Proof of Stake (PoS) was first introduced to the blockchain space in 2012 through a paper by Sunny King and Scott Nadal, aiming to address the high energy consumption of Bitcoin mining activities. In 2013, Sunny King launched Peercoin (PPC), marking the birth of the first token to combine Proof of Stake with Proof of Work.
Although Peercoin still retained a mining mechanism, its launch undoubtedly ushered in a new era centered around Proof of Stake. Soon after, tokens like Blackcoin (BLK), which operated entirely on Proof of Stake, emerged, completely abandoning the mining process. The Proof of Stake mechanism itself has undergone several iterations and upgrades, with various improved mechanisms such as Delegated Proof of Stake (DPoS) and Byzantine Fault Tolerant Proof of Stake (BFT-PoS) coming to the fore.
How Proof of Stake (PoS) Works
To effectively solve the high energy consumption issues caused by Proof of Work (PoW) protocols, the Proof of Stake (PoS) mechanism introduces the concept of validators who confirm transactions and maintain blockchain security, replacing miners. Unlike miners who require significant computational power to generate new blocks, validators participate by staking tokens on the network, giving them a chance to be selected to validate blocks and earn rewards.
Unlike the competitive reward system among miners based on solving complex computational problems, Proof of Stake allocates validator rewards through a random selection process. This ensures fairness among validators and allows them to profit from collecting transaction fees. However, to become a validator, one must hold and stake a certain amount of tokens, which varies by network. For example, on the Ethereum network, running a validator node requires staking 32 ETH.
On the Solana network, there is no minimum token requirement to become a validator. Additionally, some PoS models incorporate Delegated Proof of Stake, allowing delegators to entrust their tokens to a validator or staking pool to help secure the network. Through this method, delegators can also earn rewards, and joining a staking pool does not require holding a minimum number of tokens.
Advantages of Proof of Stake Consensus
- Energy Efficiency: Proof of Stake is renowned for its highly efficient energy usage.
- Environmental Friendliness: Due to reduced energy consumption, PoS has a smaller negative environmental impact.
- High Scalability: It enables rapid transaction processing, handling thousands of transactions per second by achieving consensus before block production.
Disadvantages of Proof of Stake Consensus
- Unproven Security: Compared to Proof of Work, the security of Proof of Stake has not been verified to the same extent. Tokens using PoS algorithms can be more susceptible to network attacks.
- Risk of Centralization: Validators holding large amounts of tokens could potentially manipulate the validation system by exerting excessive influence over the transaction verification process.
- Fork Tolerance: Because the mechanism is tolerant of blockchain forks, validators might receive copies of their staked tokens on a new forked chain. This could allow them to validate on both sides of the fork, effectively using tokens twice and earning double rewards.
9 Leading Proof of Stake Tokens for 2024
Numerous tokens currently utilize the Proof of Stake protocol, but some stand out from the rest. Notable examples include Ethereum, Cardano (ADA), Solana (SOL), Polkadot (DOT), Polygon (MATIC), Tezos (XTZ), Cosmos (ATOM), Algorand (ALGO), and Avalanche (AVAX).
Ethereum (ETH)
Ethereum holds the second position in the cryptocurrency market. This token was conceived by Vitalik Buterin in 2014 and launched in 2015 alongside co-founders including Joseph Lubin, Gavin Wood, Charles Hoskinson, and Anthony Di Iorio. Initially, Ethereum operated on a Proof of Work (PoW) mechanism. However, in 2022, it successfully transitioned to a Proof of Stake (PoS) mechanism through a major upgrade known as "The Merge." This transition made Ethereum the largest cryptocurrency operating on a Proof of Stake consensus protocol.
On the Ethereum network, transactions must be approved by validators through two rounds of voting to achieve finality. This process is facilitated by the network's Casper consensus mechanism, which adopts a Byzantine Fault Tolerant (BFT) system to ensure network security. This BFT system ensures validators can reach consensus even in the presence of faulty or malicious nodes.
Ethereum Staking Overview
Currently, running a validator node on the Ethereum network requires a stake of 32 ETH. As guardians of network security, validators are rewarded with newly minted ETH tokens and a portion of the network's transaction fees. The staking market value for Ethereum had reached $110 billion by March 28, 2024.
Cardano (ADA)
ADA is the native token of the Cardano platform, launched in 2017 by Ethereum co-founder Charles Hoskinson and Jeremy Wood. The Cardano platform is renowned for being developer-friendly and has become a breeding ground for numerous decentralized applications (DApps).
The Cardano platform utilizes a Proof of Stake (PoS) mechanism called Ouroboros. This mechanism is designed for efficient and energy-efficient transaction processing. Within the Cardano ecosystem, ADA holders can earn rewards by participating in validation activities or through delegation. Users selected as validators are chosen by operating stake pools based on the amount of ADA they have staked.
Furthermore, delegators can choose to stake their tokens to stake pools operated by other validators. Regardless of the form of participation, stakeholders can earn substantial returns from the platform's staking activities.
