Who is Validator? How to Earn Income via Validating POS Networks
Modern blockchain-based mechanisms are impossible without achieving a so-called distributed consensus. Simply put, when people make transactions, they need to trust each other with no need to involve a third party. All the transactions must be validated.
The most popular validation mechanism to date is Proof-of-Work (PoW) — it was the first consensus solution which is used in such cryptocurrencies as Bitcoin and Ethereum. This is a reliable solution which performs its functions but also has some considerable downsides. First of all, PoW is associated with high computation requirements. It’s expensive in terms of energy consumption and even involves a risk of centralization-by-mining-pool. As soon as blockchain experts realized the drawbacks of PoW, the advantages of another approach became apparent. We are talking about the Proof-of-Stake system (PoS).
PoS systems ensure a consensus thanks to users who stake a certain amount of their tokens to have an opportunity to be chosen for the validation of blocks and get a reward for it. Every validator owns a stake in the PoS network. Staking tokens, validators deposit them into the system, using them as an assurance of responsibility for a block. Validators with higher stakes are more likely to be selected for the validation for their reputation. If they decide to act maliciously, they will lose much more money than those validators who stake less. In most PoS systems, validators get rewarded by receiving transaction fees.
How to Become a Validator?
First of all, you need equipment:
- A server that runs the software of the chosen PoS system. You can start with the medium-level equipment and upgrade it as your network gets busier.
- A powerful and well-working backup server. If you don’t prove that you have a backup, delegators will unlikely choose your node.
- Firewalls for both main and backup servers.
- Hardware Security Module. HSM is crucial for validators, as there is a risk of locating the private key on the server. It allows you to sign each block.
If you’re considering making validation your source of income, prepare to co-locate at one of the best local Data Centers. You need to ensure the high security and 100% uptime. You can sign a co-location agreement for 1 year. There are also Data Centers which support monthly agreements. They usually cost less but they are cheaper for a reason — you will have to monitor their services and make sure they don’t lose power.
You also need to prevent DDOS attacks. Thus, you should protect your main node by connecting the validator node to many sentry nodes. Use AWS or another similar service to spin up many full nodes and allow your main node to connect only to those nodes.
Last but not least, you need tokens. As we’ve already mentioned above, the more you stake, the more likely delegators will select you. Your goal is to get in the top 100. Not only does the amount of tokens determine the probability of you being chosen to validate, but it also determines your reward. Validators who really want to attract more users even create their websites and promote their nodes using any available means of marketing. You can also choose whether you want to be a public or private validator. On one hand, public validators look more trustworthy. On the other hand, they are more prone to hacker attacks.
Popular Blockchains With PoS Validators
Steemit is a blockchain-based social media platform which rewards content creators and has its STEEM token. It used to be one of the most popular PoS coins in the world. Now it’s ranked 36th on Coinmarketcap, worth almost $267 million (in order to become a validator, people in the community should vote for you).
Bitshares is focused on producing open-source software. It uses almost the same blockchain as Bitcoin, however, it also relies on the PoS validation mechanism. The BTS market cap is $306 million (number 31 on Coinmarketcap) (in order to become a validator, people in the community should vote for you).
EOS also uses PoS-like validation mechanism, however, here you can vote for someone who stakes instead of staking yourself. EOS is also one of the most popular PoS cryptocurrencies with a market cap of $5.3 billion (number 5 on Coinmarketcap).
Tezos is a unique blockchain that constantly improves by upgrading itself. Stakeholders vote on changes to the protocol and decide whether or not it will make any amendments. The Tezos cryptocurrency (XTZ) is ranked 17th on Coinmarketcap with a market cap of almost $881 million.
This is a test network of many independent blockchains. Developers call it the “internet of blockchains.” Indeed, you can create a new zone and plug virtually any other blockchain into Cosmos and pass any tokens between different zones with no need for an intermediary.
How to Delegate Your Tokens to a Validator: Tezos
We decided to take Tezos as an example of a PoS system. Its PoS system allows people to create blocks and to get rewards by selecting token holders based on the proportion of their holdings, randomly. Thus, even small holders get a chance to create blocks. In Tezos, block creators are called “bakers.” Anyone can delegate his or her block producing rights to another account that will act on their behalf, baking blocks and signing them.
It’s important to understand that bakers don’t own your tokens, neither do they control them. On the other hand, if your token is randomly selected for purposes of baking a new block, the right to bake will belong to the delegate. Usually, there are 32 endorsers and 1 baker on every block generation. Endorses check blocks and make sure they are validated properly. They are selected randomly and also need to put security deposits. If the block is invalid or if the baker attempts to fork the chain, he or she loses the stake.
Here are a few important things to know.
- Your minimum stake is 10k XTZ. This minimum was chosen to limit the number of computations that select bakers (“rolls”). If you have less than this required minimum of tokens, you can delegate them to somebody else.
- The average time between blocks can be equal to or longer than 60 seconds. The protocol defines the block time as 60 seconds so a new block should be baked every minute, however, this usually doesn’t happen and the block time is longer.
- Every cycle consists of 4096 blocks. If the block time exceeds one minute for weeks or months, time for the block cycle increases due to the inflation rate based on the estimated number of block cycles per year. Thus, your annual reward starts decreasing.
- You get your reward along with your deposit after 5 cycles.
Before you can participate in Tezos’ PoS mechanism and delegate, you should activate your XTZ Allocation. Create an account, and provide the public delegate key which will be used for baking on your behalf. You can change delegates, however, this option becomes available only after many cycles.
- Use Activatez to activate the XTZ Allocation on the genesis block. This tool allows you to do it quickly with no need to remove your private data from cold storage.
- Now you have to create a TezBox with the information on your fundraiser. Visit this link, click “Restore Tezbox,” and select “Fundraiser Wallet.”
- Specify your information: ICO password, PDF seed words, and email address, as well as your KYC activation code.
- Now you need to create a particular account for delegation, it will be a new KT1 account. Just click “Add Account” and keep in mind that you’ll be charged 0.25 XTZ.
- Move your tokens from TZ1 to the KT1 account. Go to the main wallet and click “Send.” After this, you’ll need to enter your KT1 address and the amount of XTZ. Don’t fill in the fee field, and click “Send.”
- In your KT1 account, select “Delegate.”
The PoS validation mechanism made it possible to forget about the drawbacks of PoW. It has lower computation requirements and is much more efficient in terms of energy consumption. In addition, it minimizes the risk of centralization. PoS validators get rewards for validating blocks, receiving transaction fees. Having a good experience in the blockchain industry and the necessary equipment, everyone can become a PoS validator and appreciate the advantages of this system over traditional mining.