Proof-of-stake is the new kid on the crypto block. Instead of the computational process of crypto mining to produce new coins, they are simply awarded proportionally to those who already hold a number of the coins in question.
In fact, many believe the proof-of-stake consensus mechanism is the future of crypto. In a panel discussion at Tezos’ conference TQuorum in Paris, Emin Gün Sirer, a professor of computer science at Cornell university, said that 2019 will be the year of staking. He argued that the benefits of this new consensus mechanism, such as it’s small carbon footprint, will encourage wider adoption of proof-of-stake coins.
Cryptocurrency staking is pretty simple too. You stake a certain number of coins, let them sit in your wallet and you are awarded with a stream of new coins in return. But what if there was an even better way to stake your coins?
Speaking in the same panel discussion, founder of staking services company Battlestar Capital, Jason Stone says that you can improve the number of block rewards received when staking coins (such as Qtum, VeChain and PIVX), by splitting your coins up across multiple wallets. In addition, measuring the outcomes of this process and tweaking for optimum results can deliver even more rewards. This is a process known as algorithmic staking.
“Algorithmic staking refers to using algorithms to arrange the coins you manage for a blockchain in a way that nets greater block rewards than just regular staking,” Stone told Decrypt.
It’s a bit technical, but stick with us.
With proof-of-stake coins, new coins are proportionally awarded to those who already hold some of the cryptocurrency. So, if someone owns five percent of the total supply—and they stake all their coins—they will receive five percent of block rewards, on average over time.
It is a bit more complicated than that. Let’s dig deeper into the staking process: Block rewards are awarded per block to just one miner, and the chances of winning this lottery depend on how many coins you have. So, a user—with five percent of the total supply—is likely to win one in every 20 blocks.
But, there’s an issue. Whenever a wallet wins the block reward, the wallet is ineligible to win any more block rewards for the next 20 hours. It’s essentially locked for this time. As such, no further rewards are earned during this period.
Yet the solution, Stone said, lies in splitting the coins up across multiple wallets. There will still be the same number of coins, so they will still earn the same basic amount of block rewards. But, every time one of the wallets wins, only the small amount of crypto held in that particular wallet is locked—not the whole amount across all the wallets. This means the rest of the wallets are able to keep earning rewards.
By employing this method, a staker is able to earn more block rewards than if they simply lump all their coins together. Algorithms can then be used to optimize the spread of coins across the wallets, in order to maximize the block rewards.
While the wallets can be updated in real-time, there are practical limits, as each time a coin is moved, it gets locked for 20 hours, and that incurs transaction fees—which might limit the upside of the move.
While algorithmic staking might seem a simple way of boosting block rewards, there are minimum requirements before it becomes worth doing. Stone estimated that a staker needs to own at least 200 Qtum (or equivalent), worth $560, for it to be cost-effective. If this applies to you, check it out—you could get more bang for your buck.