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Shrawan Neupane
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    Shrawan Kumar Neupane
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A deep dive into staking and providing liquidity

June 11, 2022

Opinion: It’s critical to grasp the fundamentals of proof-of-stake before diving into staking, which is becoming more vital for many emerging protocols.

In many aspects, digital assets vary from conventional fiat currencies (such as dollars) that most people are familiar with. One of the most distinguishing features of digital assets is that they are neither issued nor kept by any central bank; instead, they exist in decentralized systems that are quite different from those used by conventional banks.

Because digital assets are decentralized, the technology that underpins most of the — blockchain — is the key to their decentralization. Mining is a process in which computers solve difficult equations to enable the development of new blocks, which is how most digital assets are generated (not all of the time, but most of the time!).

Proof-of-work (PoW) and proof-of-stake (PoS) mining are the two most common methods of mining (PoS). We’ll go into the technical details of PoS and staking in general in this post, but you can also read a beginner’s introduction to the distinctions between PoS and PoW here.

Staking is the practice of locking one’s assets on cryptocurrency wallets to participate in transaction validation procedures and earn freshly created coins as a result. This paradigm is specific to blockchains that employ PoS consensus processes, as opposed to the PoS systems that are also widely used. As a result, understanding the complexities of staking requires a fundamental understanding of PoS.

What Is Proof-of-Stake and How Does It Work?

To verify the legitimacy of transactions completed on the blockchain and produce new blocks, PoS validators are chosen at random or nominated based on predefined criteria. It’s worth noting that one of the most prevalent criteria for handpicking validators is the number of digital assets staked on the blockchain by each address contending for the job. The quantity, digital asset volume, and size of validators, many of whom are validators as a company, are often used to assess the strength of a validator network.

Some PoS blockchains choose validators depending on the number and quality of digital assets staked by the validator. In this situation, the more staked coins you have, the more likely you are to become a legitimate validator. In contrast, other blockchains set a staking criterion and then choose validators at random from a list of addresses that match these requirements.

Validators need not need to possess specialist hashing equipment or solve complicated issues to participate in the PoS consensus process. Instead, users only need to accumulate a significant number of digital assets and submit those assets for consideration in the creation of new blocks.

The PoS framework is less time-consuming and costly than the proof-of-work option. Similarly, if done correctly, it is feasible to preserve a reasonable level of decentralization. Although the great majority of PoS-based blockchains use a single currency for staking, others create a double token ecosystem in which a digital asset is locked and a separate coin is issued as the staking incentive.

Staking is necessary for the security of PoS blockchains. As a result, some blockchains include fail-safes and stake-slashing settings to guarantee that validators are working in the best interests of the network. In other words, once the network detects that a validator allows double-spending, the stake (the locked asset) is in danger.

What Is Cosmos-Based Staking, and How Does It Work?

It’s simpler to comprehend some of the iterations of staking on specialized blockchain infrastructures now that you’ve mastered the notion of staking in its most basic form. We’ll concentrate on staking on Cosmos-based blockchains in this article.

Cosmos is a cryptocurrency network that aims to make transactions and procedures more scalable and interoperable. Unlike most application-based blockchain systems, Cosmos gives developers all the tools they need to build blockchains that work with Cosmos’ basic concept and communicate with other blockchains with comparable infrastructures.

As a result of the Cosmos SDK, the Cosmos ecosystem is a network of compatible blockchains. The PoS-based Cosmos Hub is at the heart of this network, acting as a link between chains and allowing interoperability by monitoring and recording each chain’s current status.

Kava, Binance Chain, Terra, and Irisnet are among the blockchains that use the Cosmos SDK framework. These blockchains depend on proof-of-stake or permission proof-of-authority procedures to verify transactions since they all function in the same way as the Cosmos blockchain.

To put it another way, a majority of these networks need members to stake the network’s native token to become validators. While this is a given, there are a few differences that distinguish this form of staking from our general description at the start of this tutorial.

Token holders may either delegate their staking ability to validators or become validators themselves when it comes to Cosmos-based staking. From the top 100 validators with the largest quantity of staked coins, the blockchain selects validators to sign fresh blocks.

This is why delegation is such an important option for low-stakes players: it allows more network members to participate in staking. Delegators may also readily swap allegiances, forcing validators to stay competitive and adhere to network-centric values.

Because the delegation mechanism is non-custodial, certain hazards are eliminated. If the validator goes down or the network is attacked, all delegated tokens will suffer the same effects. One of the benefits of utilizing the Cosmos SDK is that it enables each chain to establish its stake settings.

What are the Benefits of the Cosmos SDK Framework?

Cosmos takes pride in being a catalyst for application-specific blockchains. To put it another way, developers or entrepreneurs may design their blockchains and fine-tune them for increased scalability and interoperability. Cosmos-based chains like Kava offer more efficient base codes to give enhanced security and simplicity, similar to how Chrome and Firefox have displaced Internet Explorer. Ethereum, on the other hand, continues to rely on a defective virtual machine infrastructure and a redundant consensus mechanism.

Harvest, a Kava blockchain application, is immune to problems often linked with Defi protocols as a consequence of smart contract coding mistakes, thanks to a security-focused architecture. Furthermore, network congestion, which often results in excessive gas prices on Ethereum, may be avoided.

If petrol prices skyrocket to $100, a yield farmer would have to spend $3,000 in transaction costs to diversify into 30 yield farming pools. As a result, small businesses typically find it difficult to enter the Defi market. As a result, Kava was designed specifically for the Ethereum issues and is optimized for scalable, secure, and low-cost blockchain services.

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