The proof-of-stake model has been around since 2012 when it emerged as an alternative way to reach consensus than Bitcoin’s computationally intensive proof-of-work. So far, however, PoS has taken a long time to get started, triggered by the introduction of stakes on high profile platforms like Ethereum 2.0, Polkadot and Cardano.
Despite epic price hikes since the start of the year and the fact that it is the second largest cryptocurrency by total market capitalization, Eth2 lags behind its competitors in the rankings. Why is Ether (ETH) not number one among the cryptocurrencies?
A brief history of evidence of use
Back in 2012, peercoin developers Sunny King and Scott Nadal proposed a PoS proposal as part of a hybrid consensus model. In 2013, the Nxt Genesis block welcomed the first pure proof-of-stake blockchain, which Blackcoin quickly followed in early 2014. At this point, crypto was still a relatively small niche, and consensus models, in general, still weren’t necessarily the controversial topic they would become in the years to come.
After Ethereum launched in 2015 and the rapid increase in development activities, many projects wanted to mimic its success. However, Ethereum’s scalability issues resulting from its reliance on proof-of-work quickly became a well-known issue. As a result, the core development teams began exploring other consensus models, trying to influence the work of their predecessors in their own way.
The delegated proof of engagement turned out to be a variant of the proof of engagement that was developed by Dan Larimer. EOS, Tron (TRX), Lisk, and others still use DPoS to this day. However, the model has been widely criticized for introducing too much centralization of control into blockchains.
Launched on the mainnet in September 2018, Tezos (XTZ) developed a PoS consensus model with delegation that addresses some of the most critical challenges of the EOS style DPoS consensus. The model known as “Liquid Proof-of-Stake” enables XTZ holders to delegate their validation rights to other token holders. Validation nodes or bakers on the Tezos network can use delegated funds to contribute to the minimum 10,000 XTZ required to become a baker.
Fluid proof-of-stake differs from EOS-style DPoS in that there is no hard and fast limit to the number of validating nodes that can participate in the network. Delegation is also not a prerequisite for someone to become a baker at Tezos, while in the EOS model someone can only become a block producer because of the delegation.
2020 – Stakeout starts
Tezos can turn out to be one of the first platforms to make staking popular and even achieve an institutional buy-in for staking thanks to a collaboration with Bitcoin Suisse. However, in 2020 several key developments in PoS blockchains accelerated, opening up new income opportunities for crypto users.
Polkadot started in May after several years of development in the mainnet. Just weeks later, Cardano started the Shelley iteration of its main network, allowing stakers to participate for the first time, albeit with no other functionality live.
It should be noted that each of these platforms has its own purpose and goals. Ethereum remains true to its original vision of becoming a “world computer,” while Polkadot was developed with interoperability and economic scalability in mind. Cardano prides itself on its peer-reviewed research fundamentals.
What they have in common, however, is that they are all PoS platforms and all staking functions were introduced in 2020. At the moment they also all form the top stakeout platforms, with Ethereum in fifth place and having a stake value similar to Algorand. Avalanche takes third place shortly before Algorand, but has a higher stake value, which is closer to that of Cardano and Polkadot than that of Algorand and Ethereum.
Arthur Breitman, one of Tezos’ early architects and attorney for demonstrating the use, told Cointelegraph that while PoS takes some time, he believes it has completely overshadowed PoW with the benefits it brings:
“Proof-of-stake has evolved from a fringe idea in cryptocurrency circles to fully mainstream with the introduction of Tezos in 2018 and the participation of large institutions such as Coinbase in the operation. In the meantime, consensus attacks on smaller proof-of-work chains and the high inflation associated with new proof-of-work chains have made it clear that proof-of-work for the introduction of cryptocurrencies is no longer sustainable. “
Why don’t stakers rush to Ethereum?
The main reason why stakers are reluctant to bet on Ethereum is because the barriers to entry are high and there is no prospect of a quick exit strategy in the event of sudden price movements.
