In 2020, the total market cap of all Proof of Stake (PoS) coins reached $14.5 billion and the staking rewards are getting more compelling. New coins are launching 100% PoS. Old coins are shifting to PoS. EPoS is rapidly becoming the de facto consensus mechanism keeping blockchain networks secure while giving dividends to its users.
There’s no doubt that PoS is a technical improvement beyond Proof of Work (PoW). It reduces the energy requirements of running a network to a minimum which is very important from an environmental standpoint.
Anyway, PoS doesn’t necessarily solve the scalability problems of PoW. In order to reach fast transactions and scale efficiently protocols started to sacrifice their network decentralization. EOS and Libra are limiting their networks to a small number of nodes. Tezos and Waves are criticized for “rich get richer” economics. And the worst is that new coins are following the leaders into implementing similar mechanisms. It’s true that Ethereum and Near Protocol proposed new technical solutions, but, until today, these remained just theoretical proposals. Except one:
Harmony is the first blockchain to successfully combine Sharding and Proof of Stake, making its network scalable without sacrificing decentralization and offering to its users the opportunity to earn annual yields ranging from 45% to 15% in the first year.
We’ll talk more about why combining these two technologies, sharding and PoS gives the best outcome and why Harmony’s staking rewards can outclass if the most profitable networks. But first, let’s understand how PoS works, what are its problems, and what it needs to run at its best.
Proof of Stake - Why is it better?
Most likely you are familiar with the Proof of Work (PoW) consensus system where users are mining cryptocurrency (i.e. Bitcoin) using their computers. You can look at it as using hardware devices to transform electricity into virtual currency. It made sense a decade ago when Bitcoin was the only functional cryptocurrency. Today, you might question this concept by asking: “Why do we need physical devices and a physical resource such as electricity to maintain a virtual environment?” PoS is changing that. With staking, the mining process becomes entirely virtual where instead of physical miners we have ‘validator’ who are locking up a fixed amount of their coins as a stake.
While PoS sounds like a new technology because only nowadays more protocols are adopting its mechanism, it is, surprisingly, almost as old as PoW and Bitcoin. The first PoS system was introduced in 2012 by Peercoin as an alternative to Bitcoin’s PoW. While Bitcoin’s source code remained almost the same, in all this time PoS has seen many variations and improved significantly until today when we are talking about the first truly scalable version of it, introduced by Harmony.
Peercoin was the first to introduce a system where coins were created based on the holdings of individuals. Its problem was that it wasn’t rewarding holders to decisively opt for a single chain. Individuals were creating conflicting blocks at no cost which led to the disappearance of Peercoin. Today we are calling it the “nothing at stake problem” and in most modern solutions there’s not an issue anymore. Harmony’s Effective Proof of Stake (EPoS), for example, is supporting stake delegation, reward compounding, and double-sign slashing, just for you to grasp how much technological advancement has been made since then.
Proof of Stake variations
EPoS is uniquely introduced by Harmony and it’s fundamentally different from variations such as Delegated Proof of Stake (DPoS). DPoS is designed to allow smaller tokens holders to delegate their rights to other participants who can then stake tokens on behalf. The idea is to eliminate the “rich get richer” scheme where large stakeholders are having higher profit margins. In the case of PoW you can increase your profit by adding more computational power. In PoS the computational power is equal for staking any amount. So, large token holders get more profit by spending the same amount of resources. DPoS wants to change that. As a user you are basically joining a pool where everybody gets to share the reward. But, this leads to clear centralization. The control of the network is centralized to the few delegated nodes. As a token holder you might get slightly higher rewards, but with what cost? What’s the use of blockchain if there’s not much decentralization anyway? Tezos, Waves, Lisk are protocols using this type of consensus mechanism and they increased in popularity due to no other functional alternative. Now that Harmony is where things could change. Let’s see how the alternative looks like.
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