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Blockchain Consensus Algorithm DEFinition
A consensus algorithm is a mechanism that allows users or machines to coordinate in a distributed setting. It needs to ensure that all agents in the system can agree on a single source of truth, even if some agents fail. In other words, the system must be fault-tolerant (see also: Byzantine Fault Tolerance Explained).
In a centralized setup, a single entity has power over the system. In most cases, they can make changes as they please – there isn’t some complex governance system for reaching consensus amongst many administrators.
But in a decentralized setup, it’s a whole other story. Say we’re working with a distributed database – how do we reach an agreement on what entries get added?
Overcoming this challenge in an environment where strangers don’t trust each other was perhaps the most crucial development paving the way for blockchains. In this article, we’ll take a look at how consensus algorithms are vital to the functioning of cryptocurrencies and distributed ledgers.
Consensus algorithms and cryptocurrency
In cryptocurrencies, users’ balances are recorded in a database – the blockchain. It’s essential that everyone (or more accurately, every node) maintains an identical copy of the database. Otherwise, you’d soon end up with conflicting information, undermining the entire purpose of the cryptocurrency network.
Public-key cryptography ensures that users cannot spend each other’s coins. But there still needs to be a single source of truth that network participants rely on, to be able to determine whether funds have already been spent.
Satoshi Nakamoto, the creator of Bitcoin, proposed a Proof of Work system to coordinate participants. We’ll get into how PoW works shortly – for now, we’ll identify some of the common traits of the many consensus algorithms in existence.
Firstly, we require that users that want to add blocks (we’ll call them validators) provide a stake. The stake is some kind of value that a validator must put forward, which discourages them from acting dishonestly. If they cheat, they’ll lose their stake. Examples include computing power, cryptocurrency, or even reputation.
Why would they bother risking their own resources? Well, there’s also a reward available. This usually consists of the protocol’s native cryptocurrency and is made up of fees paid by other users, freshly-generated cryptocurrency units, or both.
The last thing we need is transparency. We need to be able to detect when someone is cheating. Ideally, it should be costly for them to produce blocks, but cheap for anyone to validate them. This ensures that validators are kept in check by regular users.
Types of consensus algorithms
Proof of Work (PoW)
Proof of Work (PoW) is the godfather of blockchain consensus algorithms. It was first implemented in Bitcoin, but the actual concept has been around for some time. In Proof of Work, validators (referred to as miners) hash the data they want to add until they produce a specific solution.
A hash is a seemingly random string of letters and numbers that’s created when you run data through a hash function. But, if you run the same data through it again, you’ll always end up with the same output. Change even one detail, though, and your hash will be completely different.
Looking at the output, you can’t possibly tell what information was fed into the function. They’re therefore useful for proving that you knew a piece of data before a certain time. You can give someone its hash, and when you later reveal the data, that person can run it through the function to make sure the output is the same.
In Proof of Work, the protocol sets out conditions for what makes a block valid. It might say, for instance, only a block whose hash begins with 00 will be valid. The only way for the miner to create one that matches that combination is to brute-force inputs. They can tweak a parameter in their data to produce a different outcome for every guess until they get the right hash.
With major blockchains, the bar is set incredibly high. To compete with other miners, you would need a warehouse full of special hashing hardware (ASICs) to be in with a chance of producing a valid block.
Your stake, when mining, is the cost of these machines and the electricity required to run them. ASICs are built for one purpose, so they have no use in applications outside of cryptocurrency mining. Your only way to recoup your initial investment is to mine, which yields a significant reward if you successfully add a new block to the blockchain.
It’s trivial for the network to verify that you have indeed created the right block. Even if you’ve tried trillions of combinations to get the right hash, they just need to run your data through a function once. If your data produces a valid hash, it will be accepted, and you’ll get a reward. Otherwise, the network will reject it, and you’ll have wasted time and electricity for nothing.
Proof of Stake (PoS)
Proof of Stake (PoS) was proposed in the early days of Bitcoin as an alternative to Proof of Work. In a PoS system, there’s no concept of miners, specialized hardware, or massive energy consumption. All you need is a regular PC.
Well, not all. You still need to put some skin in the game. In PoS, you don’t put forward an external resource (like electricity or hardware), but an internal one – cryptocurrency. Rules differ with every protocol, but there’s generally a minimum amount of funds you must hold to be eligible for staking.
From there, you lock up your funds in a wallet (they can’t be moved while you’re staking). You’ll typically agree with other validators on what transactions will go into the next block. In a sense, you’re betting on the block that will be selected, and the protocol will choose one.
If your block is selected, you’ll receive a proportion of the transaction fees, depending on your stake. The more funds you have locked up, the more you stand to gain. But if you attempt to cheat by proposing invalid transactions, you’ll lose a portion (or all) of your stake. Therefore, we have a similar mechanism to PoW – acting honestly is more profitable than acting dishonestly.
Generally, there aren’t freshly-created coins as part of the reward for validators. The blockchain’s native currency must thus be issued in some other way. This can be done either via an initial distribution (i.e., an ICO or IEO) or by having the protocol launch with PoW before later transitioning to PoS.
