Staking Crypto? Proof of Work vs Proof of Stake

 

So you're ready to make some passive income with your crypto?  Who wouldn't?  I know I certainly was! One of the great ways to do this is staking!  Today we're going to be focusing on what is the difference between proof of work and proof of stake?  'cause that's really what makes this all possible.  Then we're going to cover what is staking? Why you should stake and then lastly, we're going to be talking about why Coinbase and Kraken and all of these other exchanges really want you to stake and why this is a little controversial in the cryptocurrency world.  

Now in the next video I'm going to get really tactical about how you actually stake in both Coinbase and in Kraken.  So if you're excited about that, I'm going to link that above as soon as it's ready, and you can jump to that after you finish this video.  So with that, if you're super excited about making some passive income with your crypto, grab your favorite beverage.  And let's jump into it.  

Welcome back to the channel.  I'm Brian Logan.  I am so thankful that you were here before we jump into staking just a few things.  I've started a discord channel that I'll link below, where you can come join me and ask any questions you have, share screenshots and we can just get together as a community.

bit.ly/discord-brianlogen

Secondly is a disclaimer, I'm not a financial expert or licensed professional so be sure to understand the risks with staking or cryptocurrency before getting involved. With that out of the way let's jump right into what is staking?

So it all starts with what method of security the cryptocurrency or protocol decided to use to ensure that all the transactions on its blockchain were legit and weren't duplicated.

For the Bitcoin protocol, which it's just another word for the math behind how Bitcoin works, they chose to go with proof of work. So you may have heard of this before and I actually did a video all about Bitcoin that I'll link above that covers a little bit about proof of work that is below

But that's where cryptocurrency really started - Proof of Work. You may have heard recently the negative press around Bitcoin and proof of work because it uses so much energy and because of that, and a lot of other reasons a different method of security was developed.  And that's called proof of stake.  

So now we're going to walk through some visuals on what's the difference between these two with a real focus on proof of stake and how this plays into the idea of being able to stake and make passive income with your crypto. 

Here we go! We've got proof of work and proof of stake.  Proof of work is defined by all miners trying to solve the same problem all at once.  So you can see there we've got our block of transactions. Proof of stake is where one validator is chosen to solve those block of transactions.  So we've got the little visual of our our protocol, which is just the system, the cryptocurrency and a little block waiting to be assigned to someone.  

Next in proof of work we've got our miners.  These are the people responsible for solving equation in order to verify the block of transaction.  And these are people or companies, all with different computers all throughout the world.  And for proof of stake we have another group of people called validator.  Which are just people or companies that have computing power and are there to compete for the ability to solve for the block of transactions. So miners for proof of work valid is for proof of stake.  

As I mentioned in proof of work, all of these miners are trying to solve the same problem to ensure that that block of transactions is legit.  To do this raw computing power is king.  Meaning, the more computers, the more computing that you have, the the better chance you have of solving that block of transactions.  So to oversimplify it a little bit, all of these miners are trying to solve an equation by guessing a random number, and it can take up to a trillion guesses to solve.  And because of that, that's why the more computing power you have, the faster you can make guesses and try to get that answer. And once you guess it you get the reward.  And then all the work that everybody else did doesn't really matter. So you can see there all the potential energy wasted from everybody trying to solve the same equation. So that's proof of work in a nutshell.  

Now moving over to proof of stake and how this works and how we can make money with it.  So in proof of stake, we've got all of our validators again spread throughout the world with their computers, but with proof of stake, only one person or validator is chosen to solve that block of transactions.  We're not wasting everybody trying to solve the same problem.  But in order to have the chance to be chosen to solve that block, you have to put up collateral or stake.  These are coins that you put onto the network and they are locked down, meaning you have no access to them. The purpose of staking those coins does two things.  One, it gives you the opportunity to win the block of transactions for the validator to validate, and two it serves as a method to discourage the validator from being fraudulent or messing with that block of transactions.  Because if you mess with it, the network is going to burn and take away those coins you put on the network.  So staking those coins is so important for the network to work.  So once validators have chosen to stake coins on the network, the protocol then goes around and chooses one validator to validate a block of transaction and typically the highest weight is given to validators who have staked the most amount of coins. 

This is super important, and it makes sense because if you're willing to put up a lot of coins to stake, that means you're likely going to try not to be fraudulent, because if you are, they're going to take those coins away from you.  So the more coins you stake, the greater probability of you having the opportunity to win the block.  And if you win the block to validate, you also get the reward of doing that, and that's the incentive to stake.  

Now we're going to talk a little bit more about proof of stake and how it relates to Coinbase specifically, and where you get involved, but overall, just to recap, we've got proof of work where everybody is trying to solve the same problem, and then we've got proof of stake where everybody puts some money into the pot, different amounts, and then the protocol chooses one of those validators, typically based off of how much is being staked and then they get their reward for that block of transaction.  

