What is Staking?
The most well-known blockchain project – Bitcoin – has been using the so-called proof-of-work consensus mechanism since the beginning of the blockchain in 2009. This mechanism makes the Bitcoin blockchain particularly secure due to its widespread use. However, this mechanism also has a decisive disadvantage: the consensus is achieved by performing work (proof-of-work) and leads to very high energy consumption due to the large number of operators of the blockchain (miners). Many other blockchains therefore opt for a different consensus mechanism – the so-called proof-of-stake. This proves the correctness of the blockchain not by applying computing power/energy, but by using or holding the native currency of the blockchain (this is “DFI” for the DeFiChain). This bypasses most of the energy consumption of a blockchain network. There are other consensus mechanisms that are not explained here.
In proof-of-work based blockchains, the blockchain is continuously updated by the “mining” further developed – e.g. with Bitcoin, a new block is added to the blockchain approximately every 10 minutes. The “miner” receives a reward for each new block if the block is accepted by the network. To do this, the “Miner” has to solve an arithmetic puzzle, which is solved faster the more computing power the “Miner” uses for it.
In proof-of-stake based blockchains, the blockchain is instead governed by the “staking” further developed – e.g. With DeFiChain, a new block is added to the blockchain about every 30 seconds. Again, the staker receives a reward for each new block if the block is accepted by the network. For this, the “staker” does not have to solve an arithmetic puzzle, but it is decided at random which “staker” is allowed to create the next block. However, the probability of a “staker” being selected at random depends on the number of its native currency units used or, in some blockchains, on the number of masternodes operated (servers that operate the staking), which in turn are associated with a Minimum number of native currency units (e.g. currently 20,000 DFI with DeFiChain) must be equipped.
What forms of staking are there?
|Standard Proof of Stake
|Anyone holding native currency units of the blockchain can participate in the proof-of-stake process. The probability that someone gets to create the next block is weighted according to the proportion of all currency units staked.
|“Minimum Stake” Proof-of-Stake
|Only persons with a minimum number of currency units can participate in the Proof-of-Stake process.
Each staking participant has the same chance to create the next block.
The DeFiChain uses this form and requires a minimum number of 20,000 DFI.
|Delegated Proof of Stake
|Anyone holding native currency units of the blockchain can participate in the proof-of-stake process. However, not everyone may/needs to operate a node that participates in the proof-of-stake process. Instead, you can delegate your own currency units to an existing node and still get the prorated rewards. A minimum number of native currency units is often required here as well. The probability with which a node is allowed to generate the next block is weighted according to the share of all currency units staked.
How does staking work on DeFiChain?
The DeFiChain uses the Proof-of-Stake method in the “minimum stake” form. At least 20,000 DFI (or 20,011 DFI including fees) are required to participate in staking and receive the rewards. In addition, a master node must be operated, which is continuously online and participates in the proof-of-stake process.
Each node – regardless of whether it holds 20,000 DFI or 100,000 DFI – has the same probability of being allowed to create the next block. Therefore, with a larger fortune (> 20,000 DFI) multiple masternodes are operated to receive all potential rewards.
How can I participate in staking myself?
The DeFiChain ecosystem currently offers to participate in staking yourself three alternatives :
Self-hosted master node
- Operation of your own masternode 24/7
(e.g. 4 vCPUs, 8 GB RAM and 200 GB hard disk)
- 20,000 DFI per masternode + 11 DFI fees
- Receipt of all rewards (currently 110 DFI / block)
- Own custody of the private key
- Further information
3rd party hosted masternode
- Operation of the master node by a service provider
- 20,000 DFI per masternode + 11 DFI fees
- Receive all rewards after deducting an optional fee
- Possibly own custody of the private key
- Learn more about mydeficha.in
Staking service (e.g. CakeDeFi)
- Operation of many masternodes by a platform operator
- Anyone can participate proportionately in Masternodes
- No minimum number of DFI necessary
- Receive proportionate rewards after deducting a fee (e.g. about 15% at CakeDeFi)
- No separate custody of the private key
- Learn more at cakedefi.com
What are the risks of staking?
- Price risk:
Probably the biggest risk is the fall in the price of the blockchain’s native currency (DFI on DeFiChain). If e.g. If the price of DFI falls by 60% in one year, then even with a 100% APY staking return, you have a net loss in euros.
- Private key risk:
If the masternode is operated by itself or at least the address of the masternode is held by itself, the loss of the private key is also a risk. The private key should always be stored professionally and with several safeguards in order to minimize this risk as much as possible.
- Platform/Blockchain Risk:
Another risk is that both the blockchain itself and a possibly used platform (like CakeDeFi) can contain software errors that can lead to a total loss of the cryptocurrency if the platform has not taken out insurance for this case or in another way Consumer rights can be asserted.
- Downtime risk:
A final – albeit rather unspectacular – risk is potential downtime of the masternodes, which can lead to a lower return. A professional server setup should therefore be used, especially when operating your own master node.