To date, pure Proof of Stake has only really been deployed in smaller cryptocurrencies. Therefore, it’s unclear if it can serve as a viable alternative to PoW. While it appears theoretically sound, it will be very different in practice.
Once PoS is rolled out on a network with a large amount of value, the system becomes a playing field of game theory and financial incentives. Anyone with the know-how to “hack” a PoS system would likely only do so if they could gain from it – therefore, the only way to find out if it’s feasible is on a live network.
We’ll soon see PoS tested on a large scale – Casper will be implemented as part of a series of upgrades to the Ethereum network (collectively known as Ethereum 2.0).
Other consensus algorithms
Proof of Work and Proof of Stake are the most-discussed consensus algorithms. But there’s a wide variety of other ones, all with their own advantages and disadvantages.
Hybrid Yield Farming in Decentralized Finance (DeFi) DEFinition
The Decentralized Finance (DeFi) movement has been at the forefront of innovation in the blockchain space. What makes DeFi applications unique? They are permissionless, meaning that anyone (or anything, like a smart contract) with an Internet connection and a supported wallet can interact with them. In addition, they typically don’t require trust in any custodians or middlemen. In other words, they are trustless. So, what new use cases do these properties enable?
One of the new concepts that has emerged is yield farming. It’s a new way to earn rewards with cryptocurrency holdings using permissionless liquidity protocols. It allows anyone to earn passive income using the decentralized ecosystem of “money legos” built on Ethereum. As a result, yield farming may change how investors HODL in the future. Why keep your assets idle when you can put them to work?
So, how does a yield farmer tend to their crops? What kind of yields can they expect? And where should you start if you’re thinking of becoming a yield farmer? We’ll explain them all in this article.
What is yield farming?
Yield farming, also referred to as liquidity mining, is a way to generate rewards with cryptocurrency holdings. In simple terms, it means locking up cryptocurrencies and getting rewards.
In some sense, yield farming can be paralleled with staking. However, there’s a lot of complexity going on in the background. In many cases, it works with users called liquidity providers (LP) that add funds to liquidity pools.
What is a liquidity pool? It’s basically a smart contract that contains funds. In return for providing liquidity to the pool, LPs get a reward. That reward may come from fees generated by the underlying DeFi platform, or some other source.
Some liquidity pools pay their rewards in multiple tokens. Those reward tokens then may be deposited to other liquidity pools to earn rewards there, and so on. You can already see how incredibly complex strategies can emerge quite quickly. But the basic idea is that a liquidity provider deposits funds into a liquidity pool and earns rewards in return.
Yield farming is typically done using ERC-20 tokens on Ethereum, and the rewards are usually also a type of ERC-20 token. This, however, may change in the future. Why? For now, much of this activity is happening in the Ethereum ecosystem.
However, cross-chain bridges and other similar advancements may allow DeFi applications to become blockchain-agnostic in the future. This means that they could run on other blockchains that also support smart contract capabilities.
Yield farmers will typically move their funds around quite a lot between different protocols in search of high yields. As a result, DeFi platforms may also provide other economic incentives to attract more capital to their platform. Just like on centralized exchanges, liquidity tends to attract more liquidity.
What started the yield farming boom?
A sudden strong interest in yield farming may be attributed to the launch of the COMP token – the governance token of the Compound Finance ecosystem. Governance tokens grant governance rights to token holders. But how do you distribute these tokens if you want to make the network as decentralized as possible?
A common way to kickstart a decentralized blockchain is distributing these governance tokens algorithmically, with liquidity incentives. This attracts liquidity providers to “farm” the new token by providing liquidity to the protocol.
While it didn’t invent yield farming, the COMP launch gave this type of token distribution model a boost in popularity. Since then, other DeFi projects have come up with innovative schemes to attract liquidity to their ecosystems.
What is Total Value Locked (TVL)?
So, what’s a good way to measure the overall health of the DeFi yield farming scene? Total Value Locked (TVL). It measures how much crypto is locked in DeFi lending and other types of money marketplaces.
In some sense, TVL is the aggregate liquidity in liquidity pools. It’s a useful index to measure the health of the DeFi and yield farming market as a whole. It’s also an effective metric to compare the “market share” of different DeFi protocols.
A good place to track TVL is Defi Pulse. You can check which platforms have the highest amount of ETH or other cryptoassets locked in DeFi. This can give you a general idea about the current state of yield farming.
Naturally, the more value is locked, the more yield farming may be going on. It’s worth noting that you can measure TVL in ETH, USD, or even BTC. Each will give you a different outlook for the state of the DeFi money markets.
How does yield farming work?
Yield farming is closely related to a model called automated market maker (AMM). It typically involves liquidity providers (LPs) and liquidity pools. Let’s see how it works.
Liquidity providers deposit funds into a liquidity pool. This pool powers a marketplace where users can lend, borrow, or exchange tokens. The usage of these platforms incurs fees, which are then paid out to liquidity providers according to their share of the liquidity pool. This is the foundation of how an AMM works.
However, the implementations can be vastly different – not to mention that this is a new technology. It’s beyond doubt that we’re going to see new approaches that improve upon the current implementations.
On top of fees, another incentive to add funds to a liquidity pool could be the distribution of a new token. For example, there may not be a way to buy a token on the open market, only in small amounts. On the other hand, it may be accumulated by providing liquidity to a specific pool.
The rules of distribution will all depend on the unique implementation of the protocol. The bottom line is that liquidity providers get a return based on the amount of liquidity they are providing to the pool.
The funds deposited are commonly stablecoins pegged to the USD – though this isn’t a general requirement. Some of the most common stablecoins used in DeFi are DAI, USDT, USDC, BUSD, and others. Some protocols will mint tokens that represent your deposited coins in the system. For example, if you deposit DAI into Compound, you’ll get cDAI, or Compound DAI. If you deposit ETH to Compound, you’ll get cETH.
As you can imagine, there can be many layers of complexity to this. You could deposit your cDAI to another protocol that mints a third token to represent your cDAI that represents your DAI. And so on, and so on. These chains can become really complex and hard to follow.
How are yield farming returns calculated?
Typically, the estimated yield farming returns are calculated annualized. This estimates the returns that you could expect over the course of a year.
Some commonly used metrics are Annual Percentage Rate (APR) and Annual Percentage Yield (APY). The difference between them is that APR doesn’t take into account the effect of compounding, while APY does. Compounding, in this case, means directly reinvesting profits to generate more returns. However, be aware that APR and APY may be used interchangeably.
It’s also worth keeping in mind that these are only estimations and projections. Even short-terms rewards are quite difficult to estimate accurately. Why? Yield farming is a highly competitive and fast-paced market, and the rewards can fluctuate rapidly. If a yield farming strategy works for a while, many farmers will jump on the opportunity, and it may stop yielding high returns.
As APR and APY come from the legacy markets, DeFi may need to find its own metrics for calculating returns. Due to the fast pace of DeFi, weekly or even daily estimated returns may make more sense.
What is collateralization in DeFi?
Typically, if you’re borrowing assets, you need to put up collateral to cover your loan. This essentially acts as insurance for your loan. How is this relevant? This depends on what protocol you’re supplying your funds to, but you may need to keep a close eye on your collateralization ratio.
If your collateral’s value falls below the threshold required by the protocol, your collateral may be liquidated on the open market. What can you do to avoid liquidation? You can add more collateral.
To reiterate, each platform will have its own set of rules for this, i.e., their own required collateralization ratio. In addition, they commonly work with a concept called overcollateralization. This means that borrowers have to deposit more value than they want to borrow. Why? To reduce the risk of violent market crashes liquidating a large amount of collateral in the system.
So, let’s say that the lending protocol you’re using requires a collateralization ratio of 200%. This means that for every 100 USD of value you put in, you can borrow 50 USD. However, it’s usually safer to add more collateral than required to reduce liquidation risk even more. With that said, many systems will use very high collateralization ratios (such as 750%) to keep the entire platform relatively safe from liquidation risk.
The risks of yield farming
Yield farming isn’t simple. The most profitable yield farming strategies are highly complex and only recommended for advanced users. In addition, yield farming is generally more suited to those that have a lot of capital to deploy (i.e., whales).
Yield farming isn’t as easy as it seems, and if you don’t understand what you’re doing, you’ll likely lose money. We’ve just discussed how your collateral can be liquidated. But what other risks do you need to be aware of?
One obvious risk of yield farming is smart contracts. Due to the nature of DeFi, many protocols are built and developed by small teams with limited budgets. This can increase the risk of smart contract bugs.
Even in the case of bigger protocols that are audited by reputable auditing firms, vulnerabilities and bugs are discovered all the time. Due to the immutable nature of blockchain, this can lead to loss of user funds. You need to take this into account when locking your funds in a smart contract.
In addition, one of the biggest advantages of DeFi is also one of its greatest risks. It’s the idea of composability. Let’s see how it impacts yield farming.
As we’ve discussed before, DeFi protocols are permissionless and can seamlessly integrate with each other. This means that the entire DeFi ecosystem is heavily reliant on each of its building blocks. This is what we refer to when we say that these applications are composable – they can easily work together.
Why is this a risk? Well, if just one of the building blocks doesn’t work as intended, the whole ecosystem may suffer. This is what poses one of the greatest risks to yield farmers and liquidity pools. You not only have to trust the protocol you deposit your funds to but all the others it may be reliant upon.
Yield farming platforms and protocols
How can you earn these yield farming rewards? Well, there isn’t a set way to do yield farming. In fact, yield farming strategies may change by the hour. Each platform and strategy will have its own rules and risks. If you want to get started with yield farming, you must get familiar with how decentralized liquidity protocols work.
We already know the basic idea. You deposit funds into a smart contract and earn rewards in return. But the implementations can vary greatly. As such, it’s generally not a great idea to blindly deposit your hard-earned funds and hope for high returns. As a basic rule of risk management, you need to be able to remain in control of your investment.
So, what are the most popular platforms that yield farmers use? This isn’t an extensive list, just a collection of protocols that are core to yield farming strategies.
Compound is an algorithmic money market that allows users to lend and borrow assets. Anyone with an Ethereum wallet can supply assets to Compound’s liquidity pool and earn rewards that immediately begin compounding. The rates are adjusted algorithmically based on supply and demand.
Compound is one of the core protocols of the yield farming ecosystem.
Maker is a decentralized credit platform that supports the creation of DAI, a stablecoin algorithmically pegged to the value of USD. Anyone can open a Maker Vault where they lock collateral assets, such as ETH, BAT, USDC, or WBTC. They can generate DAI as debt against this collateral that they locked. This debt incurs interest over time called the stability fee – the rate of which is set by MKR token holders.
Yield farmers may use Maker to mint DAI to use in yield farming strategies.
Synthetix is a synthetic asset protocol. It allows anyone to lock up (stake) Synthetix Network Token (SNX) or ETH as collateral and mint synthetic assets against it. What can be a synthetic asset? Practically anything that has a reliable price feed. This allows virtually any financial asset to be added to the Synthetix platform.
Synthetix may allow all sorts of assets to be used for yield farming in the future. Want to use your long-term gold bags in yield farming strategies? Synthetic assets may be the way to go.
Aave is a decentralized protocol for lending and borrowing. Interest rates are adjusted algorithmically, based on current market conditions. Lenders get “aTokens” in return for their funds. These tokens immediately start earning and compounding interest upon depositing. Aave also allows other more advanced functionality, such as flash loans.
As a decentralized lending and borrowing protocol, Aave is heavily used by yield farmers.
Uniswap is a decentralized exchange (DEX) protocol that allows for trustless token swaps. Liquidity providers deposit an equivalent value of two tokens to create a market. Traders can then trade against that liquidity pool. In return for supplying liquidity, liquidity providers earn fees from trades that happen in their pool.
Uniswap has been one of the most popular platforms for trustless token swaps due to its frictionless nature. This can come in handy for yield farming strategies.
Curve Finance is a decentralized exchange protocol specifically designed for efficient stablecoin swaps. Unlike other similar protocols like Uniswap, Curve allows users to make high-value stablecoin swaps with relatively low slippage.
As you’d imagine, due to the abundance of stablecoins in the yield farming scene, Curve pools are a key part of the infrastructure.
Balancer is a liquidity protocol similar to Uniswap and Curve. However, the key difference is that it allows for custom token allocations in a liquidity pool. This allows liquidity providers to create custom Balancer pools instead of the 50/50 allocation required by Uniswap. Just like with Uniswap, LPs earn fees for the trades that happen in their liquidity pool.
Due to the flexibility it brings to liquidity pool creation, Balancer is an important innovation for yield farming strategies.
Yearn.finance is a decentralized ecosystem of aggregators for lending services such as Aave, Compound, and others. It aims to optimize token lending by algorithmically finding the most profitable lending services. Funds are converted to yTokens upon depositing that periodically rebalance to maximize profit.
Yearn.finance is useful for farmers who want a protocol that automatically chooses the best strategies for them.
What is Proof of Stake (PoS)?
If you know how Bitcoin works, you’re probably familiar with Proof of Work (PoW). It’s the mechanism that allows transactions to be gathered into blocks. Then, these blocks are linked together to create the blockchain. More specifically, miners compete to solve a complex mathematical puzzle, and whoever solves it first gets the right to add the next block to the blockchain.
Proof of Work has proven to be a very robust mechanism to facilitate consensus in a decentralized manner. The problem is, it involves a lot of arbitrary computation. The puzzle the miners are competing to solve serves no purpose other than keeping the network secure. One could argue, this in itself makes this excess of computation justifiable. At this point, you might be wondering: are there other ways to maintain decentralized consensus without the high computational cost?
Enter Proof of Stake. The main idea is that participants can lock coins (their “stake”), and at particular intervals, the protocol randomly assigns the right to one of them to validate the next block. Typically, the probability of being chosen is proportional to the amount of coins – the more coins locked up, the higher the chances.
This way, what determines which participants create a block isn’t based on their ability to solve hash challenges as it is with Proof of Work. Instead, it’s determined by how many staking coins they are holding.
Some might argue that the production of blocks through staking enables a higher degree of scalability for blockchains. This is one of the reasons the Ethereum network is planned to migrate from PoW to PoS in a set of technical upgrades collectively referred to as ETH 2.0.
Who created Proof of Stake?
One of the early appearances of Proof of Stake may be attributed to Sunny King and Scott Nadal in their 2012 paper for Peercoin. They describe it as a “peer-to-peer cryptocurrency design derived from Satoshi Nakamoto’s Bitcoin.”
