Crypto Staking in 2020: An Overview

Public blockchains involve active participants (miners, validators, node operators etc.) to contribute towards the common goal of strengthening the network and confirming transactions through some sort of distributed consensus algorithm.

In simple terms, it’s a scheme where majority participants agree on something which goes on to thwart attacks and adds blocks to the chain.

The most common form of this consensus mechanism is PoW (Proof-of-Work), where all miners put in work (such as using their computing power) to compete for achieving consensus. The grandest example of a PoW coin is, of course, Bitcoin.

With more than 6% sector dominance (including dPoS coins) in the cryptocurrency space, PoS (Proof-of-Stake) is another popular consensus scheme.

In PoS, validators stake (or lock) some of their wealth in order to be eligible to forge blocks in the chain. The validators are chosen randomly to prevent the rich-getting-richer problem. PoS was first introduced by Sunny King for Peercoin. Interesting trivia – King is also the founder of Tachyon Protocol, which is one of the projects discussed here.

PoS algorithms are more energy efficient than PoW, which has encouraged several major projects to opt for this staking-based consensus with their own variations.

In this article, Abhijoy and I explore some of these projects which have published staking details over the last 6 months, and take a look at what’s next for Ethereum, viz. the transition to PoS via Ethereum 2.0.

Fantom, Harmony and COTI take up a tiny but growing
slice in the global staking pie (

source

)

Harmony

Harmony has developed a highly scalable, secure, and low-fees blockchain platform, with a vision to support Industry 4.0 applications on millions of devices in the near future. Their mainnet was launched in June 2019 and currently supports 4 shards of 1000 nodes (including 320 community nodes), producing blocks in 8 seconds with finality.

Harmony is based on a proprietary form of sharding, known as Deep Sharding, where not only the network nodes but even the blockchain states are divided into shards.

This increases the level of parallel processing, leading to higher network throughput. Harmony claims that through this technique of blockchain state sharding, they have been able to solve the scalability problem without compromising on security or decentralization.

Last month (May 2020), Harmony released details of their Open Staking mechanism. With this, Harmony has become the first sharding-based blockchain project to have integrated staking into its infrastructure.

This is an important development in the context of PoS projects which are implementing sharding, as the union of PoS consensus and sharding was considered to be a purely theoretical concept in most quarters till now.

The staking algorithm Harmony employs is called EPoS (Effective Proof-of-Stake). In conventional PoS, stakers are rewarded based on the amount of tokens staked. Large stakers tend to get richer at the expense of smaller stakers, which can lead to stake centralization.

Harmony seeks to strike a balance between large and small stakers by rewarding them based not on the total stake, but rather on a calculated effective stake number. A validator's effective stake is basically its actual stake bounded by upper and lower limits, determined by the median stake value. With these limits, the network caps the block reward to validators with larger stakes, while boosting it for those with smaller stakes.

The native currency of Harmony’s blockchain is ONE (total supply – 12.6 billion). A total of 441 million ONE tokens will be distributed as staking rewards annually, irrespective of changes in underlying variables like staking ratio or block validation time. Harmony claims that block generation time will reduce over time with protocol improvements.
With a fixed annual reward, the reward per block will adjust in a way so as to keep the annual rate of issuance constant.

Users can stake ONE tokens directly through one of the validators available on Harmony’s mainnet. If this seems too complicated, then they also have the option of staking through cryptocurrency exchanges such as Binance and Bitmax. The annual yield, however, might be lower in the latter case.

The list of validators and staking returns is visible in Harmony's mainnet website (

source

)

EPoS also incorporates slashing mechanism to punish bad actors. If a validator is found to have signed 2 or more conflicting blocks, the validator will be forever banned from the network, and a certain percentage (slashing rate) of staked tokens will be forfeited. The slashing increases linearly with the number of validators being slashed simultaneously, so as to discourage coordinated attacks. Slashing and sharding as scalability and security solutions respectively will be part of Ethereum 2.0 as well.

Tachyon Protocol

Tachyon is creating a decentralized, fast and secure internet protocol, by combining blockchain technology with popular distributed technologies and modern encryption techniques. The project is based on V Systems’ blockchain solution, and uses a PoS-based consensus algorithm called SPoS (Supernode Proof-of-Stake).

The primary advantage SPoS offers over traditional PoS algorithm
is that it allows only nodes with superior hardware and processing capabilities (known as Supernodes) to participate in the consensus process. By removing the dependence on ordinary nodes, SPoS promises constant network performance even under heavy traffic.

Tachyon has already released the first product that incorporates their proprietary internet protocol – a decentralized VPN application. The mobile versions of the VPN apps were launched in the first quarter of 2020.

