Despite the epic price spikes since the beginning of the year and the fact that it is the second largest cryptocurrency by total market capitalization, Eth2 lags behind its competitors in terms of staking positioning. So why is Ether (ETH) not the number one cryptocurrency when it comes to staking?
Brief history of proof-of-stake
Already In 2012 Sunny King and Scott Nadal, the developers of Peercoin, proposed a PoS as part of a hybrid consensus model. In 2013, Nxt’s genesis block hosted the first pure proof-of-stake blockchain, which Blackcoin quickly followed in early 2014. At the time, cryptocurrencies were practically a niche, and consensus models, by and large, were still not necessarily the contentious topic that they would become in the years after..
After Ethereum launched in 2015 and development activity quickly gained momentum, many projects wanted to emulate its success. Nevertheless, Ethereum’s scalability issues – stemming from its reliance on proof-of-work – quickly became a known issue. Therefore, core developer teams began examining other consensus models, trying to put his own spin on the work of his predecessors.
The delegated proof-of-stake emerged as a variant of the proof-of-stake, with Dan Larimer as a pioneer. EOS, Tron (TRX), Lisk, and others continue to use DPoS today. Nevertheless, the model has come under widespread criticism for introducing too much centralization of control into blockchains.
Tezos (XTZ), which launched on mainnet in September 2018, devised a PoS consensus model that involves delegation and that overcomes some of the most critical challenges of EOS-style DPoS consensus. Known as “liquid proof-of-stake,” the model allows XTZ holders to delegate their validation rights to other token holders. Validation nodes, or bakers, in the Tezos network can use the delegated funds as a contribution to the minimum 10,000 XTZ required to become a baker.
Liquid proof-of-stake varies from DPoS to EOS style in the sense that there is no fixed upper limit on the number of validator nodes that can participate in the network. Delegation is also not a requirement for someone to become a baker in Tezos, while in the EOS model someone can only become a block producer based on delegation.
2020: Staking takes off
Tezos can take the credit of being one of the first platforms to popularize staking, even achieving institutional adherence to staking thanks to a collaboration with Bitcoin Suisse. Nevertheless, In 2020, several key developments in PoS blockchains saw staking take off, providing new revenue opportunities for cryptocurrency users.
In May, Polkadot launched on mainnet after spending several years in development. Just a few weeks later Cardano launched the Shelley iteration of its mainnet, allowing stakers to participate for the first time, although without any other functionality yet live.
It is worth noting that each of these platforms has its own purpose and objectives. Ethereum remains true to its original vision of becoming a “global computer”, while Polkadot was developed with interoperability and economic scalability in mind. Cardano prides itself on its peer-reviewed research fundamentals.
However, what they have in common is that they are all PoS platforms and they all launched staking functions in 2020. Currently, All of them are also part of the main staking platforms, with Ethereum lagging behind in fifth place, with a staking value similar to that of Algorand. Avalanche is in third place, just before Algorand, but has a higher staking value, closer to Cardano and Polkadot than Algorand and Ethereum.
The proof-of-stake model has been around since 2012, when it emerged as an alternative way to achieve greater consensus than Bitcoin’s computationally heavy proof-of-work.. However, it has taken until now for PoS to take off, fueled by the launch of staking on high-profile platforms such as Ethereum 2.0, Polkadot, and Cardano.
Arthur Breitman, one of Tezos’s early architects and a proponent of proof-of-stake, told Cointelegraph that although PoS is taking time to be adopted, in your opinion, has completely eclipsed the PoW with the benefits it brings:
“Proof-of-stake has gone from being a fringe idea in cryptocurrency circles, to being fully accepted with the launch of Tezos in 2018, and with large institutions like Coinbase participating in the staking. Meanwhile, attacks on the consensus on the smaller proof-of-work chains and the large amount of inflation associated with the new proof-of-work chains has made it clear that proof-of-work is no longer viable for launching cryptocurrencies. “
Why aren’t stakers rushing to Ethereum?