So that last statement is why we can make money with staking, because the person with the most coins typically wins and gets the reward.  What we can do if we're not an actual validator, which we're going to cover more in a minute, is we can help validators by giving them our coins so that they have a bigger pool of coins on the network so that the protocol chooses them.  They can validate the block, get the reward, and then for helping them out, they'll pass some of that reward back to us.  

Now before we dive into exactly how this works on Coinbase, I do want to mention that this might sound a little bit like lending.  But it's different from lending, say like on blockfi, where you actually give up your coins. Someone else takes your coins and then you get an interest payment.  The people who use your coins can use it on anything, they can use it to buy a hamburger, or they can use it to buy more cryptocurrency.  The difference here is you're actually giving your coins to help further secure the network.  It's being solely used for the purpose of making the network better and stronger and safer, and then you're just getting a kick back from that validator, helping them secure the network, so that's where there's a difference.  You're still getting an interest payment.  You're still making money on your crypto, but you're not lending it out.  You're more of participating in the overall security and function of the cryptocurrency, which is actually why a lot of people like staking 'cause you're not just lending it to somebody you don't know you're actually helping the network overall.  So now let's jump into how this works with Coinbase and what's really happening when you choose to stay 

Alright, so we've got our protocol, which again is looking to choose a validator based off of typically how many coins you have.  Also, how long those coins have been staked?  And sometimes there's a random randomness built in to help make sure not always the same validator gets to validate these blocks.

And then we have our validator. Now to be a validator, you often have to have certain hardware requirements.  Uptime requirements, meaning that you can't lose Internet or you can't lose connections in the network.  You also have the responsibility for accuracy of validating enough blocks, so there's a lot that goes into being a validator.  So because of this complexity and responsibility, and sometimes even the minimum amount off coins you have to stake it's not possible for us to all be validator and because of that this is where Coinbase, Kraken and other exchanges have taken on that responsibility for us.  

So Coinbase actually acts as a validator.  

How this works for us is we've got our Coinbase account.  Which is where you should be trading all your cryptocurrency 'cause it's a whole lot cheaper than actually using Coinbase.  More on that in this video bleow.  

So we need to 1st transfer our coins from Coinbase Pro to Coin base because that's where the staking actually occurs, and then we choose to stake our coins and that's taking goes to the coin based validator and that's where Coinbase takes not only our coins but all the other coins of customers.  On Coinbase, we're choosing to stake and they take those coins and stick them on the network or the protocol.  Now, once they've staked to those funds, they obviously have a lot of money staked because of all the different clients.  So because of that, they're likely to be chosen to validate the block of transactions.  So they get chosen, they then validate that block and because they validated it, they then get the reward.  Then once they get that reward, they take a certain percentage out, and then after that they kick back the rest of the reward to us because we helped them create a large pool of money to stake on the network.  

So that's what's happening when you stake on Coinbase or Kraken or any of these other exchanges.  You're helping them create a larger sum of money so that they get chosen and then they can have the opportunity to kick those rewards back to you. 

Now in the next video, we're going to go step by step on how to actually stake on Coinbase, as well as Kraken so you can see first hand how to do it.

Now before we end, if you haven't picked up on it already, there's a bit of controversy with staking on Coinbase or Kraken, and that controversy stems from the idea that cryptocurrency was intended to be fully decentralized.  No one person or exchange has too much power to control the network, and ultimately whoever validates blocks has full control, 'cause they're the ones who say, hey, all of these transactions yep, they're good to go.  

If somebody had full control, they could ultimately change those transactions and no one else would know about it.  By using an exchange such as Coinbase or Kraken, all of us pooling our money and giving it to them to stake.  They can create such a large stake that they almost always win the block, which means they almost have full control over the network.  This likely won't happen, but there's an argument there that by using exchanges to stake you centralized cryptocurrency a little bit.

So there are ways to stake without using these exchanges, but I will say it is a lot more complex.  There's a lot more steps.  And it is not the simplest thing to do, but for now, if you just want to get involved with staking, get some passive income, this is truly the easiest way to do it.  Using Coinbase, Kraken or any other exchange, but I want you to be aware that it's out there that this is a little controversial, so it's your choice.  

I'm not saying which way to do it.  I stake on some of these exchanges, but you just need to be aware of that.  There is some concern that this, by staking on these exchanges, it's centralizing cryptocurrency a bit.  

I look forward to talking through exactly how to stake on Coinbase and cracking in the next video.  

I'm Brian Logen.

Remember to stay healthy, love your family and elevate your wealth.