There has always been a saying in the currency circle: speculate in coins in a bull market, and collect coins in a bear market. PoS (Proof of Staking, proof of rights and interests) allows investors in the bear market to obtain decent returns through mortgage mining.
Since 2019, as Ethereum, the second largest market capitalization, is preparing to shift its consensus mechanism from PoW (proof of work) to PoS (proof of equity), several star projects such as Algorand, Cosmos, and Polkadot have also adopted PoS PoS has gained people's attention and attention again, and its business model of "holding currency to earn interest" - Staking Economy (the so-called equity pledge economy) has also become a high-frequency vocabulary, which is the so-called PoS pledge economy.
Many people in the circle assert that 2019 will be the first year of the PoS pledge economy, and the market size is expected to usher in explosive growth, reaching tens of billions of dollars.
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Understanding Staking from PoS Consensus
To understand Staking, we'd better first understand the consensus mechanism of PoS. We all know that PoS is one of the mainstream consensus mechanisms. At present, there are many consensus mechanisms on the blockchain, because the first successful application of Bitcoin in the blockchain is based on the PoW consensus. Although such a consensus makes many people realize the advantages of decentralization and distribution, it also realizes that Going to PoW will bring problems such as waste of resources and extremely high barriers to participation.
The PoS mechanism is a consensus mechanism that requires nodes to provide a certain number of token certificates to obtain the accounting rights of the competing blockchain. Its core logic is: the token holders have the control of the network. To put it simply, under the PoS mechanism, mining no longer needs to rely on mining machines. After pledging your own tokens, you can become a miner and enjoy mining income. The mining income under the PoS mechanism depends on the amount of coins you hold and The time, that is, the currency age. The advantage of PoS is that it lowers the threshold for everyone to participate in on-chain governance, and secondly, it improves the consensus efficiency and saves energy and protects the environment.
So what is the relationship between Staking and PoS? In layman's terms, Staking is a business model of "holding currency to earn interest" in the PoS mechanism. It is the means of PoS rather than the purpose, and the income is also the means rather than the purpose of Staking.
Under the PoS consensus mechanism, nodes that meet the currency holding standards need to be responsible for packaging transaction information, maintaining network operation, and participating in community governance. This process is called Staking. PoS projects usually inflate or release a certain percentage of new tokens every year. As a reward, nodes can obtain these additional tokens issued by the system. This way of earning income through operating nodes is staking, and its essence is to obtain equity rewards for exercising power.
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The Rise of the Staking Economy
Let's take a look at the current economic structure of staking. According to the data from the Staking Rewards website, as of June 26, the total market capitalization of the cryptocurrency market was about 354.6 billion U.S. dollars, and the total market capitalization of locked tokens supporting staking was about 7.9 billion About US dollars, multiplied by the average rate of return of 10%, the existing pledge income has a market of about 790 million US dollars. The founder of Cobo, Shenyu, once said at a press conference that POS currently has the support of more than 80+ public chains, and has locked digital assets of 6 billion US dollars. It is expected that more than 2.5 billion digital assets will be generated in the next year. The PoS or DPoS consensus mechanism under the Staking economy can generate an estimated 10% return. With the continuous development of technology, 2019 will be the first year of the Staking economy.
Screenshot source: Stakingrewards.com
The Staking market is growing rapidly. Most of the star projects in 2019, such as Cardano, Algorand, Polkadot, and Difinity, belong to the PoS consensus mechanism. Not long ago, V God, the founder of Ethereum, posted a post on Github proposing that Ethereum use a higher Staking reward index after deploying PoS. It can be predicted that the future transformation of Ethereum to PoS may be a catalyst for the PoS ecology and Staking economy.
Screenshot source: Stakingrewards.com
In addition, the rise of the Staking economy has caused or is causing a series of changes in the industry ecology.
1. Traditional mining pools. Traditional mining pools expand their business horizontally to participate in the Staking economy. At present, many mining pools support projects based on PoS consensus while supporting computing power mining based on PoW consensus.
2. Wallets and exchanges. Staking economy keeps wallets and exchanges advancing with the times to enhance user stickiness. For example, Coinbase Custody launched by Coinbase plans to support PoS projects such as Cosmos this year.
3. Investment institutions. The Staking economy provides investment institutions with a new asset appreciation channel. Since many projects adopting the PoS consensus issued tokens through private placement, a large number of tokens flowed into investment institutions. After the emergence of the Staking economy, in addition to selling tokens in the secondary market, investment institutions can also realize asset appreciation through Staking.
4. New market players. The Staking economy has spawned different types of new participants. For example, Staking Rewards, a website that collects Staking project data information, currently covers 25 Staking node operation teams/third-party service providers around the world.
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Questions you need to understand clearly before participating in Staking
1. Who is suitable to participate in Staking?
The prerequisite for participating in staking should be to be really optimistic about the future of the project, to prepare for medium and long-term holdings, and not to trade just because of the ups and downs within a few days. At this time, token staking (Staking) will provide you with an opportunity to obtain additional income. Because for many retail investors whose investment mentality and experience are not so mature, they may not be good at the operation of the secondary market. Frequent operations or chasing ups and downs can easily cause losses. It is a more secure and practical investment strategy. And such investors are more suitable to pledge their own tokens to obtain income. This may not be perfect, but should be the easiest and most robust option.