Cardano Staking Overview
As of March 28, 2024, Cardano offered an average annualized return of 3%. With a total ADA circulating supply of 35.5 billion, approximately 63.8% of all ADA was staked. Consequently, Cardano's staking market capitalization reached a substantial $14.5 billion.
Solana (SOL)
Solana is a blockchain platform that integrates a hybrid Delegated Proof of Stake (DPoS) and Proof of History (PoH) consensus mechanism. This unique consensus mechanism gives it distinct advantages in scalability, energy efficiency, and processing speed compared to other platforms based on PoS models. Solana supports numerous projects and has recently focused significant effort on advancing the blockchain gaming sector.
On the Solana network, users who wish to become validators are not required to stake a fixed number of tokens. By employing a Delegated Proof of Stake model, users unable to run their own validator nodes can choose to delegate their tokens to a validator, thereby participating in network security and blockchain transaction validation. In consensus voting, validators with a larger stake have greater voting weight. However, delegated tokens are not locked, meaning users can unstake their tokens or redelegate them to other validators at any time.
Solana's validator nodes include those participating in voting and consensus decisions, as well as nodes providing RPC (Remote Procedure Call) services. Both types of nodes contribute to network security, but only the former directly participate in consensus voting, while the latter facilitate interaction between developers, users, and the Solana blockchain. Furthermore, Solana's staking yield is influenced by the current inflation rate and the total amount of staked tokens.
Solana Staking Overview
As of March 28, 2024, the average annualized yield for stakers on the Solana platform was approximately 7.34%, with a staking market capitalization of $70.66 billion. Validators distribute rewards to delegators every two days.
Polkadot (DOT)
Polkadot is a blockchain platform designed to enable interoperability between multiple chains, supporting the cross-chain transfer of tokens, assets, and data. The platform employs a consensus mechanism called "Nominated Proof of Stake" (NPoS), allowing it to process numerous transactions efficiently across its various parachains.
DOT, the platform's native token, grants holders governance rights, enabling them to participate in decision-making processes and contribute to network security. Users can participate in earning rewards by staking a minimum of just 1 DOT.
On the Polkadot network, nominators are responsible for electing a set of validators to maintain network security and stability. To incentivize smooth network operation, both nominators and validators are rewarded in DOT tokens. However, dishonest participants risk having their staked tokens slashed (confiscated).
Polkadot Staking Overview
The expected annualized return for staking DOT on the Polkadot network is approximately 11.93%. Currently, over 727 million DOT tokens are staked on the platform, representing a staking market capitalization of $6.9 billion. To explore more strategies for participating in decentralized networks, consider learning about advanced staking mechanisms.
Polygon (MATIC)
Polygon is a Layer-2 blockchain platform aiming to solve Ethereum's scalability issues by employing L2 scaling technologies like Plasma and sidechains. Its Ethereum Virtual Machine (EVM) compatibility and Proof of Stake consensus mechanism make it a preferred platform for developers.
Polygon Staking Overview
The Polygon network currently boasts over 105 validators. Stakers delegate their tokens to these validators for verifying transaction blocks. Over 3 billion tokens are eligible for staking on the network, offering an annualized yield of 2.39%.
Polygon has become home to thousands of decentralized applications, facilitating over 3 million daily transactions and hosting assets worth more than $5 billion. Users can participate in securing the Polygon network by becoming validators or stakers.
Tezos (XTZ)
Tezos is an open-source blockchain network supporting peer-to-peer transactions and smart contracts. Founded by Arthur Breitman in 2014, it was one of the first blockchains in the industry to adopt a Delegated Proof of Stake (DPoS) mechanism.
In the Tezos network, validators known as "Bakers" are responsible for securing the network by validating new transaction blocks. Validators confirming illegitimate transactions face significant penalties (slashing).
Tezos Staking Overview
Tezos had a staking market capitalization of over $87 million, with stakers earning an average annualized yield of 5.77%. Tezos stakers delegate their tokens to network validators and receive reward distributions every three days.
Cosmos (ATOM)
Cosmos promotes interoperability among numerous compatible blockchains, facilitated by its Inter-Blockchain Communication (IBC) protocol, which enables data exchange between different chains. Through IBC, chains built differently can trust each other and freely exchange data, tokens, and information.
The platform uses a Delegated Proof of Stake (DPoS) mechanism, enhancing transaction scalability, speed, and efficiency. ATOM serves as the platform's native currency and also plays a governance role, allowing token holders to earn rewards through staking. Furthermore, ATOM holders can help secure the network by becoming validators or delegators.
In this system, delegators stake their tokens with validators on the network, who, in turn, secure the network by validating transaction blocks. This process allows both parties to earn rewards in the form of ATOM tokens or newly minted network tokens.
Cosmos Staking Overview
The annualized staking yield for Cosmos is currently 14.36% for tokens staked for 365 days. As of March 28, 2024, the total value of assets locked in the Cosmos network reached $3.08 billion.
