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
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)!
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