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Proof-of-Stake: Beyond consensus, a Business opportunity

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Intro

Currently, Bitcoin and Ethereum’s block chains are using a process that requires energy named Proof-of-Work. In order to assure that all transitions on the web are valid and that the distributed network record is accurate.

PoW (a consensus algorithm for btc and eth), has proven, over the past years, to be a safe and reliable protocol. There are no reports of successful attacks on the bitcoin chain and as long as there are enough honest participants. The aggression to the hash power will be substantially limited to zero.

Although PoW appears to be safe and reliable, the algorithm introduced by Satoshi Nakamoto seems to have lost its appeal since critics highlight its energy-consuming aspects. And its tendency towards centralized mining pools, indeed a common criticism to the PoW’s mining industry claims. That it encourages the centralisation of resources and therefore of security providers.

More

But a more scalable and efficient system. Especially from an energy point of view, is increasingly attracting the interest of the main blockchain development teams. Such as Ethereum for instance, which is transitioning from Proof-of-Work to Proof-of-Stake. Meaning a different way to ensure the blockchain’s security where investors, in exchange for rewards, can block their funds.

Countless PoS projects are in fact heading towards a huge growth thanks to their promises of energy efficiency and major decentralization, growing both in terms of interest, as new horizons of the algorithmic consensus and in terms of new business opportunities.

Beside a substantial technological difference, it should be emphasized how a PoS network also creates by default economic opportunities, since it encourages Stakers to contribute to its own security.

In the PoS network, stakeholders are rewarded by the sum of transaction fees and by the value of the network inflation, which can be thought of as the primary incentive that encourages users to put to use their own cryptographic resources.

The Graph

The following graph shows the top 10 Proof-of-Stake networks classified based on the number of unique staking addresses. The networks with the most exclusive staking addresses are classified at the top. The ranking provides an overview of the network with the highest retail staking participation across the entire crypto universe.

Source: https://www.stakingrewards.com

In a PoS system, contest substitute by competition in order to attract native cryptocurrency, in which the participants who wish to become networks validators, block part of this proprietary cryptocurrency, as a commitment to contribute to the consensus process in good faith.

In this chart are show the top 10 Proof of Stake networks classify according to the value in USD compare to the amount of tokens put into stake. The highest Stake Value indicates the security, the resilience and greater security of the network. 

Although the total share’s value in staking is what provides security, staking has an opportunity cost: resources are blocked for a period of time. And can not use for other purposes, such as borrowing, trading or using tokens for the DeFi.

This problem is apply to the majority of the PoS networks that use a staking mechanism. But it avoids in networks such as Cardano and Takamaka, which support Liquidity Staking. 

Beyond the technical aspect, it should highlight how these PoS chains offer similar business opportunities for both individuals. And companies who try to capitalize on the prizes they are giving. 

The economic return is interesting not only because staking reduces the opportunity-cost of owning crypto. But also because crypto itself pays a much more significant reward compared to other investment assets at about zero rate.

Notice

Notice for example what the reward is, holding back some crypto in the wallet. And notice how variable the returns are from just over 2% up to a maximum of 19% per year. 

Using cryptographic resources as an opportunity to earn economic return through staking could make such resources look more appealing to the point of helping. The industry increase the use of cryptocurrency.

As usual, it is fundamental to keep in mind how early we stand on this topic. And it is worth pointing out that there’s always the chance of a new mechanism of consensus which creates, far more revolutionary than PoS, which would then be irrelevant.

Although, given the years dedicated to research on consensus projects, the chances of this event happening tomorrow lack credibility.

Although all eyes are on Ethereum 2.0. Which should have already seen the light as early as 2020, many are the recent blockchain technologies. They based their consensus on the PoS algorithm, laying the foundations for an upcoming industry and a new financial paradigm.

JP Morgan’s estimates claim that the staking of all PoS blockchains combined. Now generates $9 billion in revenue per year but it is ready to become. By 2025, a business of over $24 billion.

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