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Airdrops are so 2017, free money was fun while it lasted but now when someone says free money in crypto, the first thoughts are scams and ponzi schemes. But in 2020, there is a way to earn free money, in a legitimate, common practice, and logical manner — staking.
Staking is the core concept behind the Proof-of-Stake (PoS) consensus protocol that is quickly becoming an industry standard throughout blockchain projects. PoS allows blockchains to scale effectively without compromising on security and resource efficiency. Projects that incorporate staking include aelf, Dash, EOS, Cosmos, Cardano, Dfinity and many others.
PoW — Why change
First, let’s look at some of the issues facing Proof-of-Work (PoW) consensus that led to the development of PoS.
- Excessive energy consumption — In 2017, many concerns were raised over the amount of electricity used by the bitcoin network (Largest PoW blockchain). Since then the energy consumption has increased by over 400%, to the point where 1 single transaction on this network has the same carbon footprint of 736,722 Visa transactions or consumes the same amount of electricity as over 20 U.S. households.
- Varying Electricity Costs — The profit of any miner on the network is tied to two costs, the initial startup cost to obtain the hardware and infrastructure, and more critically, the running cost of said equipment in relation to electricity usage. Electricity costs can vary from fractions of a cent per kWh to over 50 cents (USD) and in some cases it is free. When a user may only be earning $0.40 USD per hour then this will clearly rule out certain demographics based purely on electricity costs, reducing the potential for complete decentralization.
- Reduced decentralization — Due to the high cost of the mining equipment, those with large financial bases setup mining farms, either for others to rent out individual miners or entirely for personal gains. This results in large demographic hotspots on the network reducing the decentralized aspect to a point where it no longer accomplishes this aspect.
- Conflicted interests — The requirements of running miners on the network are purely based on having possession of the hardware, electricity and internet connection. There are no limits to the amount a miner can earn, nor do they need to hold any stake in the network, and thus there is very little incentive for them to vote on upgrades that may benefit the network but reduce their rewards.
I want to take this moment to mention a potential benefit to PoW that I have not seen anyone mention previously. It is a very loose argument so don’t take this to heart too strongly. Consistent Fiat Injection
— The majority of miners will be paying for their electricity in fiat currency. At a conservative rate of $0.1 USD per kWh, the network currently uses 73.12 TWh per year. This equates to an average daily cost of over $20 million USD. This means every day around $20 million of fiat currency is effectively being injected into the bitcoin network. Although this concept is somewhat flawed in the sense that the same amount of bitcoin will be released each day regardless of how much is spent on electricity, I’m looking at this from the eyes of the miners, they are reducing their fiat bags and increasing their bitcoin bags. This change of bags is the essence of this point which will inevitably encourage crypto spending. If the bitcoin bags were increased but fiat bags did not decrease, then there would be less incentive to spend the bitcoin, as would see in a staking ecosystem.
Different approaches have been taken to tackle different issues the PoS protocol faces. Will Little has an excellent article
explaining this and more in PoS, but let me take an excerpt from his piece to go through them:
- Coin-age selection — Blockchains like Peercoin (the first PoS chain), start out with PoW to distribute the coins, use coin age to help prevent monopolization and 51% attacks (by setting a time range when the probability of being selected as a node is greatest), and implement checkpoints initially to prevent NoS problems.
- Randomized block selection — Chains like NXT and Blackcoin also use checkpoints, but believe that coin-age discourages staking. After an initial distribution period (either via PoW or otherwise), these chains use algorithms to randomly select nodes that can create blocks.
- Ethereum’s Casper protocol(s) — Being already widely distributed, Ethereum doesn’t have to worry about the initial distribution problem when/if it switches to PoS. Casper takes a more Byzantine Fault Tolerant (BFT) approach and will punish nodes by taking away (“slashing”) their stake if they do devious things. In addition, consensus is formed by a multi-round process where every randomly assigned node votes for a specific block during a round.