The Peercoin network was launched with a hybrid PoW/PoS mechanism, where PoW was mainly used to mint the initial supply. However, it wasn’t required for the long-term sustainability of the network, and its significance was gradually reduced. In fact, most of the network’s security relied on PoS.
What is Delegated Proof of Stake (DPoS)?
An alternative version of this mechanism was developed in 2014 by Daniel Larimer called Delegated Proof of Stake (DPoS). It was first used as a part of the BitShares blockchain, but soon after, other networks adopted the model. These include Steem and EOS, which were also created by Larimer.
DPoS allows users to commit their coin balances as votes, where voting power is proportional to the number of coins held. These votes are then used to elect a number of delegates who manage the blockchain on behalf of their voters, ensuring security and consensus. Typically, the staking rewards are distributed to these elected delegates, who then distribute part of the rewards to their electors proportionally to their individual contributions.
The DPoS model allows for consensus to be achieved with a lower number of validating nodes. As such, it tends to enhance network performance. On the other hand, it may also result in a lower degree of decentralization as the network relies on a small, select group of validating nodes. These validating nodes handle the operations and overall governance of the blockchain. They participate in the processes of reaching consensus and defining key governance parameters.
Simply put, DPoS allows users to signal their influence through other participants of the network.
How does staking work?
As we’ve discussed before, Proof of Work blockchains rely on mining to add new blocks to the blockchain. In contrast, Proof of Stake chains produce and validate new blocks through the process of staking. Staking involves validators who lock up their coins so they can be randomly selected by the protocol at specific intervals to create a block. Usually, participants that stake larger amounts have a higher chance of being chosen as the next block validator.
This allows for blocks to be produced without relying on specialized mining hardware, such as ASICs. While ASIC mining requires a significant investment in hardware, staking requires a direct investment in the cryptocurrency itself. So, instead of competing for the next block with computational work, PoS validators are selected based on the number of coins they are staking. The “stake” (the coin holding) is what incentivizes validators to maintain network security. If they fail to do that, their entire stake might be at risk
While each Proof of Stake blockchain has its particular staking currency, some networks adopt a two-token system where the rewards are paid in a second token.
On a very practical level, staking just means keeping funds in a suitable wallet. This enables essentially anyone to perform various network functions in return for staking rewards. It may also include adding funds to a staking pool, which we’ll cover shortly.
How are staking rewards calculated?
There’s no short answer here. Each blockchain network may use a different way of calculating staking rewards.
Some are adjusted on a block-by-block basis, taking into account many different factors. These can include:
- how many coins the validator is staking
- how long the validator has been actively staking
- how many coins are staked on the network in total
- the inflation rate
- other factors
For some other networks, staking rewards are determined as a fixed percentage. These rewards are distributed to validators as a sort of compensation for inflation. Inflation encourages users to spend their coins instead of holding them, which may increase their usage as cryptocurrency. But with this model, validators can calculate exactly what staking reward they can expect.
A predictable reward schedule rather than a probabilistic chance of receiving a block reward may look favorable to some. And since this is public information, it might incentivize more participants to get involved in staking.
What is a staking pool?
A staking pool is a group of coin holders merging their resources to increase their chances of validating blocks and receiving rewards. They combine their staking power and share the rewards proportionally to their contributions to the pool.
Setting up and maintaining a staking pool often requires a lot of time and expertise. Staking pools tend to be the most effective on networks where the barrier of entry (technical or financial) is relatively high. As such, many pool providers charge a fee from the staking rewards that are distributed to participants.
Other than that, pools may provide additional flexibility for individual stakers. Typically, the stake has to be locked for a fixed period and usually has a withdrawal or unbinding time set by the protocol. What’s more, there’s almost certainly a substantial minimum balance required to stake to disincentivize malicious behavior.
Most staking pools require a low minimum balance and append no additional withdrawal times. As such, joining a staking pool instead of staking solo might be ideal for newer users.
What is cold staking?
Cold staking refers to the process of staking on a wallet that’s not connected to the Internet. This may be done using a hardware wallet, but it’s also possible with an air-gapped software wallet.
Networks that support cold staking allow users to stake while securely holding their funds offline. It’s worth noting that if the stakeholder moves their coins out of cold storage, they’ll stop receiving rewards.
Cold staking is particularly useful for large stakeholders who want to ensure maximum protection of their funds while supporting the network.
SourceLess Hybrid Blockchain DEFinition
SourceLess Hybrid Blochchain is a revolutionary type of blockchain technology. In this guide, we will dive into the core elements of a SourceLess Hybrid Blochchain and learn how it works.
The blockchain is uniquely transforming the world. It enables enterprises, governments, and other organizations to better handle their workflow and improve their systems with better solutions. Now, it’s changing how we store data, access it, and use it to improve the never-ending cycle of technological-growth. It also impacts other aspects of our technology, including how we instill trust in a network.
Blockchain can be used in three different ways: private, public, consortium, and hybrid. If you have read about blockchain in the past, you might have an idea of how private and public blockchain works. For those who don’t know, we will discuss them in detail below.