2. Staking income
Let's first use the data to see how much rewards the operating nodes or currency holders can get. According to the data of Stakingrewards.com: At present, the average pledge ratio of POS pledge income projects is about 30.91%, and the average pledge income is close to 11%. Then deduct 5% to 20% of the node commission fee from the income part, which is the general income of ordinary users.
Of course, the income statement of each project has a relatively large difference. Statistics on June 26, 2019 (without deduction of commissioning node fees) show:
The annualized rate of return of EOS is only 1.84%, ETH is 4.39%, Cosmos is 12.13%, Ontology is 4.83%, IOST is 14.97%...Screenshot source: Stakingrewards.com From left to right: project name, market value, price, pledge rate of return
It can be seen that the annualized rate of return of different projects varies greatly, and the income of some projects is still very attractive.
3. How to safely participate in Staking?
Specifically, the pledge operation usually has the following two situations:
One situation is to entrust the node through the project party's official wallet, Wetez, Imtoken and other decentralized wallets. Then, you actually just entrust the coin on the chain at the equity level.
In this process, you don't need to hand over the private key of the wallet to the node, so you still have the ownership of the coin very safely, and all entrustments and income are checkable on the chain. This kind of decentralized operation The way is very safe.
Another situation is to choose to put the currency in a centralized wallet or mining pool, such as: OK mining pool, Cobo wallet, etc. This kind of centralized method is equivalent to temporarily depositing your own currency to the other party for safekeeping on your behalf, so you need to judge the credibility and choose a large and reliable third-party organization.
4. The 4 basic elements in staking
When considering whether to pledge our tokens, it is necessary to analyze several key elements related to staking.
1. Inflation rate
What everyone calls staking income is a kind of "inflationary income". Here, "inflation" is actually the additional issuance of project tokens, which is also the fundamental source of staking income.
Recently, many new PoS projects have mostly chosen an inflationary economic model, which will increase the supply of tokens over time according to a certain ratio or rule. This is mainly because the current industry generally believes that inflation is more in line with the actual economic situation. The part of tokens issued by inflation can be intuitively rewarded to participants (including nodes or token holders) as pledge rewards, which is conducive to the rapid development of the entire project ecology. develop.
The inflation or additional issuance model of each project is different, so you can understand it clearly before participating. Of course, there are also PoS projects that do not have an inflation mechanism, which can be ignored.
2. Staking ratio
Although the income of token holders comes from the additional issuance of tokens, the inflation rate is not equal to the actual rate of return of token holders. Because staking requires users to actively participate, if you do not actively perform staking, you cannot enjoy the corresponding benefits.
As mentioned earlier, the average pledge ratio of current mainstream PoS mechanism projects is currently only about 30%, and there will always be a certain percentage of tokens that will not be staking, and they will not be able to share the newly issued tokens. Therefore, the formula for calculating the actual rate of return of token holders should be: rate of return = inflation rate / staking ratio. Assuming that the current inflation rate of a project is 7%, if the Staking ratio is 50%, the actual pledge rate of return should be 14%.
3. The pledge fee rate charged by the node
The vast majority of token holders need to entrust tokens to nodes, and then the nodes will participate in generating blocks for users and obtain inflation rewards on the chain. Due to the operation of the node, it is necessary to bear the related expenses of the server and operation, so the node will charge a part of the handling fee.
It is understood that the current staking fee standard charged by nodes in the market is about 5%-20% of the user's mortgage income. Different projects and different nodes have different charging standards, which are completely determined by the nodes themselves. However, regarding the handling fee, the lower the better, it is similar to shopping in our life. Often the price and quality of the product are directly proportional. You have to make a balance according to the specific situation and choose a node with stable operation and good reputation. .
Summarize
At present, most POS projects will set a lock-up period after pledge redemption. The lock-up period means that after the token holder participates in Staking, if he decides not to participate in the pledge (for example, when he decides to sell his own tokens in the secondary market), the user must wait for a period of time after the redemption operation. Tokens can be unlocked for free circulation.
At present, the length of the lock-up period varies for each project, and generally the lock-up period will be set at more than 20 days. During the lock-up period, tokens cannot be circulated and traded, so users may need to bear the risk of price fluctuations during the lock-up period, which also sets a threshold for some users who like to trade frequently.
The lock-up period is not set by the node, but is formulated by the project party. The reason why there is a lock-up period is mainly a safeguard designed to prevent the node from doing evil. In addition, setting the lock-up period can also prevent investors from concentrated redemption. Reduce currency price fluctuations in the secondary market to a certain extent.
Summarize
Although the Staking economy is already a trend in the cryptocurrency world from the current point of view, there are not all supportive and optimistic voices for the Staking economy market. For example, Li Qiwei, the founder of Litecoin, and Miao Yongquan, a member of the core developer of Monero, recently talked about the hot Staking economy and PoS, saying that PoS is too complicated and insecure, and it is impossible to figure out whether it will work, and it will take time to observe.
As a new thing, the staking model must have imperfections, such as project and inflation risks. Currently, staking is rising rapidly due to the status of PoS and the low threshold of staking. If new high-quality projects continue to appear in the future, staking will still be will continue to develop. I hope that in the next era of blockchain, we can see high-quality projects solve practical problems and truly bring killer applications.