- Delegated Proof-of-Stake (DPoS) — Invented by Dan Larimer and first used in Bitshares (and then in [aelf,] Steem, EOS, and many others), DPoS tackles potential PoS problems by having the community “elect” delegates that will run nodes to create and validate blocks. Bad behavior is then punished by the community simply out-voting the delegated nodes.
- Delegated Byzantine Fault Tolerance (DBFT) — Similar to DPoS, the NEO community votes for (delegates) nodes, but instead of each node producing blocks and agreeing on consensus, only 2 out of 3 nodes need to agree on what goes in every block (acting more like bookkeepers than validators).
- Tendermint — As a more sophisticated form of DBFT and a precursor to Casper, Jae Kwon introduced tendermint in 2014, which leverages dynamic validator sets, rotating leader elections, and voting power (i.e. weight) that is proportional to the self-funding and community allocation of tokens to a node (i.e. a “validator”).
- Masternodes — First introduced by DASH, a masternode PoS system requires nodes to stake a minimum threshold of coins in order to qualify as a node. Often this comes with requirements to provide “service” to a network in the form of governance, special payment protocols, etc…
- Proof of Importance (POI) — NEM takes a slightly different approach by granting an “importance calculation” to masternodes staking at least 10,000 XEM. This POI system then rewards active nodes that act in a positive way over time to impact the community.
- “Proof-of-X” — And finally, there is no lack of activity in the PoS world to come up with clever approaches and variants of staking (some are more elaborate than others). In addition to BFT protocols such as Honeybadger, Ouroboros, and Tezos, for further reading, also check out “Proof-of-”: Stake Anonymous, Storage, Stake Time, Stake Velocity, Activity, Burn, and Capacity.
Earning Your Stake
In order to understand how one can earn money from these networks, I’ll break them down into 3 categories: Simple staking, Running nodes, and Voting. Simple Staking -
This is the simplest of the 3 methods and requires almost no action by the user. Certain networks will reward users by simply holding tokens in a specified wallet. These rewards are generally minimal but are the easiest way to earn. Running a node -
This method provides the greatest rewards but also requires the greatest action by the user and most likely will require ongoing maintenance. Generally speaking, networks will require nodes to stake a certain amount of tokens often amounting to thousands of dollars. In DPoS systems, these nodes must be voted in by other users on the network and must continue to provide confidence to their supporters. Some companies will setup nodes and allow users to participate by contributing to the minimum staking amount, with a similar concept to PoW mining pools. Voting -
This mechanism works hand in hand with running nodes in relation to DPoS networks. Users are encouraged to vote for their preferred nodes by staking tokens as votes. Each vote will unlock a small amount of rewards for each voter, the nodes are normally the ones to provide these rewards as a portion of their own reward for running a node.
Aelf’s DPoS system
The aelf consensus protocol utilizes a form of DPoS
. There are two versions of nodes on the network, active nodes & backup nodes (official names yet to be announced). Active nodes run the network and produce the blocks, while the backup nodes complete minor tasks and are on standby should any active nodes go offline or act maliciously. These nodes are selected based upon their number of votes received. Initially the top 17 nodes will be selected as active nodes, while the next 100 will stand as the backup ones, each voting period each node may change position should they receive more or less votes than the previous period. In order to be considered as a node, one must stake a minimum amount of ELF tokens (yet to be announced).
In order to participate as a voter, there is no minimum amount of tokens to be staked. When one stakes, their tokens will be locked for a designated amount of time, selected by the voter from the preset periods. If users pull their tokens out before this locked period has expired no rewards are received, but if they leave them locked for the entire time frame they will receive the set reward, and the tokens will be automatically rolled over into the next locked period. As a result, should a voter decide, once their votes are cast, they can continue to receive rewards without any further action needed.
Many projects have tackled with node rewards in order to make them fair, well incentivized but sustainable for everyone involved. Aelf has come up with a reward structure based on multiple variables with a basic income guaranteed for every node. Variables may include the number of re-elections, number of votes received, or other elements.
