Bitfinex Guide to Cryptocurrency Deployment
in Staking program
Bitfinex launched its cryptocurrency staking service on April 7, 2020. If you are not familiar with how cryptocurrency staking works, we’ve created this short guide to give you a better idea of cryptocurrency staking, the technology and philosophy behind it.
Proof of work versus proof of stake
Before we start plotting cryptocurrency, we must first understand the underlying concept that makes this possible. In blockchain, there are several consensus mechanisms, or more known as consensus algorithms. A consensus algorithm is a set of rules that determine how nodes validate transactions added to the blockchain. Each blockchain network has its consensus algorithm, which is determined upon creation.
The consensus algorithm is essential in blockchain because it creates a way for parties who don’t know each other to unanimously agree on something, in this case, whether to add a block of transactions to the blockchain network.
There are several well-known consensus algorithms in crypto, but these two – Proof of Work (PoW) and Proof of Stake (PoS) – are known to be the oldest and most widely used.
What is Proof of Work in blockchain? PoW is the first consensus algorithm created, used by many well-known cryptocurrencies, such as Bitcoin, Litecoin, Ethereum, Monero, and Dogecoin. In the consensus algorithm Proof of Work is called the process of generating a new block in the blockchain network mining. To do this, a miner has to compete with the other miners to solve complex cryptographic problems as quickly as possible. The successful miner will then be rewarded with an amount of cryptocurrency or known as block reward for their efforts; For example, in the bitcoin network, the reward is 12.5 Bitcoin for each new successfully created block.
The process of solving the difficult math puzzle requires a lot of computing power, so operating a PoW-based blockchain network is very energy intensive.
PoS was created as an alternative to PoW. The PoS mechanism is somewhat like standard practices in a business entity, where shareholders are given the privilege to make decisions and the larger the shares, the greater the influence.
In PoS new blocks are generated by a validator, also called forger or miner, which is selected based on specific criteria. Some common criteria are the number of tokens / coins held and coin age or the time that a counterfeiter has held the tokens / coins.
In a Proof of Stake consensus mechanism, a participant who holds a large number of tokens over a long period of time is more likely to be selected as a counterfeiter. In addition, the number of new blocks captured cannot also exceed the number of tokens held by the counterfeiter.
The reward for adding blocks comes from accrued transaction processing fees. A validator receives it forging reward and do not get its wagered tokens back until the block that validates it has been approved by the other nodes in the network. In case the block is considered fraudulent by the nodes in the network, the validator is not rewarded. It will also experience to cut, which means that the validator loses some or all of its wagered tokens. In addition, the algorithm will mark it as a “bad” node.
Essentially, the Proof of Stake consensus encourages holders to bet to forge new blocks for the network. Therefore, PoS is considered by some to be “safer” than PoW since the threat of 51% attacks is reduced in a PoS system. Someone with 51% hash power in a PoS token network would not want the value of the tokens to drop. So in theory they wouldn’t attack the network even though they have the power to do it.
It is from the PoS consensus algorithm that cryptocurrency staking emerges.
Explanation of cryptocurrency staking
So, what is crypto staking? Crypto staking is the holding of a specific number of supported tokens for a specified period of time in the hope of earning rewards while also contributing to the management of the tokens. As the term indicates, it only applies to tokens that use the PoS consensus algorithm such as EOS, Tezos, Cosmos and VSYS.
Why crypto strike?
Staking out cryptocurrency is one of the many ways to increase one’s crypto holdings. Probably the most appealing thing about it, however, is the fact that it allows you to passively grow your assets (after deciding where to bet to manage your cut risk).
In addition, crypto staking has many other benefits to offer such as:
- No special machines needed
Unlike mining that requires specific equipment such as ASIC, crypto stakeout only requires you to keep your tokens in wallets or platforms that are always synchronized with the network of the tokens.
No specific equipment means no excessive power expenditure for electricity.
You earn your rewards for using your tokens to help manage and operate the protocol on which the token operates. You don’t have to act.
Despite the advanced technology and concept underlying cryptocurrency letting, it is quite simple in practice. Here’s how to get started in a few easy steps:
Each PoS token has its own staking reward scheme, terms and conditions, as well as the staking service provider has its fee structure, reputation and rules. However, some ill-intentioned tokens sometimes offer stakes to incentivize users to buy up their coin while dumping in the markets. So make sure you are well informed before making any decisions.
You can use the crypto on the Bitfinex platform turn off calculator to learn about the possible rewards you could earn for all stake-backed tokens.
- Choose the service provider
There are several options for keeping your wagered tokens and getting rewarded. From digital wallets, crypto exchanges to crypto staking pools. Whichever crypto staking services you choose, make sure to follow the instructions given and understand how it works clearly as each staking provider has its own set of features and offerings.
BitfinexFor example, provides additional layers of protection for your wagered tokens. We use several methods such as insurance funds and a network of highly trusted nodes to minimize the risks of slashing and ensure withdrawal requests can be fulfilled.
- Choose the tokens of your choice
Now that you’ve done your research, you can pick the PoS tokens of your choice and start staking. You can buy them first or use your existing tokens. If you are interested in Bitfinex’s stakeout service, you can read more about it here here and strike with us if the token you are interested in is on the Bitfinex list of supported tokens.
Deployment of cryptocurrency: there is more to it
Apart from the financial benefits, using cryptocurrency also means participating in the management and operation of cryptocurrency. Token holders who wager their tokens not only receive wagering rewards, but also earn the power to vote for the decisions that affect the future of the token.
PoS token holders deploying their tokens have played their part in promoting decentralization, which is the essence of cryptocurrency and the way of the future.