The most important reason why stakers are more reluctant to staking Ethereum the thing is barriers to entry are high and there is no prospect of a quick exit strategy in the event of sudden price movements.
Eth2 stakers must lock in 32 ETH to become validators, which, at the current ETH price, is over $ 60,000. Anyone who participates is in this for the long haul, as It is not possible to withdraw or transfer funds before the next Eth2 phases go live, for which there is no set date. Whoever does not have 32 ETH for staking, can join a pool, but this can be risky, and the participants in the pool also have to pay commissions.
Could have other factors at play that prevent Ethereum from being the favorite staking platform. The launch by the Chicago Mercantile Exchange of institutional derivatives of ETH is currently causing a major stir in the ETH market, which could remove volume when staking.
Also, other platforms have a longevity advantage over Eth2, which has only been in operation for just over two months. Compared, Polkadot and Cardano have had six months to entice stakers to join the network.
And the competition?
Maybe Cardano leads the pack in terms of staking value, but since the project you don’t have a fully operational mainnet yet and are working on a long-range roadmap for full functionality, stakers are taking a chance on a speculative future price for ADA, which has been doing very well so far, with substantial gains in 2021.
When asked about the projects being built on Cardano, Bakyt Azimkanov, director of public relations and global communications for the Cardano Foundation, told Cointelegraph that currently, multiple projects are being built or planned on Cardano, and I add:
“Cardano’s first commercial application, 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 single origin wine from a family-owned vineyard in Georgia. “
It seems like most of the projects that are based on Cardano are still in the funding stages rather than the active development stages, so what?why Cardano is proving to be such an attractive platform for stakers? Azimkanov attributes it to several factors, telling Cointelegraph that staking in Cardano is easy:
“Users only have to deposit ADA in a wallet that supports delegation and choose a staking pool to delegate. The process does not require any intervention until the user wants to withdraw or change pools. Users keep their ADA in staking in their wallets at all times, making it an incredibly safe way to generate delegation rewards without great user interaction or risk of loss of funds. “
Development as a stimulus for staking?
Based on a global assessment of the top five PoS platforms, Polkadot currently offers the highest rewards to stakers: more than 13% compared to around 4% in Cardano, 7% in Algorand and 10% in Avalanche.
But,how Polkadot is managing to outperform the competition in terms of staking rewards? Peter Mauric, head of public affairs for Parity Technologies – a blockchain infrastructure company behind Polkadot – told Cointelegraph that:
“The rewards for staking in Polkadot are a by-product of the willingness of the network participants to lock their tokens in the staking system. High rewards indicate that the staking rate is close to optimal. Given that the validators of the Relay chain is going to secure individual layer one parachains, the assumptions made in the token economy are quite different from simplistic models in which there is a singular smart contract platform state to manage. “
In terms of development progress, Polkadot is ahead of its staking competitors. According to PolkaProject, which tracks development activity at Polkadot, there are currently more than 350 projects actively being built on the platform, which is a positive sign to keep the value going.
Of the staking platforms that lead the group, including the smaller projects, such as Avalanche, Algorand and Cosmos, only Polkadot, Cardano and Ethereum can claim to have a substantial amount of development activity.
Mauric considers that Polkadot’s activity levels, along with the promise of interoperability, also contribute to its popularity as a staking platform., stating that projects developing a wide range of smart contract parachains “will seamlessly interoperate both within Polkadot and across bridges to external networks that are preparing for launch.”
A golden age for staking?
The staking war may be just beginning, but the current “big five” seem pretty settled at the top, as it is. Nevertheless, It is very possible that in the coming weeks and months there will be new struggles between the staking leaders for the top 10 positions.
For those looking to participate in staking their cryptocurrencies, there has never been a better time; but of course one should always do research. Although staking can bring great rewards over a certain period of time, it comes with certain risks that the user should be aware of..
Don’t stop reading: