On December 1st, 2020, the Ethereum community and the blockchain space as a whole woke up to a new reality, one which they had been eagerly anticipating.
Ethereum 2.0 had finally arrived. The highly-anticipated network upgrade will evolve in phases and implement a number of power-scaling techniques to boost Ethereum’s capacity. Phase 0 ushers in the era of the Beacon chain, a Proof-of-Stake blockchain that could ultimately serve as the hub for the entire ETH 2.0 network. At launch, over 21,000 validators will be on hand to secure and govern the Beacon chain, each having staked 32 ETH for the privilege to do so.
Not only does this signal the start of a new chapter for Ethereum, but it is also a notable moment for staking as a whole. Staking gives token holders opportunities to participate in long-term network growth and earn passive income in the process, and has grown in both popularity and scope since its introduction eight years ago.
The Origins of Staking
In 2012, Bitcoin had shifted out of the closed circle of cypherpunks and was starting to consume a lot of energy as part of its operations. The nascent crypto community began to seek out alternatives for Bitcoin’s energy-guzzling Proof-of-Work consensus mechanism.
First introduced by Sunny King and Scott Nadal, co-founders of Peercoin, Proof-of-Stake (PoS) shifts the role of ‘validator’ from miners to potentially every token holder. Instead of running computationally-intensive hardware like in Proof-of-Work mining, participants in PoS networks can secure the network by locking up or “staking” tokens into a smart contract. By staking, network participants can earn rewards for their work but they also put their stake at risk, in the event they are bad actors.
While the principles are the same across all Proof-of-Stake networks, there are two main variations of staking for consensus:
- ‘Pure Proof-of-Stake:’ In traditional Proof-of-Stake systems, anyone can stake the required amount of tokens and become a validator on the network. Validators are often chosen on a ‘weighted lottery’ basis - the more a potential validator has staked the higher the chance that they get to participate in the production of a block. Pure PoS, like the one implemented by Algorand’s protocol, can be compared to participatory democracy whereby ordinary citizens are involved in the day-to-day management of the network.
- Delegated Proof-of-Stake (dPos)/Delegated Byzantine Fault Tolerant (dBFT): Unlike pure PoS, the family of ‘delegated’ systems don’t allow just anyone to produce blocks. Instead, protocols such as CELO present token holders with a well-defined set of validators and allow them to delegate or vote for those validators. In a sense, delegated systems could be compared to a representative democracy, whereby voters elect officials to represent them in the decision-making process.
Ready, Stake, Launch
While the initial models of staking were specifically dedicated to achieving consensus, it wasn’t long before builders realized the immense potential latent in this new economic mechanism.
Many crypto-economic models place staking in the center, starting as early as the network launch itself.
For the Beacon chain to launch, the Ethereum ecosystem needed to meet the threshold of 524,288 ETH staked into the deposit contract from at least 16,384 validators. Such a pre-launch system encourages stakeholders to have skin in the game, incentivizes community participation, and helps secure the network at the most critical juncture—mainnet launch.
Ethereum joins a slew of other projects leveraging similar stake-to-launch models. NuCypher’s mainnet launch was activated by over 2,000 validators, who staked more than 350,000 ETH for the occasion. Another successful project launch that utilized a staking pool was the Oasis Protocol through their novel staking and farming program called the ROSE Garden, which brought 6,700 new token holders to the network.
As projects evolve past the launch phase, staking takes on additional functions such as providing liquidity in DeFi and staking for governance:
- Providing liquidity on DeFi: The rise of Decentralized Finance (DeFi) and the many decentralized exchanges, lending platforms and derivatives it has spawned has been incredibly rapid. DeFi platforms allow users to lock up their tokens in liquidity pools and earn the right to a share of all trading fees generated on those pools.
- Staking for governance: Not only are DeFi tokens a vehicle for liquidity providers, but many also grant their holders an opportunity to take an active role in governing the network. Projects with on-chain governance in place allow token holders to submit and vote on proposals. Once a proposal is confirmed, the necessary changes can be applied directly to the smart contracts underlying the project.
Locking up funds in exchange for some returns is nothing new. In fact, it has underpinned the entire banking system since the Renaissance period.
With the arrival of smart contracts and staking, this ancient mechanism has evolved in ways previously unimaginable, becoming a dominant force in digital finance. Needless to say, staking forms a key component of many projects’ long-term plans and, as far as investors are concerned, is here to stay.
Stake on CoinList and Earn up to 5.4% APY
With CoinList, you can automatically earn up to 5.4% APY by staking assets like Celo, Algorand, and (coming soon) Tezos in your CoinList Wallet. Your earnings also automatically return to the pool to earn you more. The process is quick and simple:
- Create an account - Creating an account on CoinList takes minutes. You'll need to provide identity information. And we require 2-factor authentication for added security.
- Deposit or buy ALGO - Go to your ALGO or CELO wallet and click Deposit. If you don't already own ALGO or CELO, you can easily purchase on CoinList. Start by clicking "Buy & Sell" in the left navigation or in your wallet.
- Start earning staking rewards - Once your funds arrive in your wallet, you'll immediately start earning staking rewards. Rewards are generally paid once per month. And you can store your ALGO or CELO in your CoinList Wallet for free.
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