW, miners compete based on computational power, investing in specialized hardware. In contrast, PoS systems compete based on the monetary value staked by validators, ensuring that network security aligns with the economic value at risk.
Lastly, PoS systems prioritize transparency, as they feature open-source code and accessible data through block explorers, ensuring a high level of accountability and openness in the blockchain ecosystem.
Staking is the proactive engagement in transaction validation within a Proof of Stake (PoS) blockchain network. In these blockchain ecosystems, individuals holding a minimum-required balance of a specific cryptocurrency can validate transactions and, in return, accrue Staking rewards. This process involves the locking or holding of tokens and funds in a wallet to actively support the operations of a PoS-based blockchain system, ultimately resulting in rewards for participants. Staking serves a dual purpose by enabling the network to achieve consensus while simultaneously incentivizing users.
Providers of Staking Infrastructure (PoSIs) play a pivotal role in setting up and maintaining the essential hardware and IT security for token holders. Token holders entrust these infrastructure providers with the responsibility to stake their tokens effectively. As the staking process commences, token holders are not only rewarded for their participation but also contribute to the security and governance of a Proof of Stake (PoS) blockchain network.
The selection of participants tasked with creating new blocks in the staking activities hinges on specific criteria. Crucial factors include the quantity of tokens staked and the duration for which they are held. Additionally, the choice of specific PoS algorithms has a significant impact on this process. The careful consideration of these criteria and the active involvement of PoSIs ensure the robust and efficient operation of PoS blockchain networks.
coinIX & Staking
As a consequence of the latest Ethereum network upgrade, the staking lifecycle for validators has been formally closed. An attractive reward structure incentivises stakers to secure the network — coinIX now owns a seat at the table. Not only does Ethereum Proof-of-Stake serve for ESGconformity since ‘The Merge’, it is now technically possible to make the asset productive while remaining in full control over the staked funds.
coinIX has opted for the most optimal cost-risk-adjusted return rate by self-staking. This means coinIX eliminates crucial counterparty risks. Moreover, platform, governance & smart contract risks associated with centralised institutional node operators or staking pools are mitigated as well.
Chosing the ‘gold standard’ of staking also empowers coinIX to evade correlation risks — the most underrated tail risks of ETH staking. We believe: if you’re not staking the right way, you’re losing out.
coinIX GmbH & Co KGaA, based in Hamburg, is a listed In company and has been investing in the broad spectrum of blockchain innovation since 2017. This includes the next level of digitalization in traditional industries, as well as new fields such as Decentralized Finance (DeFi). For this purpose, coinIX invests in equity of startups, early token projects and liquid cryptocurrencies. It offers a listed share that is traded on the open market of the Düsseldorf Stock Exchange (WKN: A2LQ1G | ISIN: DE000A2LQ1G5 | Ticker: XCX).