Proof of Stake Explained for Dummies (What is Your take on Staking and what Crypto do you Stake?)

# Proof of Stake

Proof of Stake is the validating of transactions en the creating of blocks on the blockchain by ‘*staking*’ a certain crypto. This is a concensus mechanism.

In Proof of Stake there are no miners, but validators. They don\`t mine blocks, but forge blocks.

The rewards you get for staking your coins are the transaction fees, from transactions in the block.

# Proof of Stake Lottery

The chances of solving a block can be compared to lottery tickets. This usually depends on your ‘stake’. Let\`s say there are a 100 coins and you own 1 coin, you have a 1% chance to solve a block.

# Delegation Mechanism

With special wallet software a user has the ability to ‘*delegate*’ their stake to another user. The more coins are delegated to one user, the higher the chances of solving blocks are for that user.

More blocks = more rewards and these rewards are shared among all the stakeholders in a proportion to the staked amount.

# Pros and Cons

**Pros**

* Energy efficient
* Low entry barrier (You don\`t need expensive equipment as in Proof of Work)
* PoS cryptocurrencies are generally faster than PoW cryptocurrencies

**Cons**

* Users with many coins can have a big influence on the consensus proces.

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38 thoughts on “Proof of Stake Explained for Dummies (What is Your take on Staking and what Crypto do you Stake?)”

  1. Is there any project in place today that does not rely on PoW and is fully live and decentralized/distributed? (e.g. not Hyperledger or Ripple; also not someone pinky swearing they will phase out the center in the future, like IOTA).

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  2. One of the downsides of PoS is that there’s no perfect random oracle, so it has to be overcomplicated. Also, Proof of Stake is a form of Open Representative Voting (ORV), which doesn’t have the issue itself.

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  3. Low entry barrier needs to be stressed. I would read stuff like this as a newbie and still decide I don’t have the time or inclination to figure this out, and what goes into being a validator. Most of my experience is with ADA, but it’s essentially idiot proof and takes as close to zero time and effort as you could imagine.

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  4. A useful way of thinking about delegation is kind of like an upvote. If you think this or that node is a good, trusted node of the network, then you use your coins to give them the ol’ 👍

    The node with the most 👍 from people will have higher chances to win the lottery for making a block.

    Different Proof-of-Stake networks have different approaches to making your 👍 happen. Some are locked up for a period of time, in order to make the 👍 count, while others are less restrictive, i.e. not locked, and however many coins you hold at a given time counts for how powerful your 👍 is.

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  5. >Users with many coins can have a big influence on the consensus proces.

    Always interesting to see cons of PoS. I’m sure I’ve got things wrong. My view is as follows….

    If it was a case that a PoS would be used as a common currency, for the less wealthy would be under greater pressure to spend their coins and also their stake rewards.

    Meanwhile those more wealth can buy their crypto, and then simply let their stake rewards compound and allow their holding to grow in size. They can basically passively grow their holding, increase their reward size and also acquire larger voting power as time goes on – all by simply never selling.

    This sounds like (some) PoS projects might risk nourishing a wealth gap amongst its users (key word being “nourishing”).

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  6. I think you’ve gotten the basics here, but there’s a few more key components of a proper proof of stake system to ensure it remains fair and decentralized:

    1. One of the cons you’ve included here is that someone with a lot of money can command a large stake in the system, and therefore control block production. There are mechanisms to prevent this scenario in good PoS protocol design. One is creating a threshold limit per stake pool, after which rewards drop severely, and or block production potential might drop also due to protocol limits. There are also mechanisms such as locking and slashing that punish bad behavior on the network.

    2. Because of network thresholds on stakepools after which rewards reduce, this spreads out the staking funds quite a bit, since people are incentivized to be part of pools that are not saturated.

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  7. In germany the tax on your whole staked position would increase if you stake. We are usually tax free after one year of holding, but if you staked that coins it becomes 10 years. Tax can be up to 42% (your personal tax rate) or so. So in germany staking will actually make you lose money after taxes if the value of your coins increases.

    For that reasons I am forced to just hodl all the coins which I could stake otherwise. And it hurts.

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  8. PoS is the same system we have today. The rich get more and it ends up with being very centralized over time.

    All blockchains that use PoS will become obsolete with time as they end up being controlled by a few individuals and they people are greedy, so they will try to change it to make them profit even more, which in turn will be their downfall… Just like our monetary system today

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  9. Still doesn’t make sense to me. In PoW, computers do the work of validating blocks and get paid a reward. In PoS coins just… sit there? How does that validate blocks?

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  10. Algorand’s PoS they call “Pure proof of stake” is a consensus mechanism in which block proposers are taken from the entire pool of token holders (not just delegated block producers for example)Then 1000 token holders are randomly selected to be validators of the proposed block.

    It’s apparently due to that randomization mechanism of consensus and quick block production that Algorand can’t be forked or 51% attacked.

    The currently centralized relay nodes is a glaring issue which Algorand is aware of and addresses directly:

    **[Q23:Who manages the list of relay nodes? What about decentralization?](https://algorand.foundation/faq#running-nodes-)**

    Currently, the Algorand Foundation manages the official list of relay nodes, to bootstrap a scalable and reliable initial infrastructure backbone. Having said this we need to draw your attention to the important fact that the security of the protocol holds even if all the relays behave in a malicious way. As long as sufficiently many participation nodes (in terms of stake) are behaving honestly, the blockchain cannot fork. Furthermore, anybody with an Algorand account can run a participation node.

    We are working on a model where the decisions on relay nodes will be done in a more decentralized way.

    Edit: The con OP mentioned is still true for Algorand governance. Whale accounts easily tipped votes near the end of the voting period on G1

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  11. What crypto do I stake? I am now staking USDT on Binance, staking stable coins is very useful during downtrend. I will stake KDX on Kaddex once it’s live, we will be able to earn a percentage of all trades made on the DEX.

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  12. Sounds like the whales will get to solve all the blocks, basically the rich getting richer without doing anything but holding

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  13. The cons of anyone being able to influence the consensus process make me feel like any staking coin goes directly against the entire point of crypto

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