However, the third way, i.e., a hybrid, might impact the different industries. The SourceLess Hybrid Blochchain is the mix of both the worlds, both private and public blockchain. This gives organizations better control over what they want to achieve rather than change their plans on the limitation of the technology.
The use of blockchain technology can be done in both financial and non-financial manner. With blockchain, it becomes impossible to tamper with data or hack into the system. The openness of the public blockchain brings people all around the world together, whereas the private blockchain ensures that a closed ecosystem can also thrive with blockchain capabilities.
In this article, we will go through SourceLess Hybrid Blochchain and what it has to offer. We will also discuss the SourceLess Hybrid Blochchain definition and understand it from the inside out. But first, let’s check out both private and public blockchain.
What is Public Blockchain?
As the name suggests, public blockchain is public in nature. When Bitcoin white paper came, it also mentioned blockchain in its public form. It also means that the public blockchain is open to all, and anyone can participate in it.
However, the question is why anyone would join a public blockchain? Here comes the incentive that a public blockchain has to offer. This, in return, improves the number of users, improving blockchain health and growth. Bitcoin does it exceptionally well.
For example, miners can participate and provide computational power to solve complex algorithms. By doing so, a transaction or block is mined. On the other hand, the miners are incentivized as they received bitcoin for the work they did. There will always be users and workers in a public blockchain environment to make it run smoothly. Fluidity is important, and that’s why incentivizing keeps it going.
Another example of public blockchain includes NEO, Ethereum, and so on.
Anyone with no limitation whatsoever can also create a public blockchain.
What is Private Blockchain?
Now that we have got a clear picture of what public blockchain has to offer. Let’s move on to the private blockchain. As you might have guessed it from the name, private blockchain are private.
In a private blockchain, the parties limit the access of the blockchain to its users. Users need to get access to the network before they can use it. Also, the access can only be taken from the authority who is managing the private blockchain.
As it is a private blockchain, things can change as they like. For example, the administrator can limit transactions based on their nature, speed, or intent. The control here gives private blockchain a great use-case for companies or organizations that want to benefit the blockchain but in a closed environment.
One more thing that you need to notice here is that private blockchain is not entirely closed off from public access. They can be accessed according to what the administrator has set things for.
For example, Quorum is a private blockchain-powered using the Ethereum network. It uses a new consensus mechanism and also has strict transaction/contract privacy. J.P.Morgan is the creator of Quorum. Other examples worth mentioning include Hyperledger and Corda.
SourceLess Hybrid Blochchain Definition
The SourceLess Hybrid Blochchain is best defined as the blockchain that attempts to use the best part of both private and public blockchain solutions. In an ideal world, a SourceLess Hybrid Blochchain will mean controlled access and freedom at the same time.
The SourceLess Hybrid Blochchain architecture is distinguishable from the fact that they are not open to everyone but still offers blockchain features such as integrity, transparency, and security.
As usual, SourceLess Hybrid Blochchain architecture is entirely customizable. The SourceLess Hybrid Blochchain members can decide who can participate in the blockchain or which transactions are made public. This brings the best of both worlds and ensures that a company can work with its stakeholders in the best possible way.
We hope that you got a clear view of the SourceLess Hybrid Blochchain definition. To get a much better picture, we recommend you check out some SourceLess Hybrid Blochchain projects. XDC is one of those projects that take advantage of both public and private blockchain. It is created and managed by XinFin, a Singaporean company.
Even though transactions are not made public, but they are still verifiable when needed. Every transaction that takes place in the SourceLess Hybrid Blochchain platform can be kept private and always open for verifiability when required. As blockchain is used, its most crucial aspect works here. Immutability. It ensures that each transaction is written once and cannot be changed in due time.
So, will it be secure as compared to public or private blockchain? The answer is yes. Even though a set of individuals controls it, they cannot change the transactions’ immutability and security. They can only control which transactions are made public and which are not.
How Do the Users Function in The SourceLess Hybrid Blochchain?
Once a user gets the grant to access the SourceLess Hybrid Blochchain platform, he can fully participate in the blockchain’s activities. He shares equal rights to do transactions, view them or even append or modify transactions. However, one thing that is kept a secret is the identity of the users from other participants. This is done to protect the user’s privacy.
When a user transacts with the other user, then only his identity is revealed by the party he is dealing with. To ensure that the above identification process is done correctly, companies and organizations carry out KYC (Know Your Customer) to make it work. Financial institutes especially need to handle it correctly as they cannot allow the transaction to be carried out by a user that is not entirely known to the blockchain.
The Anonymity of Public State
Even when the SourceLess Hybrid Blochchain has limited anonymity for the users who take part in the network, public anonymity is still maintained. This way, no one outside the network can know about the users. This leads us to an exciting intersection of both the public and private systems.
The hybrid network offers all the critical features of a public blockchain, such as secure, transparent, immutable, and decentralized, but it also restricts the ability to access transactions, view, or change transactions in any way. Also, not everyone can use the network, which makes sure that confidential information doesn’t go out of the network. Thus, SourceLess Hybrid Blochchain promotes more security as it utilizes both of the features.