Algorand (ALGO)
Algorand is a cryptocurrency that utilizes a Pure Proof of Stake (PPoS) algorithm for its consensus mechanism. Created by computer scientist Silvio Micali in 2017, Algorand stands out in the blockchain space for its environmentally friendly attributes.
Algorand is a decentralized platform focused on providing low-cost, efficient borderless transactions. The platform currently boasts a processing capacity of 1,000 transactions per second. Unlike other Proof of Stake mechanisms, PPoS does not support vote delegation, effectively preventing malicious operations and ensuring equality among all nodes in the network, granting the majority of participants equal voting rights.
Algorand Staking Overview
ALGO token holders participating in network maintenance need to stake a minimum of just 1 ALGO, offering an annual percentage yield of 5.02%. As of March 28, 2024, Algorand's total staking market capitalization exceeded $463 million.
Avalanche (AVAX)
AVAX is the native token of the Avalanche network, a decentralized platform that employs the Avalanche consensus mechanism. The platform consists of three primary chains: the C-Chain for running Ethereum-compatible smart contracts, the X-Chain for asset creation and exchange, and the P-Chain, which coordinates validators and manages staking.
On the Avalanche network, validators secure the network by staking at least 2,000 AVAX. Users who cannot become validators themselves can also delegate their tokens to other validators to earn rewards. Avalanche allows validators to set a commission fee for delegators staking with them, with a minimum of 2%.
Avalanche Staking Overview
Avalanche staking data indicates that validators and delegators securing the network earn rewards in the form of AVAX tokens and a portion of the platform's transaction fees, with an annualized yield of up to 8.49%. As of March 28, 2024, over 58% of the eligible token supply was staked on the Avalanche platform, representing a total staking market capitalization of $224.75 million.
Liquid Staking Tokens (LSTs)
Liquid Staking Tokens (LSTs) represent the actual quantity of tokens staked in Proof of Stake networks. LSTs allow users to participate in staking while maintaining the freedom to sell or trade these staked tokens, significantly enhancing operational flexibility. The core advantage of LSTs lies in their high liquidity, enabling users to utilize these tokens in other decentralized finance (DeFi) activities without needing to unstake them. Furthermore, LSTs support cross-chain interoperability, allowing them to flow freely between different blockchains. Additionally, they can be used in various DeFi strategies, such as yield farming, and serve as collateral in lending protocols.
Although LSTs show great investment potential, investors must remain cautious of associated risks. LSTs introduce additional complexity into the intricate ecosystem of decentralized finance, which is a primary risk. Moreover, excessive liquidity might lead users to engage in high-risk protocols, potentially risking the loss of all staked assets.
Over-collateralization is another concern not to be overlooked. Some platforms require users to provide significant collateral to participate in liquid staking. For example, after staking Ethereum (ETH), users receive a corresponding amount of a liquid staking token like wBETH. View real-time tools for managing DeFi investments.
Frequently Asked Questions
What is the main difference between Proof of Work and Proof of Stake?
Proof of Work relies on miners solving complex computational puzzles to validate transactions and create new blocks, consuming significant energy. Proof of Stake uses validators who stake their own cryptocurrency to earn the right to validate transactions, which is far more energy-efficient. PoS validators are chosen algorithmically based on their stake and other factors.
Do I need technical skills to stake my tokens?
Not necessarily. While running your own validator node often requires technical expertise, many users choose to delegate their tokens to existing validators through staking pools offered by exchanges or dedicated platforms. This delegation process is typically user-friendly and requires no technical knowledge.
Is staking completely risk-free?
No, staking carries certain risks. These can include slashing (losing a portion of your stake) if the validator you delegate to acts maliciously or goes offline, volatility in the token's price, and potential lock-up periods during which you cannot access or trade your staked assets. It's crucial to research and choose reliable validators.
Can I unstake my tokens at any time?
Unstaking availability depends on the specific blockchain network. Some networks have instant unstaking, while others impose an unbonding period—a waiting time after requesting to unstake before the tokens are returned to your wallet. This period can range from days to weeks and is designed to protect network security.
What is a good annual percentage yield (APY) for staking?
A "good" APY varies based on the token, network conditions, and overall market risk. Generally, yields between 3% and 10% are common for major established tokens, while newer or higher-risk networks might offer higher yields to attract stakers. Always compare yields against the associated risks.
What are the tax implications of earning staking rewards?
In many jurisdictions, staking rewards are considered taxable income at the fair market value of the token on the day they are received. When you later sell those rewarded tokens, you may also be liable for capital gains tax on any increase in value since you received them. Tax regulations vary significantly by country, so consulting a tax professional is advised.
Conclusion
Although the Proof of Stake (PoS) consensus mechanism does not have as long a history as Proof of Work (PoW), it has brought revolutionary changes to the blockchain ecosystem by addressing scalability issues. The PoS mechanism is renowned for its efficient energy use. It replaces miners with validators and utilizes staking to secure blockchain networks, drastically reducing the energy required to process new transaction blocks. Furthermore, Liquid Staking Tokens, a recent innovation in the blockchain industry, are gaining increasing popularity and widespread adoption due to the flexibility and potential for high returns they offer.