Earn Hbars with Hashgraph Proxy Staking
Using Hbar for Proxy Staking Rewards
Summary: Hashgraph proxy staking is a new concept in the cryptocurrency environment that allows hbar coin holders to assign their tokens to a fully functioning node, attributing its voting power accordingly and earning fees in the process. The hbar proxy staking is a critical part of the Hashgraph consensus mechanism that not only confirms the shared state of all accounts, but also compels nodes and proxy stakers to act honestly in an incentivized decentralized network.
The act of Hashgraph proxy staking creates a financial opportunity akin to traditional financial investment opportunities such as certificates of deposit, basic saving accounts, money markets and dividend-bearing stocks. In the process of staking one’s hbar tokens to a node, a small fee (to be determined later) will be directly paid to a staker every 24 hours if held for the full day. What is remarkable about the Hashgraph proxy staking program is the fact that it also allows the benefit of users the freedom to spend staked hbar coins without penalty. This process in other proof-of-stake (PoS) platforms is called bonding, and usually penalizes a user for spending assigned tokens. Hashgraph is unique in the fact that it allows free spending of hbars without penalty, while still rewarding every hbar held for the total 24 hours to a proxy staking node.
This new model of cryptocurrency earnings program may help stimulate a new wave of investments in the digital asset ecosystem. Cryptocurrency exchanges, such as Coinbase, have put significant campaigning efforts into the digital asset investment idea in order to court new investors into the earnings reward scheme. It is important to note that this is currently only possible with proof-of-stake cryptocurrencies. The benefit of earning fees while holding one’s cryptocurrency could be a win-win situation.
Additionally, the proof-of-stake earnings model does not require any special hardware requirements that would be necessary in a proof-of-work (PoW) mining rewards program. This means that an everyday user with just a mobile phone or basic personal computer can download the Hashgraph wallet, purchase hbars on exchanges, proxy stake their hbar coins and earn rewards. The compounded gains of rewards in addition to growth of Hashgraph by market adoption could be a win-win situation and in the process form an entirely new digital class of investment.
Proof-of-Work Rewards: The great majority of blockchain distributed ledgers in the market rely on a proof-of-work (PoW) consensus mechanism in order to secure the network from distributed denial-of-service (DDoS) attacks. In the design, a large expense in computer hardware and electricity are offset by mining rewards. These mining rewards are dispensed in the form of the digital platform token in order to incentivize the network of participants and to both expand and decentralize the cryptocurrency. In the case of crypto platforms, such as bitcoin, mining rewards have created a substantial economy of mining rewards, to the tune of nearly $9-10 million USD per day (12.5 bitcoins per block x 144 blocks/day on average x ~$5300 per bitcoin= $9-10M USD/day). The total amount of rewards in the bitcoin mining community over a calendar year amounts to a staggering $3.5 billion USD.
In the process of PoW systems, however, a substantial incentive is also created amongst the mining community. This incentive is to purchase the latest and greatest computer hardware in order to compete and win the mining rewards in the cryptographic puzzle lottery that favors the fastest hashrate (computational problem-solving hardware). This effectively creates an arms race and favors the wealthy, consolidated mining pools with bulk discount purchasing power and leaves out the little man or investor. This topic is discussed in other articles as well in regard to the relative downsides in PoW mining cryptocurrencies.
In the early days of bitcoin, as well as a few other PoW coins such as Litecoin, it was perfectly conceivable that a common user with no more than a personal computer could download the blockchain, host a node and earn rewards. Very little electricity was used in contrast to today, due to the increased difficulty level of the hashrate function that has changed since then. This was a community wide incentive program that was very effective at improving adoption, while distributing the network to tens of thousands of nodes. This expansion in the nodal topology also led to an increase in network availability, resilience and security.
However, the days of simple users is nearly over and dominated largely by a few mining pools that have custom-built hardware that is far faster than conventional PC components. This means for the common user that bitcoin is no longer profitable and the incentive to participate in the network is largley monopolized by mining pools with near supercomputers. It is no longer feasible to spend a large amount of money in hardware only to be outcompeted by a mining pool that captures the next block rewards thousands of times faster than a conventional home PC.
Proof-of-Stake Rewards: In large response to the growing trend amongst PoW systems regarding mining pool consolidation, monopolization of mining rewards and exclusion of the common user, some cryptocurrencies have committed their roadmaps to a PoS reward system. The second largest cryptocurrency, Ethereum, has spent considerable discussion and efforts in order to work towards a PoS network. Other newly designed cryptocurrencies such as EOS, Cardano and Tezos, have all assigned their network security and incentive programs to proof-of-stake as well. This was largely a response to the burdensome electrical cost, environmental concerns as well as the mining pool monopolization effect of the computer hardware arms race that ensued with bitcoin and other PoW blockchains.