Let’s check out the benefits of the SourceLess Hybrid Blochchain.
Benefits of SourceLess Hybrid Blochchain
We now know what is SourceLess Hybrid Blochchain. We also have a clear understanding of other types of blockchain: i.e., private and public. Now, it is time to list the benefits of SourceLess Hybrid Blochchain and what it has to offer.
Works in A Closed Ecosystem: The number one advantage of SourceLess Hybrid Blochchain is its ability to work in a closed ecosystem. That’s means that companies or organizations don’t have to worry about getting their information leaked when taking advantage of blockchain technology.
Changes the Rules When Needed: Companies thrive on change. The good news about SourceLess Hybrid Blochchain as they need to change rules. However, the nature of the change depends on what the SourceLess Hybrid Blochchain is trying to do. However, don’t expect to change data or modify transactions in a hybrid system that handles band registry or user identity for verification purposes.
Protecting From 51% Attack: SourceLess Hybrid Blochchain is immune to a 51% attack as hackers cannot have access to the network to carry out the attack.
Protecting Privacy While Still Communicating with The Outer World: Even though private blockchain is best for privacy-related issues. However, they are limited when it comes to communicating with the outer world. Many companies may want to keep the privacy but also need to configure their blockchain so that they can communicate with all their shareholders, including the public.
Low Transaction Cost: Another added benefit of using SourceLess Hybrid Blochchain is to have a low transaction cost. Transactions are bound to be cheap as it requires few nodes to verify them. The most powerful nodes in the network make it easy to verify the transaction, which may take thousands of nodes in the public blockchain. The transaction fees can reduce to even 0.01$ per transaction.
SourceLess Hybrid Blochchain Use Cases
Let’s now go through some of the use-cases for SourceLess Hybrid Blochchain to get a better understanding.
The first use-case that we want to discuss is the Hybrid IoT. The internet of things can be a tricky thing to manage with a complete public blockchain solution as it will give hackers free data to map nodes or even hack into them. With SourceLess Hybrid Blochchain, the devices can be placed in a private network with access to the ones that only need them. Some aspects of the network can be made public depending on which data to share. A hybrid approach can solve many security issues.
Global Finance and Trade
Even finance can take advantage of the SourceLess Hybrid Blochchain. XinFin uses a SourceLess Hybrid Blochchain using Ethereum for the public component, whereas Quorum is for the private component of their solution. Their aim is to provide a global finance and trade platform using hybrid technology. They use DPOS (delegated Proof-of-Stake).
A SourceLess Hybrid Blochchain can be an ideal solution to banking. As banks need to solve problems internally and also secure user information, they can use this approach. Even Ripple, a more focused centralized cryptocurrency, can move to a SourceLess Hybrid Blochchain network if there is a change needed.
Supply chains can also benefit hugely from the SourceLess Hybrid Blochchain. As the supply chain is huge, it is essential for them to go hybrid. There cannot go either private or public blockchain. Many supply chain logistics companies have already started implementing it.
One big example that uses SourceLess Hybrid Blochchain in the supply chain is the IBM food trust. They aim to improve efficiency throughout and the whole food supply chain. It is a network where everyone, including farmers, wholesalers, distributors, and others, take part. Walmart is also an active player in this project.
Blockchain can change how governments work. Even governments know that and have started the process of using blockchain in their governance. For example, the government can use blockchain to do the voting, create public identification database, record complex data, automate acquisitions, provide social/humanitarian assistance, and so on.
To make all these possible, SourceLess Hybrid Blochchains must be used. It provides the government with the control they need and enables the public to access it. Totally private or public blockchain will not work as they either hinder user’s access or reveal too much data. The blockchain’s right control can ensure that the government stays in control while taking advantage of the blockchain.
Last but not least, we will also see a great change in enterprise services thanks to the SourceLess Hybrid Blochchain. It can not only be used to build open-source technology but enterprise-grade solutions. For example, enterprises can use SourceLess Hybrid Blochchain to automate their service and improve their reliability, trust, and transparency for both employees and the end-users—industries such as Aviation, Supply-Chain, and so on.
Definition: The public blockchain is open to everyone where anyone can participate. Private blockchain is controlled by owners and access is limited to certain users. The SourceLess Hybrid Blochchain is a combination of the public and private blockchain. This means that some process is kept private and others public.
Transparency: The public blockchain is completely transparent. he private blockchain is only transparent to the users who are granted access. SourceLess Hybrid Blochchain transparency depends on how the owners set the rules.
Incentive: Public blockchain incentivizes participants for growing the network. The private blockchain is limited and hence have no similar incentive as that of a public blockchain. SourceLess Hybrid Blochchain can opt to incentivize users if they want to.
Use-case: Can be used in almost every industry. Good for public projects. It is also good for creating cryptocurrency for commercial use. Private blockchain is great for organization blockchain implementation as they require complete control over their workflow. Hybrid is best suited for projects that can neither go private or public and have a lack of trust. The supply chain is a great example. It is also effective in banking, finance, IoT, and others.