As the system matures, the number of active nodes will be increased, resulting in a more diverse and secure network.
Staking as a solution is a win-win-win for network creators, users and investors. It is a much more resource efficient and scalable protocol to secure blockchain networks while reducing the entry point for users to earn from the system.
1 DOGE is currently valued at $0.00139 or 0.000002196 Bitcoin/DOGE. DOGE has become 5% more valuable vs. the Bitcoin since yesterday, and roughly 5% more valuabe vs. the USD since Bitcoin's price is holding steady around $630/Bitcoin. submitted by
The DOGE market cap (total value of all DOGE) is $71,123,000 today, with a total of ~52 billion DOGE in existence. The market cap of DOGE is roughly 1% the size of Bitcoin's market cap, which is impressive. DOGE currently has the 5th biggest market cap out of all the digital currencies, behind Bitcoin, Ripple (not really a mineable currency), Litecoin, and Peercoin.
DOGE has seen a steady decrease in value this week, losing 40% of its value vs. the USD, and 11% of its value vs. Bitcoin. Alot of this can probably be explained by instability in the Bitcoin market due to Mt. Gox's shutdown.
However, in the longer term DOGE is showing strong growth. It has increased in value 315% vs. Bitcoin since it opened 67 days ago. DOGE has strengthened 31% vs. the USD since opening, however since DOGE's weakest point on January 8th DOGE has strengthened 650% vs. the USD!
In other news, miners are currently mining around block 108,000. Rewards for blocks won't be halved until 92,000 blocks from now. The current reward is 0-500000 per block.
Back for more? Great! Today's article is going to cover What Blockchain is doing in the future
. 1. Proof of Stake vs. Proof of Work 2. Pooled Computing 2a. Grid Computing 2b. Blockchain Security 3. Financial Sector Disruption 3b. ERC-20 Tokens 3a. ICO's A short disclaimer: The following Blockchains are discussed purely at my discretion. I did my best to remain unbiased, but I do own most of the coins that are brought up here. I hold the coins because I believe in them, this belief is not just that they will increase in value, but also that they will accomplish the goals they've set for themselves. I could be wrong. 1. Proof of Stake (POS) vs. Proof of Work (POW).
For a Blockchain to be secure it must have measures in place to keep bad folks from changing the digital ledger. When Bitcoin was first created it implemented a solution to this problem called Proof of Work
, or POW
, which made altering the Bitcoin Blockchain very difficult.
Essentially what happens in a POW Blockchain is that all of the Nodes (computers running the Bitcoin client) race each other to solve a cryptographic puzzle. The first Node to solve the puzzle wins the right to chain a new Block onto the Blockchain. Solving this puzzle uses a lot of each Nodes computing power (Time x Electricity)
, but there is no way to chain a new Block onto the Blockchain without first solving this puzzle. This secures the Blockchain from alterations to its past Blocks, because a malicious Node would have to solve the puzzle for every single past Block AND be the first Node to solve the current Blocks puzzle. Since it obviously takes much more Time x Electricity
to solve multiple puzzles instead of just one, the malicious Node will never be able to catch up to the current Block without a massive advantage.
So what is this Massive Advantage? For a malicious Node to alter a POW Blockchain, it would need direct control over a 51% majority of the entire Hashing Power
being used by the Blockchain. Hashing Power is the amount of Time x Electricity a computer uses on behalf of the Blockchain (resources spent Validating Requests, solving puzzles, etc).
