ZoneBitcoin EditorialMasternodes and staking… you’ve probably heard of these terms before. Even more, if you regularly follow this blog because it is true that I talk about it regularly. We often talk about staking and masternode, because in cryptocurrency, these two systems constitute the pillars of passive income.
But are they really similar? Do these two systems allow you to earn interest and that's it? Is there anything else to know?
What is the difference between the two, how do they work and how do they benefit the network?
Before we see the pros and cons of Staking or Masternodes, here is what we need to know about staking and masternodes.
Blockchain consensus mechanisms: The theory.
In fact, Blockchain technology is the backbone of cryptocurrencies, to use an easy to understand image. The main aspect of this technology is to record all transactions on a sort of tamper-proof ledger.
This ledger or digital register is decentralized. This means that several people will all work in unison to record these different operations. Okay so far?
Well, we are now entitled to wonder how the network actually records and validates these different operations.
How does it work, who verifies all these transactions and makes sure no invalid data is added to the blockchain?
There is actually a well-defined protocol for each blockchain. A protocol that explains how networks should proceed to validate and ensure that the blockchain is operational.
🤓 It is this operating protocol that we call a consensus and it is this same consensus which can be different from one project to another.
The different types of Consensus:
Now this is the job of the consensus mechanism. The entire network is consensual, which verifies that the information recorded in the ledger is valid.
Every cryptocurrency uses a consensus algorithm and many types of consensus mechanisms are used, such as:
- proof of work (PoW)
- proof of stake (PoS),
- delegated proof of stake (DPoS),
- proof of service (PoSe),
- Direct Acyclic Chart (DAG),
- Practical Byzantine Fault Tolerance (PBFT),
- etc.
Each of these consensus mechanisms has its advantages and disadvantages and we are not going to discuss them all here. That would take way too long, wouldn't it? What is more relevant is to highlight the differences between Proof of Stake (used for Staking) and Proof of Service (used by Masternodes).
Proof of Stake (PoS) and Proof of Service (PoSe) -> The difference
To better understand Proof of Socket (PDS) and Proof of Service (PoSe), let's first briefly look at Proof of Work (PoW).
PoW or Proof of Work (Proof of Work in French) :
It is the first consensus algorithm of the Blockchain network used by Bitcoin. In PoW, blocks are created by miners. Each block on the blockchain contains a set of transaction data and the miner will be rewarded for creating each new block. In PoW, for the participant to add the next block in the blockchain, they must find a solution to a complex mathematical problem. To solve this problem, computing power is required. Whoever has the most computing power will have the best chance of finding a solution. This process is competitive and whoever generates acceptable proof of work wins the first block. This whole process of finding new blocks is called mining.
Proof of work is the most popular consensus algorithm and some of the best examples of cryptocurrencies using PoW are Bitcoin, Ethereum, Litecoin and Monero.
In Proof of Work, the network is proven to be secure, but the biggest drawback is that it consumes a lot of energy.
This is in fact the main flaw that is criticized in the “Proof of Work”.
Now, one of the answers to this high mining cost is Proof of Stake (also read Proof of Stake).
Proof of Stake
In fact, it's quite similar to Proof of Work. Their work is the same. This involves validating transactions, creating new blocks and distributing new coins.
Peercoin is the first cryptocurrency to implement Proof of Stake which, in addition to PoS, also uses PoW.
It is actually not uncommon to use several types of consensus. You will come across many PoW/PoS hybrid coins where the PoW is used for the creation of new coins and the point of sale is used to validate and maintain the security of the network.
On the other hand, there are also 1000% Proof of Stake coins such as NXT, Blackcoin, and Neblio.
For example, in NXT, the maximum stock of 1 billion NXT has been reached and no new coins are created. In plays like this, there won't be any block rewards; instead, the winner of the next block receives transaction fees as a reward.
>>> Read the article on staking with Binance
So how are winners (those who will receive rewards) determined in Proof of Stake?
How does it work?
Just like PoW; A sort of lottery is also involved in Proof of Stake, but the process is quite different. In the Proof of Stake system, there is no complex mathematical problem and therefore there is no computing power or energy burning. Here, the creator of the next block is chosen deterministically based on their capital wealth. 😎 The more coins he keeps, the more he will be rewarded in proportion to what he has.
Proof of stake mining is a process of keeping coins in a wallet unlocked and leaving them connected to the network 24/24.
The creator of the next block will get in-game rewards and that winner will be chosen based on their coin shares. In order to participate in staking, no minimum amount is required. However, the more you bet, the more you win; the greater the gain in rewards will be.
Now let's see how masternodes are different from Proof of Stake and what benefits do they offer to the network and its users.
Staking and Masternodes : What a difference?
They actually have one thing in common; they are considered a means of passive income in the cryptosphere.
Also, they both work pretty much the same way, i.e. you hold a certain number of coins and holdings will earn you rewards from time to time. Because of this incentive model, beginners tend to think that staking and masternodes are the same.
No they are not at all! First of all, the work of masternodes has nothing to do with consensus, whether that of PoW or PoS.
Dash was the first to introduce Masternodes. Consider masternodes as a secondary security system for the network.
Unlike PoW and PoS, masternodes are not the only ones responsible for creating a new block.
This is the reason why you will never come across coins that only use masternodes. You will find masternodes with PoW (example: Dash). You will find masternodes with PoS (example: PIVX) or masternodes with both PoW & PoS (example: LuxCoin).
Although they do not create new blocks, they have the power to reject them because they secure the network and verify transactions. To further secure the network, part of the block reward is also shared by Masternode holders.
So how is this different from Proof of Stake?
In Masternodes, you do not stake coins or secure the network like in Proof of Stake.
Instead, masternodes provide an additional service to the network. What type of service? Service such as hosting and maintaining the entire blockchain and enabling the following features:
- instant transactions (InstantSend)
- private transactions (PrivateSend)
- governance
- voting rights.
Thus, masternode holders are not rewarded for simply securing the network but for enabling these additional services on the blockchain. Therefore, this is proof of service or proof of engagement and not proof of participation.
How does it work?
Masternodes are full nodes on the network that have particular utility on the blockchain. Unlike staking, to be able to participate in Masternodes, a certain number of coins must be locked.
Additionally, these coins cannot be kept in your local wallet. It must be online 24/24 to secure the network.
So, to run a masternodes smoothly without any interruption, a VPS (Virtual Private Server) is required. Masternode rewards are also based on a deterministic schedule, but compared to Proof of Stake, masternode profits are more predictable. We can more easily estimate them.
So far, is it clear? Now that you are fully aware of the difference between Proof of Stake and Masternodes, let's see its advantages and disadvantages.
For this, we will see it in a future article to keep you in suspense!
