Monday, 31 May 2021

Staking Versus Stacking: Clearing up the Confusion

To clearly make the distinction between staking and stacking cryptocurrency we have to understand what Consensus is in as it is used in blockchain technology.


A consensus mechanism is a fault-tolerant verification system that blockchains like Bitcoin, Ethereum and others use to validate each block on their respective networks. This Consensus mechanism is built-in and spread out across the entire blockchain network - on all the computers and smartphones and servers that deal with crypto-currencies. It’s like stamping a digital signature to every token and every transaction; and anyone, anywhere can easily verify this signature. This is the cornerstone of security that has created the decentralized trillion-dollar crypto industry.


Now we'll look at three different consensus mechanisms and compare them: 

1.) Proof of Work (PoW),

2.) Proof of Stake (PoS), and 

3.) Proof of Transfer (PoX)


Proof of Work

Proof-of-work is what is informally called mining. I'm sure you've heard the phrase 'mining Bitcoin'. This is the process by which Bitcoin miners 'create' new 'coins' or blocks. These blocks are made by running a cryptographic algorithm billions of times on very very huge numbers. These numbers are so huge, and the process is so intensive that it needs very powerful computers and a very significant amount of time. This process also consumes a tremendous amount of electricity, needless to say. The digital signature is then added at the end of each block to lock and secure it. The reward for miners is the new blocks that they have created.


Proof-of-work was the first type of consensus mechanism used and has been with us for almost 11 years now. It is a very secure but costly system in many ways and all of that electricity consumption is a major hazard to the environment. So in comes Proof-of-Stake to the rescue.


Proof of Stake

What is Staking? Simply put, staking is the process of actively participating in transaction validation (of the aforementioned) blocks of the blockchain. On these blockchains, anyone with a minimum-required balance of the specific cryptocurrency can validate transactions and earn staking rewards in that currency. It involves committing funds in that cryptocurrency to support the security and operations of the network for a specified time and then receiving a proportionate percentage afterwards.


Stakers are essentially providing funds to run the network from within its own ecosystem without it having to consume large amounts of electricity from outside and other related costs. The proof in (PoS) is that funds have been deposited and locked unto the network for a specific time. Similar to the Payment Slip you get in bank when you deposit money.


Staking is designed to be as profitable as the mining or trading of cryptocurrencies, and without the risk. All you have to do is stake a specified minimum in exchange for profits. And in most cases, even if you don't have the required minimum as an individual, you can combine your funds together with others in a staking pool. A staking pool allows multiple stakeholders to combine their computational resources and increase their staking power in the process of verifying and validating new blocks.

Ethereum, like Bitcoin, currently uses proof-of-work but will soon phase this out in favor of proof-of-stake. This will also phase out mining from the Ethereum network. It will require users to stake their ETH to become a validator in the network. This development among others will be part of Ethereum 2.0.

Proof of Transfer

The third and newest system of consensus is Proof-of-Transfer (PoX). 

It’s a new mining/consensus mechanism that uses a Proof of Work chain (in the case of Stacks, the Bitcoin chain) to be leveraged and extended in new and very important ways.

PoX is a way to extend and benefit from the time-tested security and power of Bitcoin beyond the classic design of the Bitcoin network. Bitcoin is secure because it’s stable and resistant to change. It’s secure because it has a very small scripting language with a small area of attack, among other properties. Building new features to the classic Bitcoin protocol is hard and not desirable as these features add complexity. It's very immutable, this is one of the reasons its been informally described as digital gold.


Now (PoX) was created  so that creators can benefit from Bitcoin’s properties without modifying Bitcoin itself.


The PoX consensus mechanism was made to allow builders to create a new network with its own unique features that has the stability and security of an existing Proof-of-Work blockchain from the beginning without needing to change that existing chain. Stacks chose Bitcoin in order to leverage the world’s most secure and most widely used blockchain, while simultaneously delivering full support for the creation of tokens, smart contracts, unique decentralized finance mechanisms, and much more.


Stack’s Proof-of-Transfer (PoX) is made up of two parts: STX Mining & Stacking.


Since electricity has already been consumed in the process of Bitcoin mining (PoX) means you don't have to waste any more. This is one of the core ideas behind the creation of Stacks network, and its native on chain asset is called Stacks (STX). Like other blockchains, the network is secured by miners who commit resources in order to compete to mine a Stacks block and receive an STX reward. In this case, however, mining doesn’t need any special hardware or high upfront costs. Anyone who wants to mine a block simply sends any amount of Bitcoin to the address provided by the protocol. The protocol uses the Bitcoin as an input and merges it with a verifiable random function (VRF) in order to run the leader election and choose a winning miner. The more Bitcoin a miner commits, the higher their chances of winning the leader election.


Once a winning miner is chosen, they broadcast the new block they’ve created across the network, and the protocol rewards their effort by sending them a reward of STX tokens.

But what happens to the Bitcoin that the miners have sent to the protocol? That’s where Stacking comes in.


Basically, Stacking is when STX token holders lock up their STX tokens on the network for a minimum amount of time. This completes the economic cycle of Proof of Transfer as all eligible Stackers are sent Bitcoin from miners. 

This cycle is typically 15 days but it can vary since the entire process is dynamic. For every cycle 4,000 reward slots are typically available. The minimum amount required to get a reward slot depends on the total amount of STX that's stacking and can change from cycle to cycle. If you don't meet the minimum, you can and should definitely pool your STX together with others.

The Proof-of-Transfer is that this cycle is complete. Stacks and PoX are less than two years old (as of this writing) but it is set to revolution the Crypto Space by riding on the success and stability of Bitcoin while opening up a large window of opportunities for the future.

So in summary, Staking=PoS while Stacking=PoX (while piggy-backing on PoW)!

If you enjoyed this article and you want to support this website please consider using the link below to install CryptoTab which allows you to mine Bitcoin for free in your browser.

No comments:

Post a Comment