In the case of Bitcoin (and Ethereum), there are literally millions of computer Nodes dedicating their Hashing Power to solving the puzzles. It would take a 51% majority of all Nodes to agree that they wanted to alter the Blockchain before anything could be changed. Proof of Stake
, or POS
is an alternative to Proof of Work. Despite the terrible acronym, POS is a much more energy efficient method of securing a Blockchain. Rather than winning the right to chain a Block by quickly solving puzzles, in the POS system the Node who wins the right to chain a new Block is chosen at random, with a few caveats. Essentially the process proceeds like this: 1. Each Node that wants to participate in chaining a new Block onto the Blockchain selects an amount of that Blockchains CryptoCurrency to Stake
. When a CryptoCurrency is Staked it is basically locked in a vault that is untouchable until a certain amount of time passes. 2. A Node with a Stake is chosen by the Blockchain to chain the newest Block onto the Blockchain. 3. The other Nodes with Stakes verify that the winning Node is following the rules. If the winning Node is following the rules, the new Block is chained onto the Blockchain and the process repeats for the next new Block. 4. However, if the winning Node is NOT following the rules, the other Nodes with Stakes tattle on the winning Node. When enough Nodes with Stakes tattle on the winning Node for not following the rules, the winning Nodes entire Stake is burned (deleted) and a new winning Node is chosen to chain the Block.
To date, only a few CryptoCurrencies are using a purely Proof of Stake system (Peercoin & NXT). The majority of CryptoCurrencies use Proof of Work (Bitcoin, Litecoin, Ethereum), and a few use a hybrid system of both POS & POW (Decred).
Ethereum is trying to make the transition from POW to POS, and their lead developer has cited the enormous amount of energy used for Proof of Work as the reason why. The solving of puzzles for POW is the culprit of this energy use, but Proof of Stake has not been tested on a live Blockchain at the same scale as Proof of Work. Time will tell if Ethereum and the other Proof of Stakers are correct, and I hope they are for the sake of the planet! It is estimated that both Bitcoin and Ethereum burn over $1 Million worth of USD in Electricity and Hardware PER DAY
to secure their Blockchains.
In my opinion, following the progress of the Casper algorithm for Ethereum is the best way to stay up to speed on the current state of Proof of Stake research, and to better understand the benefits that POS may bring if it goes live on the Ethereum Blockchain. Link to Casper FAQ 2. Pooled Computing.
Do you know what the fastest computer in the world is today? It is the Sunway TaihuLight, a Chinese supercomputer that can do 93 Quadrillion floating-point operations per second
, also know as FLOPS. This is incredibly impressive, especially because this is the only way we have to perform Molecular Dynamics Simulation, or to simulate what Molecules do under changing situations. All of this computer power being in one place creates an issue though. The issue is that the amount of heat the supercomputer generates while running is enormous, and it is the main factor limiting humanity from building even faster, centralized supercomputers. 2a. Enter Grid Computing!
The decentralized solution to a supercomputer has already been achieved with Grid Computing. Grid Computing is the networking of many different devices (Personal computers, smartphones, servers, etc) for the purpose of carrying out computations each device could not accomplish by itself. This idea sounds great, but the issue Grid Computing runs into is that a single malicious computer can ruin the entire Grid of computers that are connected to form the supercomputer, so opening a Grid Computer to allow the public to participate is currently not feasible. 2b. Enter Blockchain!
With its cryptographically secured trustless system, any computer can be linked into the grid. And since there is no trust required, anyone who wants to interfere with the Grid Computers harmony should not be able to do so. Currently there are no successful Blockchain based supercomputers that I know of, but Golem and SONM are supposedly getting close. Neither of these CryptoCurrencies has released a working version that you can perform computations on as of yet, but if they do Grid Computing will greatly increase access to powerful computers for everyone the world over. 3. Financial Sector Disruption.
In the first Quarter of 2017, crowdfunded Blockchain tokens raised more money for new ideas than the entire amount of capital invested by traditional Venture Capital firms. Sound impressive? This is only the beginning of the disruption that Blockchain is aiming to bring to the traditional Financial Sector of the global economy. From super cheap borderless payments to home mortgages, Blockchain based CryptoCurrencies have already made progress on vastly improving the way these services work.
