A Simplified Guide to Blockchain Validators and Staking with Real-World Examples
What you are going to learn here will help you to make the right decision when it comes to staking your cryptocurrencies for rewards. You will learn how validation works on blockchain networks that use Proof of Stake and other similar types of protocols.
What you are going to read in this article:
Introduction
What Are Validators
How to Select a Validator
Where to Find Good Validators
How to Assess the Performance of Validators on Any Blockchain
What Is the Relationship Between Staking and Validators?
Which Online Platforms Help People to Stake Their Cryptocurrencies?
What Actually is Staking – The Activity That Lies at the Heart of Validation
Introduction
Hi everyone today we are going to break down what validators do in the world of cryptocurrencies. We are going to explain why they are important to people who use different types of blockchains from Ethereum to Solana to Cardano . These blockchains use a process called staking to secure peoples crypto assets. Validators are very important to the process of staking.
What Are Validators?
What are these Validators and how do they help people to protect their crypto assets. Some imagination will help you out here. Just think of validators as referees in a sports game. They are in the game to make sure that everything is fair and that the rules are followed.
Basically validators are special participants in a blockchain network, whose main job is to check and confirm transactions. When a person (a sender : for example an online buyer) sends cryptocurrency to another person (a receiver: for example an online merchant), validators ensure that the transaction is legit.
To ensure the legitimacy of a transaction, validators verify if the sender has enough coins or tokens to give to the receiver. They also confirm that the transaction has not been done before. This helps to prevent fraud and the double-spend problem in digital transactions.
Fraud occurs when fake transactions are carried out. Some senders who have little or no amounts of a cryptocurrency try to trick receivers that they have paid them with a fake proof of payment. Validators stop such cheats from succeeding. Some senders also send a single payment twice because of glitches in the internet network they are using to make payment. Validators help such people to avoid paying twice.
Validators confirm several transactions, within a specific period of time on a blockchain network like Ethereum or Cardano. They group these transactions into a block and add it to the blockchain, which keeps a permanent record of all transactions.
How to Select a Validator
Unlike many sporting games where you cannot choose the referee for a game, people using Blockchain networks have the choice of choosing validators for themselves. Choosing a validator on a blockchain is like picking a trustworthy friend to help you out with your homework. Here is how you can choose a validator step-by-step:
1. Pick a Very Good Blockchain: It is all up to you to choose which Blockchain to use to carry out transactions like buying things online or executing smart contracts. Make a decision on which blockchain you want to use. Popular ones include Ethereum, Cardano, and Solana.
2. Check out the Requirements: Different blockchains have different rules for validators. For example, Ethereum the popular network requires validators to stake at least 32 ETH before they can become eligible to validate transactions.
3. Be on the Lookout for Performance: Look for validators who have a good track record with validating. That is those who have been around for a long while and have high uptime. High uptime means that they are always or mostly online and are also working most of the time. In other words, they have made a career of validating.
4. Seek out and Analyze Community Feedback: Check what other users say about these validators. Reviews on online cryptocurrency forums can help you find reliable validators.
Where to Find Good Validators
Validators are commonly found on blockchains , which use a Proof of Stake (PoS) protocol . They can also be found on blockchains, which use protocols that are similar to PoS. These protocols include the Delegated Proof of Stake (DPoS) , Proof of Authority (PoA), and Proof of History (PoH).
Here are some real-life examples from cryptosphere:
Ethereum 2.0: The popular blockchain network Ethereum allows users to become validators by staking at least 32 ETH to participate in validating transactions. There are significant rewards for validators on all blockchain networks, which you will come to understand as we go deeper into this article.
Cardano: Another popular blockchain network uses a PoS mechanism called Ouroboros. This is a process in which validators, who are known as slot leaders validate transactions and add blocks to the blockchain.
Solana: The popular blockchain that is driving the soaring rise of many Memecoins in cryptosphere, uses a unique combination of Proof of History (PoH) and PoS, to enable validators secure the network.
Tezos: Another popular blockchain employs a Liquid Proof of Stake model, which allows users to delegate their staking rights to specific validators without transferring the ownership of their tokens to them. They retain ownership of their crypto assets.
