Types of Cryptocurrency Staking and how you can use it to earn passive income 

The process by which a distributed blockchain network comes to a consensus on the record of transactions that have occurred is a basic component of all blockchain networks. 

Bitcoin and many other blockchain networks use an energy consuming process known as Proof of Work. Hardware operators known as miners participate in a Proof-of-Work architecture by providing processing power to validate network transactions in exchange for cryptocurrency. The execution and recording of transactions on PoW protocols are powered by this crypto mining process.

Proof of Stake

Most next-generation blockchain networks have embraced the Proof-of-Stake (PoS) mechanism, a more recent consensus method. PoS consensus methods are a reworking of the network consensus-achieving process. They are intended to solve the shortcomings and inefficiency of conventional PoW transaction verification techniques.

Anyone on a network can stake tokens, and you can even add your tokens to staking pools, which will handle the administration of the process for you. PoS algorithms choose which nodes will be allowed to validate transactions depending on the size of the stake size ( chances of being chosen for validation increase with the number of tokens you have staked); Age of the staked tokens; and random selection. However, the size of the staked assets is the biggest criterion that will ultimately decide who gets to act as the validator. 

Types of Proof of Stake Systems:

1. Delegated Proof of Stake

A set number of delegates are granted the authority to assign the creation of new blocks by network participants in a Delegated Proof-of-Stake (DPoS) architecture. Users use a democratic voting process, weighted by the number of tokens locked up in platform crypto wallets, to choose which delegates will validate fresh blocks. Users can switch out ineffective delegates with another validator at any point throughout this ongoing voting process. 

Delegates must act honourably and wisely in order to maintain the support of their constituents and voters. The rights to produce blocks were divided equally among the approved delegates. Stakeholders receive a percentage of a delegate’s block production incentives based on the number of tokens they own in exchange for supporting that delegate.

Even though DPoS protocols impose a hard restriction (usually in the range of 20 to 100) on the number of active delegates that can create new blocks, this structure nonetheless leads to some degree of centralization.

2. Pure Proof of Stake

Pure Proof of Stake consensus mechanism focuses on user-friendly creation of decentralised applications (dApps). PPoS consensus techniques lack an inherent penalty mechanism to stop malicious node behaviour and potential security flaws like duplicate block validations, in contrast to many other PoS implementations. 

PPoS allows any interested user to join and secure the network with minimal minimum staking requirements. This sets up a scenario in which rogue individuals trying to take over or damage the network would have to face financial ruin. As long as the majority (two-thirds) of the network’s nodes are behaving honourably, a PPoS system will function normally.

3. Proof of Importance

Proof-of-Importance (PoI) mechanisms take into account extra parameters when evaluating each node’s relative level of on-chain influence, whereas standard PoS consensus mechanisms simply take into account a node’s capital vested amount when assessing that node’s proportional governance capabilities. 

PoS is being improved upon by PoI, which aims to evaluate user contributions more comprehensively than just capital requirements. 

4. Liquid Proof of Stake

Token owners can lend their validation rights to other users through Liquid Proof of Stake (LPoS) without giving up token ownership. Token holders in an LPoS network have the autonomy to decide whether to stake their own tokens or let other users access to their tokenized validation rights. 

Moreover, unlike DPoS, which has a set validator count, LPoS has a dynamic number of active validator nodes. Liquid staking is a more modern and new variation of classic staking that is currently finding support by a number of cutting-edge smart contract protocols. Users can continue to receive rewards from their initial investment while using their locked cash for other cryptocurrency-related activities thanks to liquid staking.

Liquid staking protocols are a new breed of protocols that offer traders the ability to increase their cryptocurrency holdings.

With the help of these protocols, users can stake and unstake any quantity of an asset without affecting the initial deposit. In this manner, consumers receive a tokenized version of their cryptocurrency assets and deposits are secured on platforms for liquid staking. This derivative form functions in a one-to-one relationship with the underlying asset and has the same value. To distinguish them, they are typically tagged with a distinct logo.

A staker may request and receive one stETH (where “st” stands for staked ETH) if they deposit one ETH into one of these liquid staking platforms.

Because liquid staking allows users to lock their cryptocurrency assets while maintaining access to them, users can profit from their crypto holdings in a number of ways. They can increase their initial deposit earnings by using the liquid versions of their assets on other DeFi protocols. 

5. Hybrid Proof of Stake

While the majority of PoS protocols intentionally diverge from PoW, certain hybrid consensus techniques combine PoW and PoS components to fuel on-chain activities. These hybrid consensus systems, also known as HPoS, often depend on PoW miners to create new blocks containing transactions. PoS validators subsequently vote on whether or not to approve the blocks and add them to the blockchain’s ledger.

There are other PoS systems in use currently but they are variations of the systems described above. 

Way Forward

Without having to invest a lot of resources, every node operator should have an equal chance to build new blocks and get rewards. By doing this, the blockchain system will remain protected from richer nodes having an unfair edge over other nodes. 

Further evolution of Proof of Stake consensus mechanisms should aim at effective use of network capacity since it chooses block producers fast, giving transaction data more time to be transmitted. A modern flexible and scalable blockchain system should include proper governance model that enshrines the principles of decentralisation, sustainability, and also allows individuals to function as stakeholders. 

Disclaimer: This article was created for informational purposes only and should not be taken as investment advice. An asset’s past performance does not predict its future returns. Before making an investment, please conduct your own research, as digital assets like cryptocurrencies are highly risky and volatile financial instruments.

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