In the architecture of some proof-of-stake networks, such as EOS, an elaborate voting mechanism to allow ‘delegated’ block producers (BP) the right to earn rewards was created. This also used an inflationary mechanism to fund the process, in an asymmetric rewards program that grew the total EOS supply by 5% per year, but only directly rewarded the block producers (miner-equivalent to bitcoin) a near 1% of those new EOS tokens. What was created in the process was a staking model that allowed the common token holder the ability to participate in the EOS network and earn a fraction of the BP rewards.
However, after calculating the total invested and the total return-on-investment (ROI), one quickly realizes that the total earned in the EOS platform is less than $0.01 USD for every ~$5,000 USD invested per year based on the current rewards rates for a simple staker. This also means that becoming a block producer for any common crypto investor was largely out of the question. This is due to the expensive thresholds for CPU, bandwidth and memory costs incurred in the process of qualifying as a BP in the EOS network. Practically speaking, EOS is not remunerative, nor rewarding for an average investor and is nearly impossible to compete with the supercomputing block producers in the EOS ecosystem. This network was not designed to favor the little man or investor by any stretch of the imagination.
Hashgraph Proxy Staking and Proof-of-Stake Rewards: In the breakthrough discovery of the Hashgraph algorithm, an entirely new set of principles of consensus and staking rewards was invented with the public Hedera DLT. The new concept of ‘proxy staking’ was extolled in the Hashgraph whitepaper that described the ability of any Hedera wallet holder to earn hbar by staking. This concept was unlike any previous PoS cryptocurrency. In the process of proxy staking, a user of hbars could assign their hbars to a fully functional node (until phase 2 & 3, when any user can be a full node) to earn hbars.
The Hashgraph proxy staking program is detailed in the Hashgraph whitepaper and specifies the ability of a hbar wallet holder to not only stake but to also spend the same hbars if so desired. What’s more is that no penalty would be incurred if an hbar investor felt like spending hbar tokens that happened to be proxy staked to a node. However, it is a requirement of anyone that proxy stakes hbars to only be paid a fee for the total amount that has remained in a staking status for at least 24 hours. Any hbars spent in that 24-hour period would be deducted from the total rewards calculation for the day. Although the amount that will be earned has not been announced, the anticipation is that it is more remunerative than the majority of PoS systems, such as EOS, in order to fully incentivize individuals to join the Hashgraph network, contribute to consensus and decentralized voting, as well as participate in mutual rewards for maximal hbar distribution.
If one considers the possibility that one can earn hbar through proxy staking and receive the benefit of the growth of the network by hbar price increase on exchanges, it becomes a win-win situation in favor of the staker. This is a reward scheme that has not become mainstream in the cryptocurrency world due to the few available PoS digital currencies available on exchanges. In fact, Coinbase, one of the world’s largest cryptocurrency exchanges has recently promoted the staking rewards program of another crypto project in order to generate interest in the investor model through staking rewards. However, in the Coinbase design, this would incur a counterparty risk where a stake holder allows the exchange to hold the currency, gain the fees and ‘share’ them at a discount to the exchange user.
In the Hedera Hashgraph proxy staking model, this counterparty risk and exchange custodial risk in not necessary. An hbar investor can simply assign its hbars to a node in a proxy stake through the wallet app and directly earn micropayment rewards without any dilution of earnings or custodial risk. This is yet another win for the common user in the Hashgraph ecosystem do to its user-specific design and implementation.
Conclusion: The whitepaper description of the Hashgraph proxy staking mechanism and its benefits to common user should motivate investors to consider how to earn hbars in the Hedera public network. Understanding that the hbar proxy stake rewards are in addition to the growth potential of the Hashgraph network should also be considered a win-win situation for any cryptocurrency investor. The proxy staking earning method is akin to traditional financial assets such as certificates of deposit, money markets, interest-bearing bank savings accounts and dividend-bearing stocks.
It should also motivate the hbar investor to consider that some of the largest cryptocurrency exchanges, such as Coinbase, have also attempted to offer staking reward programs due to their investor-favorable earnings programs. However, the Hedera Hashgraph proxy staking system has no custodial risk, counterparty fees or dilutions of rewards since they can easily be earned without penalty within the Hedera wallet app. This is a winning solution for the DLT that may become the most fair, fast, secure and stable network in the 21st century.