What kind of Transactions do Validators Secure?
Validators secure different kinds of transactions and these all depends on the blockchain they operate on. Here are some examples:
Financial Transactions : On a platform like Ethereum, validators confirm transactions which involve the transfer of ETH or ERC-20 tokens between two parties. The validators ensure that funds are available and that all transaction stick to the rules of the network.
Smart Contract Execution: On platforms like Ethereum and Cardano, validators also secure transactions that are based on smart contracts. These kind of contracts are self-executing with the terms of the contract directly written into code. Validators ensure that the transactions meet the requirements of the contracts.
NFT Transfers: On blockchains like Solana, validators help the network to secure transactions that are related to Non-Fungible Tokens (NFTs). This ensures that ownership transfers are valid and recorded accurately on the blockchain.
Each blockchain has specific rules governing how validators operate. Here’s a breakdown of these rules:
Ethereum 2.0:
To become a validator on the Ethereum network , users must stake a minimum of 32 ETH to get started. Validators are also randomly selected to propose new blocks based on the size of their stake. Validators are also required to maintain high uptime to avoid penalties.
Cardano :
Validators on this blockchain network can operate with varying amounts of ADA. Here no minimum stake is required. The network uses a system of slot leadership to choose validators chosen based on their stake. This requires participation in network governance through voting.
Solana:
On this network, for users to become validators they must meet hardware requirements for high performance due to the network's speed. Here as well, no minimum stake is required for participation. However, higher stakes can improve the chances of users being selected for block validation. Validators are rewarded based on their performance and uptime.
Tezos:
This blockchain network requires users to posses a minimum amount of XTZ to become a validators called bakers. This blockchain network allows delegation, meaning users can delegate their tokens to bakers without losing ownership. Bakers however must follow governance rules and participate in protocol upgrades.
How to Assess the Performance of Validators on Any Blockchain
To assess the performance of validators on a blockchain network, you should consider the following criteria:
1. Uptime : This implies the frequency and amount of time a validator is online and is available to validate transactions. High uptime indicates that the validator is reliable.
2. Attestation Success Rates: This is a measure of how often a validator successfully submits attestations (or confirmations) for blocks. A high rate of success indicates that the validator is an effective participant on the network.
3. Participation Rate:This refers to the percentage of slots of which the validator actively participates in the consensus process. A higher rate of participation obviously shows higher commitment and better reliability.
4. Block Proposal Success Rate: The frequency with which a validator successfully proposes new blocks is a sign of maturity and success. A higher rate of success suggests good performance. This is the sort of validator that will definitely be worth the while of any user on the network.
5. Penalty Rate : You also have to assess the percentage of staked tokens by a validator that are penalized due to misbehavior or failure to validate correctly. A low penalty rate indicates that the validator regularly adheres to the rules of the network.
6. Reward Rate: The amount that a validator has earned over time should be compared to their staked amount. This shows how effectively they are contributing to the network's security and functionality. The higher the rewards, the better the guarantee of success as a validator for your own stake.
What Is the Relationship Between Staking and Validators?
Staking is closely tied to validators because it involves users locking up their crypto assets as collateral. This makes them eligible to participate in the validation process.
Here is how it works:
When users stake their coins with a validator, they help secure the network and they earn rewards for their contributions. For example, on the Ethereum network, users who stake ETH with validators earn rewards based on how much they stake and how well their chosen validator performs.
In the Cardano network, users can delegate their ADA tokens to a validator without losing control over their tokens. This allows them to earn rewards while they support the security of the network.
Which Online Platforms Help People to Stake Their Cryptocurrencies?
Several cryptocurrency platforms help to facilitate cryptocurrency staking by connecting users with validators . Some of them also provide built-in staking features on their platforms. Here are some popular ones:
1. Binance: Binance , which is the largest crypto exchange in the world, directly offers staking services for various cryptocurrencies through its platform. This allows users to easily earn rewards.
2. Coinbase: Coinbase another popular crypto exchange provides an easy way for users to stake cryptocurrencies like Ethereum and Tezos directly. Users of the Coinbase platform can stake different cryptocurrencies from within their Coinbase accounts.