Tachyon VPN currently supports over 400,000 users worldwide. As more users join the network, Tachyon anticipates that there will be a tremendous demand for network bandwidth in the future. To meet this requirement, Tachyon is building a peer-to-peer marketplace, where nodes will be able to sell spare bandwidth (and other resources, later on) to customers of Tachyon VPN through their staking infrastructure.

At the time of writing, Tachyon Protocol has 1200+ community-run servers live worldwide (

source

)

Tachyon’s native token is IPX (total supply – 1 billion). The details of the IPX Staking System were announced earlier last month (May 2020). Like other PoS-based blockchain projects, Tachyon offers Staking rewards to users who stake their IPX tokens. In addition, Tachyon is also offering what it refers to as Sessions rewards, to node providers who are willing to sell bandwidth to VPN users.

To earn Staking rewards, token holders can delegate their tokens to network nodes. In return, they will be paid proportional to the amount and time duration of tokens staked. 5% of the total circulating supply of IPX has been earmarked to be distributed as staking rewards annually.

Session rewards will be paid to node providers directly by the VPN users who purchase bandwidth from them. The rate of session rewards will vary depending on session pricing and bandwidth demand from users.

Each 5MB block of network traffic will be considered to be 1 session. Initially, Tachyon will pay the session rewards; once the IPX Staking System is integrated into Tachyon VPN, the session pricing will be determined by free market dynamics between sellers and users.

By allowing token holders to contribute to the overall network operation, Tachyon hopes to implement a more community-driven and decentralized
staking model. The system will be self-governed by all the participant nodes, and will help in ensuring a stable supply of bandwidth for Tachyon VPN.

Tachyon Protocol's rewards framework consists of Staking and Session Rewards (

source

)

A minimum of 20,000 IPX tokens have to be staked in order to start
a Tachyon node. Tachyon has tied up with professional node operators as
Platform Partners to smoothen the on-boarding process for users who want to run nodes. Ipxus is the first official Platform Partner; it offers Tachyon cloud servers, manages nodes, and runs IPX staking service on behalf of users. Korean cryptocurrency exchange Bithumb is also starting IPX staking service for its users shortly.

COTI

COTI (Currency of the Internet) is an enterprise-grade Fintech platform that enables organizations to build their own payment solution and digitize any currency, in order to increase efficiency and enjoy complete control over their money. COTI’s mainnet has been operational since December 2019, and as of now (June, 2020) consists of 10 nodes.

Architecturally, COTI uses what is known as a DAG (directed acyclic graph) and not a blockchain-based ledger, where each node is a transaction in time.

In COTI’s DAG (termed Cluster), a new transaction gets attached to two prior transactions, and individual transactions provide validation for one another.

Every user in COTI’s network has an associated trust score, which incentivizes good behaviour. A user’s trust score increases with active participation in the network activities; on the other hand, any attempt to defraud the system leads to loss of trust value. With time, the entire DAG gets segmented into flexible clusters by their accumulated trust score, creating a Trust Chain.

COTI claims that their Cluster solves the scalability issue by connecting and validating transactions simultaneously and asynchronically, as compared to linearly approving transactions in conventional blockchain-based projects.

The concept of trust score brings us to COTI’s consensus algorithm, PoT
(Proof-of-Trust). A node will be able to verify transactions that are of equal
or lower value than the trust it has accumulated. In other words, nodes have to stake ‘trust’ in order to be eligible to verify transactions.

COTI’s ecosystem defines 4 different types of nodes, out of which Full Nodes are responsible for validating transactions and performing the required PoT work. COTI’s native currency is COTI (total supply – 2 billion). In order to be eligible to operate a Full Node, a user has to stake at least 15,000 COTI tokens.

Users who instead want to delegate their tokens to existing nodes can stake either through the COTI mainnet wallet, or through exchanges like Binance and KuCoin. This effectively delegates the process of running one’s own full node to more advanced stakers. Currently, 40 million COTI are staked through the mainnet wallet and 30 million through exchanges.

COTI and Fantom offer some of the most competitive staking rewards out there (

source

)

Earlier this year (March 2020), COTI announced the details of their updated Staking 2.0 model. Full Nodes are the only available nodes that can be run by network users as of now. These nodes are further classified into Community nodes and Advanced nodes.

Community nodes will be able to stake upto 5 million COTI, out of which the node operator will be able to stake a maximum of 750,000 COTI, and enjoy an annual reward of 35%. The remaining 4.25 million COTI will be split between community members who may stake 15,000 to 500,000 COTI for 30-90 days.

Advanced nodes will require staking 500,000 to 5 million COTI for a minimum period of 90 days, in exchange for a guaranteed annual reward of 25%. Such nodes will be operated by COTI, while the staked amount can be split between a maximum of 4 stakers, decided on an invitation basis.