In parts of the under-developed world, services like those mentioned above barely exist or are not even feasible. It is estimated that 2 Billion adults do not have a bank account today. However, with a simple CryptoCurrency wallet installed onto a Smarthphone, an unbanked adult can go from having no way to interact with the global economy to being at the technological cutting edge of global economic participation.
The furthest progress being made with the goal of turning unbanked people into banked is probably HumanIQ. Their goal is to allow users to create their own economies locally, and then to tie those economies into the global reach of the Ethereum Blockchain. HumanIQ (and other CryptoCurrencies with a similar goal) has a decent shot at leveling the playing field for folks in under-developed regions. What sets HumanIQ apart from prior attempts to accomplish this same goal though, is that the HumanIQ Coin is an ERC-20 Token
. This means they are exclusive to the Ethereum Blockchain. A more thorough explanation of an ERC-20 Token will be given in the next section. 3a. ERC-20 Tokens.
In the last article, Part 2. What is Blockchain tech doing Today?
it was mentioned that Ethereum supports a Programmable Element in addition to the typical Blockchain function of recording transfer of value transactions. One of the ways this Programmable Element has been used is in the creation of ERC-20 Tokens. These Tokens act like an entirely separate CryptoCurrency, but are able to be secured by the massive amount of users on the Ethereum Blockchain. This allows developers of new CryptoCurrencies to save time and money to get their idea off the ground, as the amount of work to create an entirely new and secure Blockchain is quite intense.
This option to use an existing Blockchain as the security for your CryptoCurrency has led to an explosion of new ideas that are all aiming to take advantage of Blockchain Tech. A few of the more notable use cases for ERC-20 Tokens are: The Golem project: With the aim of creating a decentralized supercomputer, Golem uses an ERC-20 Token as a means of rewarding participants for linking their computer into the Golem supercomputer. GigaWatt: Created an ERC-20 Token that will be used to rent Hardware space at their Hydro-powered CryptoCurrency mining farm in Washington state.
It is important to note that an ERC-20 Token does not directly gain any monetary value from the price of Ethereum. The advantages that the ERC-20 Token creator receives are:
- Anywhere Ethereum is accepted, their ERC-20 Token can also be used.
- Their ERC-20 Token is secured by the Hashing Power participating in the Ethereum Blockchain. 3b. ICO's.
The ease and advantages of creating an ERC-20 Token have also had the effect of promoting a new type of crowdfunding. The ICO
, or Initial Coin Offering
is when a CryptoCurrency Team allows a "Pre-sale" of the Coin they are creating for a project. Anyone who likes the goal of the Team can send Bitcoin, Ethereum, or any accepted CryptoCurrency to the Team in exchange for some amount of the Team's new Coin. After the Pre-sale is over the Team opens their Coin to the Public and the people who bought at the Pre-sale can either hold the Coin or sell it.
Currently, even though it is not required, a large amount of ICO's are happening with ERC-20 Tokens. This is mostly due to the easier method of creating an ERC-20 Token vs. building a Blockchain from the ground up.
As is the case with anything, tons of money being thrown at ICO's without any regulation creates some problems. The biggest issue that many people have with ICO's is accountability. An alarmingly high percentage of ICO's raise millions of dollars and have little to show for it, other than some proof they hired a team of developers and a Whitepaper (paper outlining their goal and how they will accomplish it).
Obviously not every great idea succeeds, but when the idea is backed by millions of dollars of other people's money, fiduciary responsibility becomes a central issue. The United States SEC (Securities & Exchange Commission) recently stated that:
"U.S. Securities Laws May Apply to Offers, Sales, and Trading of Interests in Virtual Organizations."
While this is not outright regulation, in my opinion it hints at some type of future restriction for ICO's. I am not a fan of the Guv'ment telling me what to do, but I have to admit if the Crypto-sphere doesn't regulate itself to a higher standard the long, fat, uninformed hand of bureaucracy is going to do it for us.
Thats all for today, hope you enjoyed the article! Thanks again for reading, and please comment below. Parts 1-4 can be found here.
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