3. Kraken: Kraken another big exchange online also supports staking for multiple cryptocurrencies. It also provides detailed information about the potential rewards for staking.
4. Exodus Wallet: This is a a user-friendly wallet that allows users to stake some specific cryptocurrencies directly from the app. Users can do this without losing control of their private keys.
5. Staked.us: This is a platform that is specifically designed for institutional investors , who are looking to stake various cryptocurrencies. On this platform, institutional investors can securely stake cryptocurrencies under professional management.
These platforms make it easy for both new and experienced users to participate in staking while they all help to maintain the integrity and security of the blockchain networks.
What Actually is Staking – The Activity That Lies at the Heart of Validation
Staking is like putting your money in a savings account but this time think of it as a savings account for cryptocurrencies. When you stake your coins or tokens on a crypto platform like Binance or Coinbase, you lock them up to help validate transactions on a blockchain network.
Here is why so Many People are Doing it:
They Will Earn Rewards: Just as savers will earn interest from a bank, when you stake your coins, you will earn rewards over time. These are usually a percentage of what you have staked.
Support the Network: By staking, you help to ensure that the network is secure and is running smoothly.
Potential for Growth: As more people use the network to carry out transactions, the value of your staked coins will go up. This explains why during the NFT craze of 2021, staking on the Ethereum network became very profitable because many people used it to mint, or buy and sell NFTs. Today, in the midst of the current Memecoin frenzy , Solana is attracting a lot of interest.
To Stake or not to Stake
Now, let’s talk about whether staking is a good idea for you or not. Here are some pros and cons you need to consider before staking :
Some of The Advantages of Staking
Passive Income: You will earn rewards just by holding your coins in a staking wallet.
Security: Staking helps you to make the network safer by preventing fraud and double spending.
Compounding Returns: The more you stake, the more rewards you earn over time. This implies that your stake will earn returns that can be compounded to increase the size of your initial investment overtime.
Some of The Disadvantages of Staking
Locked Funds: When you stake your coins, they might be locked for a while. This means you will not be able to access them easily, especially if you have an urgent need for cash.
Market Risks: The value of your staked coins or tokens can go up or down depending on the volatility of the market. If the market crashes, you can lose money even if you are earning rewards. The value of the rewards will be significantly reduced.
Technical Know-How Required: Setting up staking is definitely going to be tricky if you are not tech-savvy. You need the guidance of experts or experienced enthusiasts to help you navigate your way through to good stakes.
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References
Usefulness: Provides for you a general perspective of how validators operate in blockchain systems.
Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System. [online] Available at: https://bitcoin.org/bitcoin.pdf [Accessed 13 Dec. 2024].
Usefulness: Discusses processes and challenges within the transition of Ethereum from Proof of Work to Proof of Stake and its implications for energy consumption.
Ethereum Foundation (2022). Ethereum 2.0: The Transition to Proof of Stake. [online] Available at: https://ethereum.org/en/eth2/ [Accessed 13 Dec. 2024].
Usefulness: Explains the major differences between Proof of Work and Proof of Stake, including their security models and centralization risks.
Buterin, V. (2017). The Meaning of Decentralization. [online] Available at: https://vitalik.ca/general/2017/01/19/decentralization.html [Accessed 13 Dec. 2024].
Usefulness: Offers insights into the environmental impact of cryptocurrency mining and the benefits of staking.
Krause, M.J., & Tolaymat, T. (2018). Quantifying the Energy and Carbon Costs of Bitcoin Mining. *Nature Communications*, 9(1), pp.1-6.
Usefulness: Provides an overview of different blockchain platforms that utilize staking and the respective mechanisms used for validation.
CoinMarketCap (2023). What is Staking? [online] Available at: https://coinmarketcap.com/alexandria/glossary/staking [Accessed 13 Dec. 2024].
Usefulness: Discusses the role of validators in various blockchain networks including Ethereum, Cardano, and Solana, along with the requirements of these platforms for staking.
Mikulić, J., & Škare, V. (2021). Blockchain Technology in Financial Services: A Review and Research Agenda. *Journal of Business Research*, 124, pp. 159-171.
