Introduction to Staking
Tags: Governance, Staking, Inflation, Blockchain, Proof Of Stake

Source: Introduction to staking

Hello and welcome to the first BitSong Community article.

3 days ago we released our Telegram Wallet Bot, a tool we developed to be able to easily interact with our Testnet.

The tool proved to be immediately very useful and of high interest among our community, therefore we announce that it will be further improved and made open source.

Some of our community members, a little less expert on how a Blockchain dPoS works and what is staking, asked us if we could explain the various processes to them a little better, so that they could be ready to take advantage of the staking once our mainnet is online, but also to be able to do all the necessary tests now in Testnet.

Consequently, with this article we want to make a simple and detailed overview of what staking is and how it works. At the end of the article, you will also find a surprise, that we have decided to make available, ie a Guide on how to use the Telegram Wallet Bot.

What is Staking?

Staking is the process of keeping funds in a cryptocurrency wallet to support the operations of a blockchain network. Essentially, it consists of freezing cryptocurrencies to receive rewards. In most cases, the process is based on user participation in blockchain activities through a personal crypto wallet, such as the Trust Wallet.

The concept of staking is closely related to the Proof of Stake (PoS) mechanism. It is used in many PoS-based blockchains or one of its many variants.

In 2014, Daniel Larimer developed the so-called Delegated Proof of Stake (DPoS) mechanism. It was first used as part of the Bitshares network, but other cryptocurrencies have adopted the same model.

The DPoS allows users to commit their balances as votes, which are used to elect a certain number of delegates. Thus, elected delegates manage blockchain operations on behalf of their constituents, guaranteeing security and consensus. In addition, traders can stake their currencies, receiving periodic rewards for holding funds.

The DPoS model tends to reduce latency and increase the performance of a network (ie it can process more transactions per second). This is mainly due to the fact that it allows consensus to be reached with a lower number of validating nodes. However, it generally results in a lower level of decentralization as users rely on a small group of nodes.

How does staking work?

As already mentioned, staking is the process of maintaining funds to receive rewards, contributing to the operations of a blockchain. Thus, staking is widely used for networks that adopt the Proof of Stake (PoS) consensus mechanism or one of its variants.

Unlike the Proof of Work (PoW) blockchains that rely on mining to verify and validate new blocks, PoS blockchains produce and validate new blocks through staking. This allows you to produce blocks without the need for mining hardware (ASIC). Therefore, instead of competing for the next block with a large computation job, PoS validators are selected based on the number of coins they have committed to the stake.

Generally, users who have higher amounts of coins in stake are more likely to be chosen as validators for the next block. While ASIC mining requires a significant investment in hardware, staking requires a direct investment (and commitment) in cryptocurrency. Each PoS blockchain has its own particular staking coin. The production of blocks through staking allows a higher level of scalability.

Some blockchains adopt the Delegated Proof of Stake (DPoS) model. This allows users to simply report their support through other network participants. In other words, a trusted participant works on behalf of users during decision-making events.

The delegated validators (nodes) are those that manage the main operations and the overall governance of a blockchain network. They participate in the processes of reaching consensus and define fundamental governance parameters.

Network inflation

For some networks, the staking rewards are determined as a fixed percentage “inflation” rate. This encourages individuals to use their currencies (instead of just HODL). This process amortizes the operating costs of the network to all token holders.

For example, Stellar distributes its inflation weekly to users staking their coins through a staking pool. An advantage of this approach is the possibility aside of the network to provide a fixed or controlled interest rate.

Consequently, if a user owns 10,000 XLMs for a year and specifies an on-chain inflation destination for a transaction, he should expect to earn 100 XLMs as a reward. This would happen over the course of a year with a balanced inflation rate of 1% (ignoring the cumulative effects).

Furthermore, the information can be consulted by all users of the network who are deciding whether to participate in staking or not. This could stimulate new stakers as it offers a predictable rewards program instead of a probabilistic scheme for receiving a reward per block.

In closing, we hope to have been clear enough about the various procedures and how the Blockchain PoS or dPoS work unlike PoW and for any clarification we are always at your disposal.