Eth2 stakers need to lock away 32 ETH to become a validator that is worth over $ 60,000 at the current ETH price. Everyone who attends it is there for the long run as there is no way to withdraw or transfer funds before the next phases of Eth2 go live, for which there is no defined date. Anyone who does not have 32 ETH can join a pool. However, doing so can be risky and pool participants must pay fees as well.
There could be other factors preventing Ethereum from being the preferred platform of operations. The introduction of institutional ETH derivatives by the Chicago Mercantile Exchange is currently causing a sensation in the ETH market, which could result in the volume being taken out of use.
Additionally, other platforms have a longevity advantage over Eth2, which has only been up and running for a little over two months. For comparison, Polkadot and Cardano had six months to entice the Stakers to join the network.
What about the competition?
While Cardano is leading the way in terms of deployment value, since the project does not yet have a fully functional mainnet and is working on a long-term roadmap for full functionality, the stakers are taking their risk for a speculative future price for ADA that has done very well so far with significant increases in 2021.
Connected: Cardano approaches another major upgrade as ADA releases an inspired rally
When asked about projects building on Cardano, Bakyt Azimkanov, director of global PR and communications at the Cardano Foundation, told Cointelegraph that there are several projects currently building on Cardano or planning to do so, adding:
“The first commercial use of Cardano for supply chain tracking was facilitated by the Cardano Foundation. This project, a joint venture with supply chain tracking technology provider Scantrust, uses the Cardano blockchain to verify the authenticity of organic wines from a family-run Georgia vineyard. “
It seems that most of the projects building on Cardano are still in the funding phase and not in active development. Why is Cardano proving to be such an attractive platform for stakers? Azimkanov attributes this to several factors and explains to Cointelegraph that Cardano is easy to bet:
“Users simply have to deposit ADA into a wallet that supports delegation and select a stake pool to delegate to. The process then continues until the user wishes to withdraw or change pools. Users keep their staked ADA in their wallets at all times, making it an incredibly safe way to generate delegation rewards without the need for heavy user interaction or risk of losing funds. “
Development as an incentive to stake out?
Based on a holistic assessment of the five PoS platforms that occupy the top spots, Polkadot currently offers the highest rewards for stakers – over 13% versus around 4% for Cardano, 7% for Algorand and 10% for Avalanche.
But how does Polkadot manage to outperform the competition when it comes to using rewards? Peter Mauric, director of public affairs at Parity Technologies – a blockchain infrastructure company behind Polkadot – told Cointelegraph:
“The setting of rewards in Polkadot is a by-product of the willingness of the network participants to integrate their tokens into the deployment system. High rewards are an indication that the staking rate is near optimal. Since validators in the relay chain will secure individual layer one parachutes, the assumptions made in the token economy differ significantly from simple models in which a unique status of an intelligent contract platform has to be managed. “
In terms of development progress, Polkadot is ahead of its competitors. According to PolkaProject, which is tracking development activities on Polkadot, over 350 projects are currently actively building on the platform, which is a positive signal for maintaining current value.
Of the leading platforms, including smaller projects like Avalanche, Algorand and Cosmos, only Polkadot, Cardano and Ethereum can claim to have a significant amount of development activity.
Believing the level of activity on Polkadot, along with the promise of interoperability, Mauric also adds to its popularity as a deployment platform, explaining that projects developing a wide range of smart contract parachutes will work together seamlessly both within Polkadot and across bridges to networks preparing to take off. “
A golden age to stake out?
It may be the beginning of the wars of staking out, but the current “Big Five” look pretty good from today’s perspective. However, there is still the possibility that in the coming weeks and months there will be further jostling among the operational leaders for the top 10 places.
Connected: Ethereum 2.0 deployment, explained
For those looking to participate in staking their crypto, there has never been a better time – but of course one should always research. While staking out over a period of time can actually bring huge rewards, it carries certain risks that the user should be aware of.