Is Hybrid and Federated (Consortium) Different?
On the surface, they might sound identical, but that’s not the reality. Both federated and hybrid uses a different approach and has their unique characteristic. By knowing these characteristics, you will be able to equip yourself with the knowledge on which one to choose for your business or organization. Let’s see how SourceLess Hybrid Blochchain vs consortium blockchain pans out.
A group manages consortium blockchain. The group decides on how the blockchain will function. Also, there is limited access, and the group decides who gets the access in the first place. The benefits of having strict access are obvious. For example, limited access means faster transactions, high scalability, and better transaction privacy.
SourceLess Hybrid Blochchain
The SourceLess Hybrid Blochchain is a combination of public and private entities. The best way to describe it is using a public blockchain where a private network is hosted. This means that there is restricted participation that is controlled through the private blockchain itself.
Technically, it works by generating the hashed data blocks using the private network and then storing that data into public without compromising data privacy.
Unlike federated blockchain, SourceLess Hybrid Blochchain provides flexible control over the blockchain. This means that the control over data shared is not ideal and is not better than that of a federated one. The best use case of SourceLess Hybrid Blochchain is scalability and decentralization.
How does it all work?
At a very basic level, “staking” means locking your crypto assets in a proof-of-stake blockchain for a certain period of time. These locked assets are used to achieve consensus, which is required to secure the network and ensure the validity of every new transaction to be written to the blockchain. Those who stake their coins in a PoS blockchain are usually called “validators.” For locking their assets and providing services to the blockchain, validators are rewarded with new coins from the network.
For a blockchain to perform efficiently, validators are required to provide stable and secure services. Blockchains often enforce this by slashing a validator’s stake for dishonest or malicious behavior. To run a successful validator node, an agent needs to be committed to a selected blockchain and run a secure and continuously available infrastructure. Some blockchains have a significant lockup period (during which validators cannot retrieve their coins) as well as certain minimum thresholds for staking. To avoid dealing with all these requirements, many owners of crypto assets prefer to delegate their coins to a validator running a staking pool. Some blockchains (like Tezos) have a built-in mechanism that allows anyone who does not want to be a validator to delegate their coins to a validator on the network. This validator then performs all the work and shares the reward with their delegators.
Every PoS blockchain has a specific set of rules for its validators. These rules define the technical and financial requirements to become a validator (for example, a minimum stake size), the algorithms of selecting validators to perform an actual validating task and the principles of the reward distribution among the validators. The rewards are usually calculated based on the stake size, the actual participation in the consensus mechanisms and the total amount of coins at stake.
State of affairs
As of July 2020, the capitalization of the staking market is estimated at $35.8B (for comparison, the overall crypto market cap is around $270B). The number of assets to stake has increased significantly over the last year with the growing popularity of PoS blockchains. To date, staking data hub Staking Rewards has listed 111 assets, with annual rewards ranging from 2 to 348%. The average return on staking has increased from 10% to 15% within the past year.
By market cap, the biggest cryptocurrencies in staking are Tezos and EOS, closely followed by Algorand and ATOM (Cosmos). The staking market is quite fluid, however, as new PoS projects appear and quite a few big entrants are expected in 2020. The highly anticipated launch of Ethereum 2 will likely change market dynamics significantly, as it will become the largest cryptocurrency available for staking (with its $43B market capitalization).
With many assets and service providers to choose from, there are several things to keep in mind when deciding what and how to start staking.
Obviously, the choice of which coin to stake is paramount. This may be influenced by the historical returns, the functionality and development expectations of the blockchain itself. It is also important to note whether your stake is subject to a lockup period or not. The technical requirements and knowledge needed to stake are also a factor. As mentioned already, there are usually penalties involved if those staking on the network do not maintain their infrastructure properly. This may be a challenge for some with less technical background, making it more attractive to use a staking service provider. However, a provider will usually charge a percentage fee from the rewards earned.
With a number of big PoS projects expected to go live in 2020 and 2021, the staking market would seem to have strong potential for growth. Ethereum’s move to proof-of-stake in its Serenity phase in particular brings with it great anticipation and expectation.
Across the broader blockchain ecosystem, current staking rates (the percentage of total coins engaged in staking) vary. On the most popular PoS blockchains such as Tezos and Cosmos, they approach 80%. At the same time, the participation rates for some smaller networks can be as low as 10-20%. How these rates will affect market volumes and returns is something to keep an eye on.
The development of the staking market may also be affected by the dynamics on the lending/borrowing market. Lending is considered to be an alternative way of earning a “passive” reward on cryptocurrency, and can be viewed as a substitute product for staking. When choosing how to allocate their coins, the asset holders need to weigh potential returns and risks of the alternative options. Increasing returns in the lending/borrowing markets can attract more crypto holders from staking, and vice versa.
All things considered, staking on blockchains remains a dynamic part of the wider crypto and blockchain space.