Fantom

Fantom is building a scalable ecosystem to support real-world use cases through a customizable blockchain and smart contract platform. Fantom's Opera mainnet was launched in December, 2019. Since then, it has been working as a base layer to its platform for modular enterprise blockchains and subsequently planned DApps.

Fantom is similar to Harmony in terms of scope of project, and is based on the DAG architecture akin to COTI.

The Fantom PoS consensus scheme is a DAG-based aBFT (asynchronous Byzantine Fault Tolerant) algorithm called Lachesis. aBFT is considered to be an improvement over classical BFT or practical BFT (pBFT) in terms of achieving the triple objective of decentralization, security and scalability. The high-throughput and fast finality of transactions is made possible by the independent nature of Lachesis nodes.

FTM is Fantom’s native currency (total supply – 3.175 billion), with a current circulating supply of 2.1 billion. The remaining 1.075 billion tokens are held in reserve, to be released gradually for staking rewards. The token is currently available in both ERC20 and BEP2 versions, along with mainnet versions on Opera and Xar Network (a DeFi framework in partnership with Cosmos). FTM also acts as a governance token where stakers can participate in decision-making through voting.

FTM's on-chain governance scheme (

source

)

Staking on Fantom is simple and can be done through its dedicated iOS/Android app wallet, or from the web and desktop wallets. Users who are looking to delegate their tokens can deposit as low as just 1 FTM and start staking through a validator node. In return, validators take a 15% commission from the delegator’s staking rewards.

Validators are essentially full nodes on the Fantom network that participate in the Lachesis consensus mechanism to forge new blocks.

To run a validator node, one needs to stake at least 3.175 million FTM, and have a high calibre cloud instance and storage. The network generates a total of 16.48 FTM per second as rewards for staking.

Early adopters reap highest benefits. As more FTM enters staking, ROI decreases (

source

)

Fantom also provides a bespoke CaaS (Consensus-as-a-Service) solution based on Lachesis for enterprise blockchains. The Opera mainnet is
compatible with the Ethereum Virtual Machine and has Solidity compiler support.

Recently, Fantom announced ABCI (Application BlockChain Interface) compatibility which essentially turns Lachesis into a modular or a plug-and-play consensus. As a result, it allows for easy DApp support and customisable smart contracts for organisations which are already using Ethereum in an enterprise setting. Over 2020, Fantom aims to work on widening its DeFi offerings and build more integrations and
partnerships.

Ethereum 2.0

No article about staking based projects in 2020 can be complete without
a mention of Ethereum, which is slated to shift to staking-based consensus this year.

Second to only Bitcoin in terms of market cap, Ethereum will undoubtedly be the biggest mover in the PoS space.

This is a significant upgrade since Ethereum has so far been a PoW coin. This update is referred to as Ethereum 2.0 or Serenity.

The complete overhaul to Serenity is expected to take place in multiple
phases starting in 2020. The first two phases will work as a test period where Eth1 will continue to exist in parallel, supporting all economic and smart contract activities.

In order to receive staking rewards, a minimum of 32 ETH will be needed to be staked by validators. The first phase will officially go into effect (called the beacon chain launch) when there are 16,384 validators staking on the network.

One of the reasons why ETH developers opted for PoS was the centralisation of large miners in PoW.

However, it is likely that independent delegator services or staking pools, which run validator nodes on behalf of others, will go live during this phase. It will be interesting to observe if these pools end up creating centralisation which Ethereum developers have been trying to curb. Validators acting maliciously will be penalised through slashing.

For scalability, Eth2 will also implement sharding in the second phase. Currently, 64 shards are planned where each shard will have a dynamically chosen set of validators, which will keep getting shuffled to reduce the probability of a shard attack. None of these technical upgrades, however, will have any bearing on the ETH HODLers who can continue unaffected.

In effect, the Eth1 chain will become a part of Eth2 by the end of these phases. Beyond Serenity, Ethereum will also be exploring advanced
cryptography (for example, in the post-quantum computing era) as shared by Vitalik Buterin recently in a detailed roadmap.

Parting Thoughts

As the world awaits the commencement of Serenity’s Phase 0, we will continue to keep a close watch on more interesting iterations of PoS. This segment already commands a market cap of USD 9+ billion (in addition to another ~USD 9 billion in dPoS coins), which will go up further by ~USD 30 billion (at current prices) once Ethereum 2.0 goes live.

Do let us know which PoS variation seems the most interesting to you. As always, Abhijoy and I are reachable on Telegram. Feel free to say Hi anytime for any questions and engaging discussions.

About the authors:

Rohit Chatterjee is an Analog Design Engineer working at Texas Instruments. Abhijoy Sarkar is a banker-turned-entrepreneur. They are high school friends who lost contact years ago. They reunited over crypto in early 2018 and have been investing through mutual research and shared knowledge.